Ministers fight over plan to peg council tax bills by easing local government rules

A cabinet row has broken out over the prospect of another huge rise in council tax bills next April, on top of the record 13 per cent increase this year.

Ministers are increasingly worried that the Government will be blamed for the above- inflation rises in recent years, which Tories have attacked as Labour's "biggest stealth tax". But they are divided over how to keep down bills.

John Prescott, the Deputy Prime Minister, who is responsible for local government, wants the Government to cut sharply the "ring-fenced" money that Whitehall hands to town halls. This would give councils more room for manoeuvre on spending and taxes.

Other ministers accept the Prescott plan in principle, but have refused to cut their own earmarked grants to councils. One minister said yesterday: "We all know there is an obvious solution: to reduce the amount of money handed over with strings attached. But there is a stalemate because spending ministers are saying the money should come from other departments, not theirs. It's a case of 'not in my back yard'."

Ministers said to be opposing a reduction in their areas include Charles Clarke, the Secretary of State for Education, David Blunkett, the Home Secretary, and John Reid, the Secretary of State for Health.

Next week Mr Prescott will announce the annual settlement on town hall funding. He is expected to argue that councils should keep their rises in single figures next April, and to threaten to "cap" the budgets of high-spending authorities.

However, council leaders have already warned that householders face a 12 per cent increase next spring, an average of more than £100 each, or cuts in services unless the Government finds an extra £800m. Council chiefs have told Mr Prescott they face a £300m shortfall on residential care for the elderly and children, and £200m on police budgets.

Despite the cabinet rift, ministers believe Mr Prescott will prevail because Tony Blair is likely to back his idea of cutting the amount of "ring-fenced" grants to town halls. The move would be presented as part of the Government's conversion to "new localism" and an end to the "command and control" approach ministers have been accused of since winning power.

A study by the council finance expert Rita Hale for the Local Government Information Unit (LGIU) found that specific grants for education had risen faster than those for any other service since 1997, from £250m to more than £3.5bn in the current financial year. In social services, earmarked grants have risen from £454m to £1.8bn over the same period.

Ms Hale's report said: "We concluded that, in part, this change in the spending mix was likely to be the result of pressure from departmental ministers to boost spending in their areas and the effect of the requirement to provide matching funding for some specific grants."

Dennis Reed, the LGIU's chief executive, said: "The £800m shortfall estimated by the Local Government Association must be taken seriously. It would be undesirable if ministers continued putting councils in a position where the delivery of the costly new responsibilities that Whitehall has placed upon local government is not properly funded."