English councils went on a massive £6.6bn commercial property spending spree over the past three years, buying office buildings and shopping centres to offset the impact of government funding cuts, the public spending watchdog has revealed.

The scale of the rush to acquire revenue-generating investments to fund council services has left many local authorities potentially badly exposed in the event of an economic recession or a property crash, the National Audit Office (NAO) said.

Between 2016 and 2019, councils spent £3.1bn buying office developments, £2.3bn on retail property, including £759m on shopping centres, and nearly £1bn on industrial property – a 14-fold increase on the previous three years.

The chair-elect of the cross-party Commons public accounts committee, Meg Hillier MP, warned that the austerity-fuelled property investment boom raised “serious alarm bells” and called for ministers to take steps to minimise risks to taxpayers.

Hillier said: “Given local authorities have faced such big cuts, it’s understandable that many might take part in risky investments to get more money in. However, a 14-fold increase in spend on commercial property raises serious alarm bells.

She said the ministry for housing, communities and local government “needs to take stock and ensure that there is protection for local taxpayers from local authorities acting as investment bankers”.

The NAO said the government should review the rules on council borrowing to ensure they were “still fit for purpose” and that local taxpayers were properly protected.

It said that, in 2010, just 11 councils collectively spent £100m on 13 acquisitions. Local authority commercial property investment took a sharp upturn in 2016, however, and last year 107 councils spent £2.2bn on 221 investment opportunities. Of those, just 49 unnamed councils accounted for 80% of the spending.

One of the pioneers of the commercial property boom was tiny Conservative-controlled Spelthorne district council in Surrey, which has built a £1bn portfolio using cheap Treasury-backed loans as a way of countering £2.5m of government grants cuts.

It said last year that income from commercial property would cover half its £22m annual operating budget, raising more for its coffers than council tax. Without that income it would have had to make cuts to meals on wheels and bin collections.

Opposition councillors have accused it of “gambling with residents’ money” but its leader councillor Ian Harvey told the Financial Times that his critics were “devoid of realistic alternatives” to government cuts to its central grant funding.

There were huge regional variations in councils’ appetite for commercial property investment, the NAO said. Over the last three years south-east England councils spent £3.5bn on acquisitions, compared to £131m by councils in the north-east. More than £4bn of investment was poured into developments in the south-east and London.

The NAO said it was hard to assess the overall risk to councils, or measure the reliance of council services on property investment income. But it noted that the most active investor councils had seen borrowing rise from almost nothing in 2015 to more than seven-and-a-half times their annual revenue funding.

Asked by the NAO why they had invested in commercial property, most councils surveyed said it was to generate income to fill gaps in their budgets. Those who invested in shopping centres mainly said it was part of a broader regeneration plan. Some had avoided property, instead investing in other areas such as renewable energy.

Councillor Richard Watts, chair of the Local Government Association’s resources board, said £16bn of cuts since 2010 had stretched councils to the limit: “Councils have faced a choice of either accepting funding reductions and cutting services – such as care for older and disabled people, protecting children, reducing homelessness, fixing roads and collecting bins – or making investments to try and protect them.”

Although the Treasury increased the cost of council borrowing last year, it is unlikely to significantly arrest the trend. A survey of councils earlier this month found 66% said they will become more reliant on income from commercial investments in the future and 75% planned to increase their level of borrowing.