By Daniel Hunter

Councils' cash reserves will run out in five years if local authorities use them to cover the expected cuts in the money they receive from government.

The warning comes as the latest figure on councils' cash reserves is released, showing that prudent local authorities have set aside £17 billion. This includes £12.4 billion in earmarked funds, most notably allocated for growth promoting infrastructure projects.

The remaining £4.5 billion is to help dampen the impact of cuts to council funding and manage the risks associated with major policy changes such as the localisation of business rates and council tax benefit, which are both due to be introduced next year.

With cuts in public spending tipped to carry on until 2020, analysis by the Local Government Association shows that if councils used all of the £17 billion to cover the expected cuts to local government funding, the reserves would run out by 2018. Such a move would also leave councils with no funds to make vital investments or manage any new financial risks over the next five years.

"Prudent councils fixed the roof while the sun was shining which is why they are now in a position to invest in the infrastructure and development projects which will help drive Britain out of economic downturn," Sir Merrick Cockell, Chairman of the LGA, said.

"Billions of these reserves are essentially a growth fund which councils are using to build new roads, regenerate areas and attract investment from job-creating businesses.

"Councils are working extremely hard to shield frontline services from the 28 per cent cut to the money they receive from government. But cash reserves can only dampen the impact, not fill the gap. If councils plundered their reserves to cover the cuts, the cupboard would be bare within five years and there'd be nothing left to invest in the growth promoting projects Britain desperately needs.

"As with any prudent family budget, councils set aside money to invest for the future and hold some back for a rainy day. Similarly, a well run business will keep at least six to eight weeks' outgoings in reserve. The latest figures show that council reserves cover exactly that. If the banks had taken a similar approach we wouldn't be in the mess we are in today."

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