Reductions in local government funding could mean some councils become 'unviable', according to a report by the Public Accounts Committee (PAC).

Central government grant funding is set to reduce by over a quarter in real terms (£7.6bn) between 2011 and 2015. This, coupled with reforms to business rates and council tax benefits, is having a substantial impact on the local government finance system, the committee said.

Commenting on the evidence contained in its report, Financial sustainability of local authorities, PAC chair Margaret Hodge said that central government 'does not properly understand what the overall impact will be on local services'. She said that while some information was available, it was 'superficial and incomplete'.

'For instance, the Department for Education has failed to provide a proper cost analysis of how funding reductions will affect services to children. Nor has enough work been carried out across government departments to determine how funding reductions in one area of spending might affect services in another: for example, how cuts in local authority adult social care might lead to bed blocking in hospitals,' Hodge said.

The report warned that the continuing financial constraints could make it impossible for some councils to meet their statutory obligations, and said the first local authority likely to fail has already been identified. However, it says the Department for Communities and Local Government 'does not have a clear strategy for responding to and dealing with such failures' and should overhaul its accountability arrangement and clarify its plans to respond if councils become unviable.

Hodge said: 'The Department must understand better the impact of its cuts on vulnerable groups. We also want to know what actions it would take in the event of multiple financial failures of local authorities.'

Steve Freer, CIPFA's chief executive, said: 'CIPFA's own surveys of local authority Chief Finance Officers (CFOs) have shown that, whilst to date the impact of expenditure cuts on frontline services has been minimised wherever possible, CFOs are increasingly concerned about future years and the longer term prospects for critically important services. With the next spending review rapidly approaching it is essential that the government understands and models carefully the likely effect on key services and the resulting potential impact on families and communities across the country.'