Sarah HallBelt-tightening council bosses have warned they could have to dip into their reserves after the government refused to allow them to borrow up to �10m to cover losses caused by the collapse of Icelandic banks.Sarah Hall

Belt-tightening council bosses have warned they could have to dip into their reserves after the government refused to allow them to borrow up to �10m to cover losses caused by the collapse of Icelandic banks.

But Norfolk County Council leaders were quick to stress the refusal would not affect proposals for a lowest-ever council tax increase of 1.9pc.

The county council, which is looking to make �115m worth of savings over the next three years, was hit by the collapse of Iceland's banks last year - with �32m invested in three banks.

Last month the council hit a snag in getting that cash back after one bank, Glitnir, said it would not give councils priority status, in contrast to other banks, which meant councils would only get back about a third of the cash invested.

The authority asked the government if it could make a long-term borrowing of just over �10m to cover the possible losses - only to be refused permission because other councils were in bigger trouble.

Ian Mackie, cabinet member for finance and performance, said: 'While this is disappointing, we have always had other options available to us and these include the possibility of covering any loss in the short-term by drawing from our reserves which stand at almost �44m.

'There will be no impact on the budget for 2010-11 and nor will there be any need to increase the recommended level of council tax.'

And Mr Mackie said the council remained optimistic it would yet get back the cash it had tied up in Glitnir Bank.

He said: 'We have always known that recovering funds from the three Icelandic banks was going to be a drawn-out process, with twists and turns likely along the way.

'The proceedings still have some way to run and in the meantime, the Local Government Association is making the strongest possible case to the Icelandic authorities for the full return of the money invested by very many UK public bodies.'

The blow comes at a time when Norfolk County Council keeping a particular close eye on its financial planning, with a controversial finance package looking to plug a �115m funding gap between now and 2013.

The only other councils in Norfolk which lost out because cash was invested in the Icelandic banks were Breckland District Council, with �12m and Great Yarmouth Borough Council, with �2m.