The policy of penalising authorities that propose large rises will be unveiled by John Prescott when he announces the annual local government settlement in the Commons. The Independent understands the Deputy Prime Minister will announce a pounds 2.3bn funding package to keep tax rises down to 4.5 per cent, equivalent to pounds 30 for an average home. But he will also insist there will be no return to the days of "tax and spend" of profligate councils and will announce a new power to deter large rises.
Council tax benefit subsidy will be withheld from town halls that raise bills above guideline levels drawn up by Whitehall. The subsidy is worth millions to local authorities and is vital for cities such as Liverpool and Leeds, where up to 40 per cent of residents claim the benefit.
The Government's determination to control council spending, which at pounds 50bn makes up a quarter of all public spending, was shown yesterday with publication of the Local Government Bill. It abolishes universal capping of town hall budgets, but Mr Prescott will retain reserve powers to cap the worst offenders - measures that critics of the new penalties have dubbed "capping through the back door".
Labour council leaders and MPs reacted with fury to the proposals, with some describing them as "regressive" and "an attack on the poor".
Sir Jeremy Beecham, the Labour chairman of the Local Government Association, which represents all authorities in England and Wales, said he would lodge strong protests with the Government.
"We are extremely unhappy about this. It is very unwelcome, as it hits the poorest authorities hardest and is going to make matters worse. It further distorts the link between local spending decisions and council tax decisions. It is not capping but it is as good as and I suspect the hand of the Treasury in it."
Yesterday Hilary Armstrong, the Local Government minister, said council taxpayers would not face "excessive" increases in their bills. "We don't believe there will be excessive council tax rises. I cannot imagine councils want to behave in a massively irresponsible way. But if they do we will have to intervene."
Paul Burstow, the Liberal Democrat local government spokesman, said that if councils ignored the proposed benefit penalties, cities such as Liverpool could see a rise of pounds 180 on their bills; Manchester would see a rise of pounds 205 and Islington a rise of pounds 156 if the subsidy were withdrawn. "This really is another example of the Government's control freakery. It is incredible that a Labour government is effectively attacking the poorest in urban areas."Reuse content