Hugh Lightbody, from the local government body Cosla, said councils have delivered “vital services” during the pandemic but this has “come at cost”.
Sarah Watters, the chief officer for local government finance at the group, said authorities are now looking to “recast and reprioritise” their budgets.
She also told MSPs on Holyrood’s Economy Committee that talks are under way with the Scottish Government as local authorities seek to use cash already allocated to them for capital projects for day-to-day spending instead.
Mr Lightbody, the chief officer at Cosla’s Business Gateway national unit, warned: “With reductions in income from a range of sources, and increased expenditure to respond to the crisis, councils will face a funding gap this year of £350m once all consequentials have been factored in.
“Many councils will be starting from a deficit position so if the Covid-related gap cannot be addressed then there will ultimately need to be further reductions in services.”
Ms Watters confirmed councils are “looking at a gap of around about £350m” in funding.
She said Cosla has been working with the Scottish Government to “explore a range of fiscal flexibilities that we would seek to use in this financial year and next financial year”, adding this includes using a proportion of this year’s general capital grant for revenue purposes.
Ms Watters said such measures will “put things on a slightly more sustainable footing for next year”.
While she insisted this cannot be an “alternative to fair funding for 2021-22”, she added they “would certainly help councils to mitigate some of the issues we are experiencing this year in relation to revenue pressures”.
Her comments came after Mr Lightbody told the committee that “despite the challenges we have continued to deliver vital services to vulnerable people, communities, and businesses across Scotland”.
He said councils have “played a pivotal role in ensuring Scottish Government funding for businesses has been delivered quickly and effectively”.
Mr Lightbody told MSPs that by September 8 councils had received and processed more than 100,000 applications for the small business grant, with more than £1 billion of cash being paid out to more than 90,000 firms.
The Business Gateway service, which supports companies, handled more than 6,000 enquiries from established businesses in the first quarter.