Action at Holyrood in the early weeks of 2008 will focus on the Budget. This is new territory, where the Scottish Government lacks a majority and has to horse-trade with the opposition.

During the recess, MSPs on the Finance Committee are considering the recommendations made privately by the subject committee, such as education and health, for shifting resources around.

The rules require that money put into a priority not chosen by Finance Secretary John Swinney must be matched by a cut elsewhere. The Finance Committee looks across the range of spending, and can recommend cuts from one area to put more money into its preferred option.

Chaired by SNP trusty Andrew Welsh, its conclusions are only recommendations. But if Mr Swinney is not willing to give at least some ground to opposition parties' priorities - police and drugs spending for Tories, training for Labour, universities for LibDems, less roads spending for Greens - he will struggle to have his budget approved.

That is only the start of the political battle. With the first of the next three years' funding financially tight, there is going to be pain in parts of the public sector that have enjoyed eight years of steeply rising budgets.

One of Mr Swinney's innovations has been to win friends in local government by giving them more freedom to spend money, with less of it ring-fenced. In the current 2007-8 year, nearly £3bn can be spent only on specified items, out of more than £10bn.

The plan for the £11.14bn council grant next financial year is for £2.2bn of that to be removed from ring-fencing, while £500m of police grant remains (which councils are happy with), and another £200m for community regeneration, which will cease to be ring-fenced in 2009-10.

This has given Mr Swinney an opportunity to pass the blame for future cuts on to councillors. It has also let Labour at Holyrood highlight the 40 spending areas which had specific money identified, but where there are now no guarantees.

Labour MSPs reckon most problems will arise in flood prevention, which costs vast sums that councillors will be tempted to divert to more pressing needs, at least until heavy rain.

The issue that has most political mileage is in funding for vulnerable and disabled children, if only for its emotive impact. A Commons committee recommended a major increase in spending on services for them in October 2006. The Treasury responded with £340m extra, £34m of which came to Scotland. That was passed on to councils by the previous Holyrood administration and earmarked for children's services.

It has become a political football. While Labour talks of betraying vulnerable children, SNP ministers stress the money is still there, but have deliberately chosen not to say where it should be spent.

That requires 32 councils being held to account by local voters and official watchdogs, with annual reports on their progress in hitting nationally-agreed service outcomes.

It also requires the voluntary and charity sector to re-orient itself to councils, aware that its services are often the most vulnerable to change and cuts and with major concerns highlighted in The Herald today, with strong concerns voiced by the Prince's Trust, NCH Scotland, and Children 1st.

The SNP dismisses the Labour attack on two grounds: one is that the Labour leadership at Holyrood appears "determined to sabotage improved relations between central and local government", contrasting this with less harmonious relations while Labour dominated both.

Nationalist politicians are also delighted to find Labour split.

The Holyrood front bench warns the end of ring-fencing is a danger to vital services, while Labour's council leadership has signed up to the Swinney reforms, being particularly positive about the end to ring-fencing.

The split was there in the last executive, with Finance Minister Tom McCabe favourable to more autonomy but colleagues led by Andy Kerr blocking such moves.

As explained today by Pat Watters, a Labour councillor in South Lanarkshire, but one who represents all the parties within the Convention of Scottish Local Authorities, this change is seen as giving local government its proper place in responding to local priorities.

At issue are competing theories of government: localism and accountability. At stake are billions of pounds, and vital services.