Up to half of Britain’s care homes will close and the NHS will be overwhelmed by frail, elderly people unless the chancellor, George Osborne, acts to prevent the “devastating financial collapse” facing social care, an alliance of charities, local councils and carers has warned.

In a joint letter, 15 social care and older people’s groups urge Osborne to use his spending review on Wednesday to plug a funding gap that they say will hit £2.9bn by 2020. They warn that social care in England, already suffering from cuts imposed under the coalition, will be close to collapse unless money is found to rebuild support for the 883,000 older and disabled people who depend on personal care services in their homes.

Osborne has already decided to use his overview of public finances to give town halls the power to raise council tax by up to 2% to fund social care, in a move that could raise up to £2bn for the hard-pressed sector. However, the signatories of the letter, such as Age UK and the Alzheimer’s Society, want him to commit more central government funding to social care.

The looming £2.9bn gap “can no longer be ignored”, the letter says. “Up to 50% of the care home market will become financially unviable and care homes will start to close their doors,” it adds. “Seventy-four per cent of domiciliary home-care providers who work with local councils have said that they will have to reduce the amount of publicly funded care they provide. If no action is taken, it is estimated that this would affect half of all of the people and their families who rely on these vital services.”

Osborne’s endorsement of a hypothecated local tax to boost social care comes after intense lobbying behind the scenes and public warnings from bodies such as the King’s Fund health thinktank.

“Social care in England has been in retreat for a long time. But the fact that the industry is now losing its appeal, both as a business and as a form of employment, marks a new and dangerous phase in its decline,” said Caroline Abrahams, Age UK’s charity director, who signed the letter. She urged Osborne to use the spending review “to bring stability to a worryingly fragile situation”.

Jeremy Hughes, chief executive of the Alzheimer’s Society, another signatory, said: “Since 2010, £4.6bn of cuts have already resulted in an estimated 500,000 older and disabled people being denied access to care. If the government blazes ahead with 25%-40% cuts to local authority budgets, more people with dementia will be severely affected.”

The letter is also signed by a number of care home providers, who fear the introduction of Osborne’s national living wage will add to their costs and make providing care unviable.