The Department for Communities and Local Government (DCLG) must establish emergency intervention plans in case budget cuts and increased demand for services force a spate of town hall bankruptcies, government spending watchdogs warned today.

Councils are on course to achieve £4.6bn cashable spending review savings by April, but still need to find an equivalent sum again before March 2015, the National Audit Office's (NAO's) second value for money report on local government calculates.

The auditor's study into the financial sustainability of local authorities outlines the increased difficulties town halls face in maintaining services over the rest of the spending review period while absorbing 28% cash cuts.

Some authorities affected by the continued economic downturn might simultaneously experience a decline in business rates income and an increase in welfare claimants, the auditors note – with the cumulative effects of such changes varying, depending on wider economic conditions.

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The DCLG should put in place arrangements to spot dangers early, the watchdog urges, especially since the risk for councils is spread unevenly across the sector.

Existing measures to address council failure depend on long-established safeguards and central government intervention generally occurs in the case of 'one-off' failures related to services or corporate governance – which last occurred at Doncaster MBC in 2010.

But the NAO found at present there is no proven framework to address 'multiple financial failures during possibly more challenging times for local authorities'.

Amyas Morse head of the National Audit Office said: 'The department will need to be able to detect emerging problems and respond flexibly and quickly.'

Chair of the influential Commons Public Accounts Committee (PAC), Margaret Hodge said: 'As the cuts kick in, the department needs to make clear what it will do if multiple authorities fail financially.'

Ms Hodge added the PAC expects the DCLG to provide MPs 'with a clear statement on the financial impact of the government's changes to authorities’ funding and income and what this might mean for local services'.

More recently, West Somerset DC was at risk of failing to provide statutory services to an acceptable level, before proposals were put in place for the authority to merge with neighbours. Birmingham City Council also claimed it was economically unviable when a £750m equal pay claim threatened to drain funds to a level that would prevent it from providing frontline services.

Sir Merrick Cockell, chair of the Local Government Association said:'The report paints a picture of increasing financial risk and uncertainty for councils which are already dealing with some of the deepest cuts in the public sector.'

In response, a DCLG spokesman said:'Councils need to do their bit to deliver sensible savings, and in turn, protect frontline services and keep council tax down.'