'Worst settlement for a decade' say authorities

Ministers and local government leaders were on a collision course over the interpretation of the Treasury's announcement of a "fair and affordable" settlement for local councils - worth £26bn a year by 2010 and promising a 1% growth on top of inflation.

The local government minister John Healey said he had given the Tory-controlled Local Government Association what it wanted by promising a real-terms increase above inflation. He warned local authorities: "This ensures there is no excuse for excessive council tax rises or a reduction in the quality of services."

Alistair Darling also insisted in his speech: "We have provided sufficient resources to ensure that local authorities can keep overall council tax rises substantially below 5%."

But Sir Simon Milton, Conservative chairman of the Local Government Association, said: "This is the worst settlement for local government in a decade. Councils will continue to work hard for the people they serve but they face tough choices. The chancellor's announcement will mean above-inflation rises in bills for council taxpayers and businesses, and there remains a black hole in funding for the care of the elderly."

The row centred around the small print in the settlement, where the government wants local councils to find another £4.9bn in efficiency savings by 2011 by smarter procurement - saving £2.8bn - and a new collaboration with voluntary groups and businesses to save another £1.8bn. If they fail to do this it will more than wipe out any extra cash they can spend on services.

At the same time, ministers have set tough new targets for local services including increasing the rate of recycling and composting household waste to 40% by 2010 and improved services for children in care, families in need and old and vulnerable people.

Councils will get their first new income stream - the right to raise a supplementary business rate for major projects - provided they can get agreement with local businesses. This is expected to be crucial for new infrastructure projects, such as extending Manchester's tram and light rail system. This is the first implementation of proposals put forward last year by Sir Michael Lyons to make local government more financially independent.

Ministers also announced more room for manoeuvre for councils. Mr Healey said: "We are also giving local councils significant new flexibility to respond to local priorities with at least £5bn moving into general grants which are not ring-fenced, a massive cut in central government indicators from around 1,200 to just 198."

The latter proposal has been a particular bone of contention as local authorities have complained they have been strangled by red tape with too many government targets.

The Liberal Democrat Treasury spokesman, Vince Cable, said: "With a crushing spending squeeze on local government, it seems inevitable that council tax will rise by as much as 5% each year. This will mean that council tax will have more than doubled since Labour came to power. This unfair tax must be abolished."