The Accounts Commission’s annual overview of local government charts a 5 per cent drop in revenue funding in the next financial year, bringing a total real terms fall of 11 per cent since 2010/11.

The report said councils have been effective in balancing their budgets to date but face increasingly difficult decisions to continue making ends meet. Increasing financial pressures, a rising demand for services and an ageing population mean councils need to be open to all options for delivering services.

Despite making savings to meet their budgets, indicators show that councils have improved performance in areas such as educational attainment, housing quality and waste recycling in 2014/15. But customer satisfaction in a number of services has declined.

In anticipation of future funding reductions, the majority of councils underspent their 2014/15 budgets and increased their reserves. The report says that most councils have reduced their workforces to save money and many are planning further staff reductions. But they have to ensure that they will have the people with the knowledge, skills and time to design, develop and deliver effective services in future.

To date many councils have balanced their budgets by making incremental savings to existing services, reducing staff numbers or increasing charges. The report warns that these are neither sustainable nor sufficient solutions given the scale of the challenge facing councils.

Councillors also need to keep updating their skills and knowledge to fulfil their complex and demanding role, it adds. It is increasingly important that they are able to challenge and scrutinise decisions and performance. More effort is also required to better involve local people and communities in making decisions and delivering services.

Douglas Sinclair, chair of the Accounts Commission, said: “Councils have coped well so far but the scale of the future challenge requires longer-term planning and a greater openness to considering alternative forms of service delivery. What is important for the public is that whatever choice a council makes about how to provide a service, it can demonstrate that the choice represents best value both in terms of cost and quality.”

COSLA welcomed the report’s recognition that councils have been effective in balancing their budgets to date, despite increasing financial pressures.

Councillor Kevin Keenan, COSLA’s finance spokesperson, said: “As the report recognises, councils not only face financial challenges, not least of which being the £350m, 3.5 per cent, cut to their 2016/17 budgets, but they also face rising demand in services from an ageing population. The pressure on delivering services with these challenges cannot be under-estimated.

“The report identifies that councils quite rightly have had to make savings but, even with these savings councils have improved their performance overall. Yes councils can always do more to deliver services differently and the report amply demonstrates the degree of innovative delivery approaches which councils are taking already. But as we have sought to point out to the Commission, it is all well and good saying that councils need to be more innovative. It is quite a different proposition when they are faced with increasing central direction over how they deliver services which focus on inputs, rather than outcomes for our communities.

“I welcome the Commission’s recognition in this regard that educational attainment has improved and I trust that the message is loud and clear that achieving success through local decision making can and does work.

“Some commentators may wish to make a point about council underspends. These underspends are deliberate and necessary. If our communities want to see councils bring about the changes needed to respond to our future challenges, then this must include councils making choices about managing public money in a way that can best achieve our local aspirations. Maintaining reserves is not only prudent, it is necessary to meet the future challenges.

“Finally I welcome the report’s focus on the complex and demanding role undertaken by councillors. Councillors are representatives of local communities and it is to those communities that they must answer. Quite rightly as the report suggests those communities should also be involved in making decisions on service delivery. If councils and councillors are more empowered this by nature flows through to our communities and allows for better decisions locally.”

Andy Wightman, Scottish Green Party local government spokesperson, said the key to tackling councils’ budget crisis is to reform local democracy.

The MSP candidate for Lothians said that it is crucial for councils to work with communities to develop and improve services, but that focus should be placed on giving councils the fiscal freedom to raise and spend revenue according to local needs.

Andy Wightman said: “Audit Scotland’s new report clearly shows that our councils simply cannot face any more cuts to their already stretched budgets. Local authorities have been scrimping and saving to try and balance their finances in the face of drastic cuts, without the ability to properly raise revenue through local taxation.

“The Scottish Greens believe in the fundamental value of local democracy – we need to empower people to be able to take key decisions about how their communities are run. Working with community groups to develop services in an important first step, but will not be enough to bring power back into the hands of Scottish people. To do this, we need to give council the fiscal freedom to raise and spend revenue according to local needs.

“The Scottish Greens will continue to campaign for a local tax system that supports local democracy and gives people the ability to decide on what services they need, and how these services should be funded.”