JOHN Swinney has insisted it would be "impractical" to meet councils' demands for £1bn more funding in next year's budget.
Nicola Sturgeon's second in command has warned more money for councils will "starve the health service of funding".
The Deputy First Minister, who is currently the Finance Secretary, will deliver his draft budget for the next financial year next week.
Ahead of his financial strategy being set out, all 32 of Scotland’s council directors of finance wrote to the Deputy First Minister to highlight concerns over the sustainability of councils.
The letter warned tough decisions could be made on axing or reducing key services in schools and the health sector if additional support is not made available.
It urged Mr Swinney to reduce the “bureaucracy over small pots of monies” and give local government “full autonomy” over how the funds are used.
It also requested that Barnett consequentials from the UK Government are targeted to support vital local government services.
But Mr Swinney said it would take away vital cash from the NHS, which is under significant pressure.
Mr Swinney has already cut £400m from health budgets this financial year to fund pay deals.
He has warned that "a very hard limit on the money available this year" to fund public sector pay agreements.
Responding to a topical question on the letter from council finance directors from Labour MSP Mark Griffin, Mr Swinney said: “I do recognise the gravity of the financial challenge.
“I’m faced by that everyday in what I’m wrestling with in the Scottish budget just now, in dealing with the profound implications of inflation, public sector pay and energy costs and these will be felt by public bodies the length and breadth of the country.”
In response to the council finance directors’ request on Barnett consequentials spending, he said: “If I followed that, that would mean there wouldn’t be any extra money to the health service. Now I don’t for a minute believe that’s Mr Griffin’s position.
“I can’t do everything that’s asked of me in this letter because it would be impractical for me to do so. It would starve the health service of resources.”
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