Scotland's councils could be facing a shortfall of more than £550 million in just two years’ time, public spending watchdogs have predicted.

The Accounts Commission has forecast the gap between the amount local government spends and its income could grow from £87 million in 2016/17 to an estimated £367 million in the next financial year, before rising again to £553 million in 2018/19.

By then, analysis suggests more than a third of Scotland’s 32 local authorities will face a funding gap that is greater than the amount of cash they have in reserves.

The figures were contained in a new report from the Accounts Commission which warned councils will “need to make significant savings to address forecast funding gaps”.

It went on to state “significant challenges for local government finance lie ahead”.

The Accounts Commission warned: “Councils’ budgets are under increasing pressure from a long-term decline in funding, rising demand for services and increasing costs such as pensions.

“There is variation in how these pressures are affecting individual councils, with some overspending their total budgets or budgets for individual services such as social care.

“Councils need to change the way they work to deal with the financial challenges they face. All councils face future funding gaps that require further savings or a greater use of their reserves.”

Council incomes amounted to £18.9 billion in 2015/16, with £10.9 billion (57%) of this cash coming from the Scottish Government – a drop of 1.7% in real terms from 2010/11.

When the figures for 2016/17 were taken into account, authorities have seen a real-terms reduction in government funding of 8.4% since 2010/11, with the Accounts Commission stating this is “approximately the same as the reduction in the Scottish Government’s total budget over the same period”.

The report said councils “have experienced a long-term decline in their grant funding from the Scottish Government”, adding this “is is expected to continue to fall in future, putting greater pressure on budgets”.

Authorities spent £19.5 billion in 2015/16, with spending increasing on “key services” such as social care “because of rising demand from an ageing population”.

The Accounts Commission said: “Many councils overspent their social-care budgets and this poses a risk to their longer-term financial position.”

Councils’ overall debt currently stands at £13.72 billion, costing local authorities about £1.5 billion a year in interest and repayments.

The Accounts Commission said: “Long-term financial strategies must be in place to ensure council spending is aligned with priorities.”

It added that not all authorities have a financial strategy in place for the medium to long-term. The report stated: “Three councils (East Renfrewshire, Glasgow City and Highland) do not have a financial  strategy covering the medium or long term.”

Councillor Kevin Keenan, finance spokesman for local government body Cosla said: “It is virtually impossible to set medium and long-term financial plans based on  short-term funding and yearly budgets from Scottish Government.

“There is no doubt that despite difficult settlements from the Scottish Government, councils have managed their finances well but significant challenges lie ahead in maintaining this.”

A Scottish Government spokesman said: “Despite the cuts to the Scottish Budget from the UK Government, the Scottish Government has treated local government very fairly.

“This report highlights the pressures that councils 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 value for money.”