COUNCILS are facing a £1 billion funding shortfall by 2019, forcing them to choose between emptying their reserves or slashing services, according to spending watchdogs.

The Accounts Commission said that, after already drawing £87m from reserves to maintain services this year, Scotland’s 32 councils faced far bigger funding gaps of £367m next year and £553m in 2018-19.

The Commission said councils faced “significant challenges” ahead, with budgets under pressure from a “long-term decline in funding”, and rising demand for services, particularly social care as a result of Scotland’s ageing population.

Local government is also creaking under £15.2bn in debt, costing £1.5bn a year to service, with 22 councils spending more than 10 per cent of revenue income servicing debt last year.

Within three years, over a third of local authorities will have to plug financial black holes bigger than their entire general reserve fund - the safety net held in case of emergency spending.

The Commission warned councils must make “significant savings”, or general reserves could fall from almost £1.2bn in 2015-16 to a precarious £165m in 2018-19, a drop of 86 per cent.

Scottish Government funding to councils has already fallen by 8.4 percent in real terms since 2010-11, in line with the Westminster squeeze on Holyrood’s own funding.

The watchdog’s Financial Overview 2015-16 said: “All councils face future future funding gaps that require further savings or a greater use of reserves. Councils face tough decisions around their finances that require strong leadership and sound financial management.”

Councils had a total income of £18.9m last year, £10.9bn from the government and business rates, £1.2bn from rents, £2.1bn from council tax and £4.8bn from fees and charges.

This year’s government grant has fallen from £489m to £9.6bn, with the squeeze increasing in 2017-18 and 2018-19.

The Commission warned some councils had not drawn up medium (three to five year) or long-term (five to 10 year) plans for their finances.

Only 14 councils had long-term strategies, while 15 others had medium-term ones, and East Renfrewshire, Glasgow and Highland had neither.

Council umbrella group Cosla said the SNP Government’s continued use of one-year budgets - Finance Secretary Derek Mackay recently cancelled an overdue three-year spending review - made it "virtually impossible" to plan ahead in detail.

The Commission said the overall lack of cash mean it was vital that councils think long-term.

Commission deputy chair Ronnie Hinds said: "Councils are generally doing a good job with their finances in difficult circumstances. But pressures continue to increase on a number of fronts at the same time as they face the prospect of further reductions in their funding. It's vital that councillors and officers set medium and long-term financial plans".

The Commission said councils had £2.5bn of “usable reserves” at 31 March 2016, the largest and most flexible of which were general funds containing £1,172m.

If councils used general funds to cover shortfalls in 2017-18 and 2018-19, instead of making savings or hiking charges, the reserves would fall to £165m.

As a percentage of the general revenue, general fund reserves would fall from 9.1 per cent this year to a precarious 1.2 per cent at the end of 2018-19.

Tory MSP Graham Simpson said the report showed the impact of “budgets slashed by the SNP in recent years”, adding: "We would urge the SNP to come clean on what lies in store for local authorities down the line.”

Calling on the government to use new tax powers to boost investment in services, Scottish Labour Deputy Leader Alex Rowley said: "These figures confirm that the SNP has slashed funding for local services, like schools and social care, which put the life chances of people across Scotland at risk. The SNP shouldn't use the Scottish Parliament as a conveyor belt for Tory austerity. We should use the tax powers of the Parliament to invest in public services and give everybody a fair chance in life.”

Scottish LibDem leader, Willie Rennie MSP said the SNP should raise income tax by a penny to raise more education and stop inflicting “brutal cuts” on councils.

Cosla finance spokesman councillor Kevin Keenan said: "Despite difficult settlements from the Scottish Government, councils have managed their finances well but significant challenges lie ahead. Whilst councils and councillors do their best to mitigate the damage to communities from political choices made at the centre, this is becoming harder and harder to do."

Jenny Laing, convener of the group of non-Cosla councils, accused the First Minister of a "war on local authorities".

Referring to the 1.3m people in Aberdeen, Glasgow, Renfrewshire and South Lanarkshire, she said: "The people we represent are looking at a £1bn shortfall over the next five years.

"This is a horrendous situation. Nicola Sturgeon... really couldn't care less about the people of Scotland."

The Scottish Government said it had treated local government "very fairly".

A spokesperson said: “This report highlights the pressures that councils – like other parts of the public sector – face, but also highlights that they are continuing to improve services. We expect local authorities to continue to use resources as efficiently and effectively as possible to ensure taxpayers get the best possible services and value for money."