A reduction in services and increased charges will be inevitable in facing up to its budget shortfall.

And once the council tax freeze is lifted in 2011/12, charges could go up by 3% to increase council income.

The bleak picture painted to councillors yesterday afternoon (Thursday) was that council operating costs would have to be slashed by £8 million every year from April, 2011.

No indication was given about which services might be hit, but a pledge was made that no stone will be left unturned in the local authority's drive to rein back spending.

Council departments responsible for an overspend will also have an obligation to help balance the books by making savings elsewhere.

Efforts to claw back half the sum have already begun, with £4 million in savings expected to come from the Designing Better Services (DBS) programme.

Spelling out the message to councillors at a special meeting, Mark Palmer, chief financial officer, said: "We must be spending £8 million less every year than we currently spend on delivering council services. That could be on the light side of the challenge we face.

"£8 million is only the start of the financial problem this council is facing as part of the overall UK problem."

Mr Palmer was referring to the credit crunch, which has led to a huge rise in national debt, forecast to increase further in the years ahead.

The level of national tax revenues to fund that debt has decreased, with a knock-on effect on local authorities who receive 80% of their funding from national taxation.

Moray has also been hit by poor returns on its investments and is well aware that it can no longer rely on efficiency savings targeted in the DBS programme as being enough.

The current financial picture is in stark contrast to when the council's four-year financial plan was agreed in May, 2008 and economies were buoyant.

The need to tighten the council purse strings also comes at a time when the council faces uncertainty regarding PPP operating costs, pay awards, future grant funding, out-of-area placements and the flood scheme.

The council remains committed to retaining £5 million in reserves – the amount of excess on its insurance to the cost of a flood emergency – until all its flood schemes are in place.

Councillor Allan Wright, vice-convener of Moray Council, said that every budget heading in the council would come into focus, and there would be consultation with oppositions groups, before a report is replaced before the full council in September. "The gravity of the report cannot be emphasised enough, and it will certainly be difficult for us."

Councillor Stewart Cree (Keith and Cullen) added: "This is a stark report that clearly sets out what has to be done. We have to take action now – we can't wait any longer.

"I am glad the budget review is on course. That will be extensive and will take time but the message from that must be clear.

"We have to protect core services, the vulnerable, elderly, school children, and others, and make sure that every penny counts and enforce a culture of prudence. It is not a black day but a day to recognise what has to be done and start doing it."

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