The Scottish executive has launched an independent review of local government funding as a public finance specialist called into question the way money is allocated to social services departments.

The executive review, chaired by Sir Peter Burt, will take 18 months and look at all areas of local government finance, including the grant area expenditure formula which determines how much each authority gets to fund social services.

A report for Aberdeen Council by public finance specialist Arthur Midwinter reveals a £135m shortfall in children's social work services. He blames this on an erosion of the core grant for children's services under the distribution formula, alongside a rise in demand for services.

On average, Scottish councils are spending 50 per cent more than the executive budgeted, while 12 authorities are spending 70 per cent more.

Midwinter said the funding gap was "exceptionally large" compared with the 2 to 3 per cent gap normally seen in education.

"There is a clear case for the executive to review its funding provision, or its own objectives for children's services will not be met," he warned.

But Alan McKeown, policy manager at the Convention of Scottish Local Authorities, said the grant area expenditure formula allowed councils to take money from other funding streams to meet priorities.