Council tax set to hit middle-classes

THE MIDDLE classes of London and the Home Counties, vital to the Conservatives' election victory, will face steep rises in local taxation in April unless the Government acts to cushion the blow of the new council tax, analysts believe.

First estimates of 'winners' and 'losers' under the tax suggest that the South - the traditional Tory heartland - will bear the brunt. Its local authorities stand to lose pounds 450m in government subsidies as resources are switched to the North. Taxpayers, many already burdened by high mortgage repayments, could find that their bills double.

Research by the merchant bank Morgan Grenfell indicates that the new tax will be a major headache for the Government, with some households facing increases of more than pounds 500. Sally Wilkinson, Morgan Grenfell's UK economist, compared present poll tax charges with possible council tax bills, assuming local authority spending remains at current levels. She found average households in Greater London stand to lose pounds 300, with the rest of the South-east losing pounds 160, the South-west pounds 110 and East Anglia pounds 45. The rise is likely to be even more marked for one- and two- adult households, especially those living in more expensive properties. These groups did relatively well out of the poll tax but could now be hit by a sharp increase.

Sir Rhodes Boyson, a former local government minister, said: 'I warned the Government about the impact of the poll tax in the North, but it did nothing until we lost Ribble Valley. This time I hope they act before there is a similar rout in the South.'

The council tax will be paid in eight bands, according to the value of one's home. In theory, households in properties of the same value will pay broadly the same council tax, irrespective of locality. But as homes in the South tend to be more expensive, their owners will pay more.

The new figures do not take into account the transitional relief scheme which the Government intends to introduce to soften the steepest increases in the initial years. Details have not been divulged, but room for manoeuvre is limited as ministers brace themselves for a tough public spending round.

Poll tax transitional relief consumes pounds 1.25bn. The Chartered Institute of Public Finance and Accountancy (Cipfa) estimates that ministers will have to double that amount just to hold the average council tax nation-wide to pounds 400 as promised.

To add to its problems, the Government appears to have overestimated the value of properties. Last year the Department of the Environment sent local authorities its prediction of the proportion of properties in each band. Councils report that the actual valuation of properties is proving significantly lower, leaving the Government with a dilemma: either to require councils to raise the charge set at each band, which would be politically damaging, or to put in more money from the Treasury, which would add to the strain on public spending.

Michael Howard, the Secretary of State for the Environment, can also cap council spending as a means of keeping bills down. But this is unlikely to stem the flow of central government resources to the North. Under the new system, government subsidy, which makes up the difference between councils' local-tax revenue and their standard spending, will flow from areas of high property values to areas of low property values. Cipfa has calculated that inner London alone stands to lose pounds 212m in subsidy, equivalent to adding pounds 122 to each adult's poll tax bill.

The Conservative-controlled London Boroughs Association has called for special bands for London and the South-east to protect people from swingeing increases. Its research suggests three Tory-held councils stand to lose more than pounds 20m each in government grants: Barnet, Kensington & Chelsea, and Westminster.