Matt Mercer examines the differentials in council tax and considers whether high tax points to low efficiency.

With council tax rising by up to 60 per cent since 1997, it is perhaps not surprising that local authority finance has become a dangerous political issue for ministers.

The Conservatives, rejuvenated under Michael Howard, plan to hit Labour hard on tax as the next election season begins in earnest, and so it was a relieved Nick Raynsford who announced that the government had succeeded in pegging average rises on a Band D property to 5.9 per cent, or £65, for 2004/05.

Critics say that the current system distorts local accountability, with the proportion of council cash raised locally too low at 25 per cent, and the amount distributed through central government grants too high. As a result, council tax increases suffer from what is termed the "gearing effect", whereby raising one per cent in additional local revenue results in a four per cent increase in bills to taxpayers.

High council tax rises posted last year brought the issue to the fore, with areas such as Greater London enduring an average rise of 17.9 per cent. Some councils had to increase their bills by amounts well above the average. The Conservative-run Wandsworth Council in London, for example, put up its council tax by 45 per cent - though it was still relatively low at £580 after previous cuts.

In addition to providing ample ammunition to the government’s detractors in the press, the sharp increases of recent years have triggered a spate of protests from pensioners, who say that the rises erode their pensions.

The rises have even prompted Blairite former Cabinet minister Stephen Byers to argue that voters should be able to veto inflation-busting rises via local referendums. In a speech to the New Local Government Network in February, the former transport secretary said, "a local vote for local priorities must be the way forward in the 21st century". "Tony Blair recognises that the council tax is an issue that has to be dealt with. We need a fairer system in place that does not mean looking at radical solutions," he added.

However, what has been the effect of these increases? Contrary to the government’s hopes, have they actually led to greater inefficiency in Britain’s councils?

It is clear that business groups such as the Confederation of British Industry are yet to be convinced that local authorities are bastions of well-organised competence. In a report published earlier this year, the CBI argued that councils are squandering around £3 billion a year because of their ideological opposition to using the private sector. Its study pinned the blame for the tax rises squarely on town hall inefficiency and said that council procurement practices are hampered by a lack of expertise. Competition should be used to improve services quality and reduce costs, it added.

The CBI also urged councils to provide more information on how providers are selected and take a strategic approach to procurement, rather than focus on individual contracts. They added that local authorities should establish a market intelligence unit to gather information and prepare research on public service markets and private sector service providers.

The CBI’s argument, as one would expect, prompted a sharp response from the Local Government Association. Vice-chairman Sir Sandy Bruce-Lockhart said that the business group’s argument was "remarkably out of date" and added that they did not understand the issue.

He also pointed to a recent study by the Audit Commission, which found a "marked improvement" in the performance of the largest local authorities in England last December.

The Commission, an independent public body responsible for ensuring that public money is well spent, said in its Comprehensive Performance Assessment review that almost three times the number of councils moved up a performance category as had fallen. The commission also discovered that progress had been the most rapid among the worst councils.

Improvements, according to the auditors, had been concentrated in those services that meet the needs of the young, and older and vulnerable people: education, social care for adults, housing and housing benefits. Audit Commission chairman James Strachan said that the councils’ progress was "excellent news", but added that, "all councils – regardless of ranking" should focus on where they can do better.

The findings of the independent Audit Commission lend credence to the view that higher council tax rates do not have a damaging effect on the efficiency of town halls. It should be remembered, however, that the Commission’s analysis covers just one year. So the scope for continuing political debate over the link between council efficiency and tax rises will continue. No doubt it is an issue we’ll hear more about over the coming months.