Treasury rejects call for 2bn pounds bail-out

The Treasury is rejecting calls for a financial bail-out to smooth the introduction of the council tax, despite a bid from the Department of the Environment for around pounds 2bn extra.

A bilateral meeting last week between the Secretary of State for the Environment, Michael Howard, and the Chief Secretary to the Treasury, Michael Portillo, was described by one source as a 'stand-off'. Ministers at the Department of the Environment are threatening to take the dispute to arbitration with other senior Cabinet ministers.

Because of the change in the way public spending is being negotiated this year there is less latitude for detailed negotiations between the Treasury and the DoE. Instead Mr Portillo has offered the department a small increase on its planned spending total for local government.

Under the new system, if Mr Howard is unsatisfied he will have to convince ministers from other departments to surrender some of their funding. Spending, to be determined by a new committee chaired by the Chancellor, will be restricted to pounds 245bn in 1993-4.

The increase for the DoE, understood to be only a small proportion of the sum bid for, is a recognition of the difficulties likely to be encountered next year when the new tax comes into force. However the Treasury is unsympathetic to DoE claims that further large subsidies are vital to prevent a repetition of the poll tax debacle.

Treasury ministers believe that, with the reduction in inflation, there is no excuse for councils to increase spending - and hence council tax bills - as they did when the poll tax was introduced. They also argue that the tax will not provoke the same anger as the community charge because it is perceived to be fairer.

However the DoE believes that it is vital, if bills are to be kept reasonable, that councils are given a realistic sum of money by central government.

Under what is described as a principle of 'equality of misery', the Treasury is taking a tough line with most departments, hitting the Department of Transport hardest of all. The Department of Health has been offered a slight increase on planned total but the Department for Education has been given a tough settlement. The Department of Employment has also been disappointed.

Mr Portillo has taken advantage of a declining population in Scotland to phase in a reduction in the generous formula for funding Scotland, Wales and Northern Ireland.

At the DoE the scope of the transitional relief, which will cushion the financial pain inflicted on those who lose in the change over to council tax, will be determined by the public spending round.

Although the DoE has discussed specific measures to ease potential problems in London and the South-east, where property prices - and hence the numbers of those in the top bands - are higher, ministers are said to be unenthusiastic about the proposals. They believe the moves would provide an unnecessary complication to the implementation of the tax.

John Redwood, the Minister for Local Government, enjoys tough powers with which to restrict the size of bills.