Personal Finance: Council tax looks set to rise yet again

COUNCIL TAX bills are likely to rise next year by at least twice the rate of inflation - and perhaps by much more - as a result of last week's announcement by the Government of the grant it is giving to local authorities. On the figures released last week the typical council tax for a band D home, valued at between pounds 68,001 and pounds 88,000 at 1991 prices, will rise by 4.5 per cent from pounds 748 to pounds 782. Business rates, which are set by government and handed back to local authorities, will rise by 8.7 per cent - more than three times the rate of inflation.

The Government has increased its grant support to local authorities by 5.4 per cent and says it expects councils to limit their council tax rises to 4.5 per cent. The Local Government Association, which represents councils, says tax increases will depend on the decisions taken by local authorities, but it expects most to increase council taxes by a maximum of 5 per cent.

Individual councils, though, may choose to set much higher increases, as a result of the elimination of the cap. In recent years central government had effectively set local council taxes by giving every council a cap that fixed the maximum charge. The Liberal Democrats say that abolition is likely to lead to typical council tax increases of about 8 per cent. The Conservatives also suggest that the Government's prediction is optimistic.

Gillian Shephard, the shadow Environment Secretary, claimed that the settlement showed a shift in financial support away from local authorities in London and the South-east, towards Labour's "friends in the north". But the Local Government Association says this is only marginally true. The sting in the tail is for residents whose local authorities raise council taxes by more than 4.5 per cent. Councils will be penalised for above-average tax increases by not being fully reimbursed by the Department of Social Security for the extra cost in council tax benefit increases. The higher the increase, the lower proportion of benefit the DSS will repay.

Individual residents receiving council tax benefit will not lose out. The council will still pay council tax benefits in full, but part of the extra cost will fall on other council tax payers. This means that where a council wants to increase its tax by 10 per cent - more than twice that suggested by the Government - the bills will probably rise by 12 per cent, to cover the extra cost of paying council tax benefits.

"They are robbing the poor to give to the poorest," said Paul Burstow, the Liberal Democrat local government spokesman. "The Government would be better to address the fundamental flaws in the local government finance system, rather than playing the role of a twisted Robin Hood."

Eventually the whole system of local government finance will be reformed, and the Government is carrying out a consultation process on how to replace a system that confuses almost everyone within local authorities, let alone the public. However, a different allocation method will produce many winners and losers and will be highly controversial. It is now intended to leave implementation of a new system until after the next general election.

The latest grant distribution system will stay in place for the next three years, which should produce greater stability in council tax charges. Government grants are the most important factor in setting council taxes because they make up about 75 to 80 per cent of a council's income.

Council tax bills will gradually come down, the Government hopes, through measures being introduced by a new Local Government Bill, also published last week. It replaces an obligation on councils to tender contracts competitively with a regime called "Best Value", which is expected to be tougher on councils.

All local authorities will have to enter into joint ventures with businesses and other councils where this will improve efficiency. They will also be required to ask residents what level of services they want, and what council tax they are willing to pay - a system likely to be tested by many local authorities for the first time in setting their council taxes for the next financial year.

England's highest council tax is in Liverpool, where the band D charge this year was pounds 1,172. The city's council welcomed its grant increase of 5.1 per cent, and it has committed itself to not raising its charge for at least three years.

Last week's grant settlement only affected English local authorities. Welsh and Scottish councils will learn their grant levels in the next few days.