There are no easy options for reforming council finance but ministers are determined that any changes will be practical and fair, says Nick Raynsford.

Local government funding is an issue which has been high up the political agenda for the past year.

The high council tax rises imposed by many authorities last year led to widespread discontent, especially amongst elderly people and others on fixed incomes.

The government recognises the difficulties faced by these people - we do not want high council taxes any more than they do. Increases like those we saw last year were clearly unsustainable. That is why we made it clear that we would if necessary use our capping powers to protect the public from unreasonable tax increases.

Many councils heeded this message and this year’s rises are significantly lower. I was encouraged that the average rise in Band D council tax was 5.9 per cent - less than half that of last year and the lowest rises in almost a decade.

We are also working actively to help those on low incomes. A new campaign from the Department for Work and Pensions is encouraging people to claim the council tax benefit that is due to them. We estimate that at present, 40 per cent of pensioners are missing out on the benefits owed to them? some £750 million. And the chancellor announced an extra £100 million for all pensioner households with a member over the age of 70.

But what about the government’s longer-term policy on local government finance? Let’s start with some facts.

Firstly, this government has an excellent record on funding local government. In January I announced that in 2004/05 we are investing an extra £3.7 billion in central grant - an increase of 7.3 per cent from the last financial year. Every council in England has had an above inflation increase. In total we have increased grants to councils by 30 per cent in real terms since 1997.

This is in stark contrast to the previous four years, under the previous government, when there was a seven per cent real terms funding cut to local government.

Along with this increased investment we are giving councils more freedoms, ensuring they have more flexibility over how they spend their money. We have removed £750 million of grant from "ringfencing" - reducing the total "ringfenced" to only 11 per cent. The Local Government Act, which received Royal Assent last year, gave councils significant new financial freedoms - powers to charge and trade; more control over council tax discounts and exemptions; powers to retain income from some fines; powers to develop new partnerships with business and powers to borrow and invest money without government consent.

So we have put significant extra investment into the system and given councils new financial freedoms. There is also great scope for councils to make efficiency improvements.

But I do accept there are some difficulties with the current council tax system. However, any changes to the existing system need to be considered in the wider context of the whole of local government finance. Anything we do needs to be properly thought through.

The dangers of over hasty or ill thought out changes are obvious - witness the fiasco of the poll tax under the last Conservative government.

It’s easy to criticise the existing system and come up with headline-grabbing ideas for a new one. The real challenge comes in finding ways of improving on what we have, and ensuring that any changes made result in real improvement, rather than ending up with a system that could be less fair and more costly to administer.

We recognised concerns about the balance of funding - how much local government funding is raised centrally and how much locally - in our 2001 white paper, Strong Local Leadership - Quality Public Services. Last year we set up a high level working group, which I chair, to look at the issues, review the evidence and carefully consider reform options. The group includes representatives from local and central government, the business world, academics and other experts in local government finance.

Since it began work last April, the review has discussed the principles of a successful local government finance system, commissioned independent research, and held a public consultation. The review began by examining the issues of concern, and is currently in the process of looking at several possible reform options.

I would like to emphasise one key finding from the review so far. Our consultation showed that there are many concerns about aspects of the current system, including the impact of council tax rises on taxpayers with fixed incomes. But there was no clear or simple view of what needs to be done, or how radical the changes need to be. There are no easy fixes.

The review has commissioned further evidence from interested parties on four options proposed by responses to the public consultation - reform of council tax, a local income tax, re-localisation of the business rate, and a "mixed" option of smaller taxes and charges. Each of these has its pros and cons. For example, suggestions for change to the current council tax banding system have been proposed, but before changing the banding system we would need to examine carefully the impact on those groups such as pensioners on low or fixed incomes living in high value properties. We also need to determine if a local income tax would be as fair and as easy and cheap to run in practice as some claim.

There are some formidable administrative obstacles and significant potential loopholes which advocates of a local income tax do not appear to have recognised. A system based solely around PAYE returns would effectively exempt perhaps half a million company directors who are remunerated through dividends - this is hardly a fair system, particularly when families with two or more members in work would be faced with large tax increases.

And while re-localisation of the business rate has long been supported by many in local government, many in the business community would be strongly opposed to any change to the current arrangements for national determination of business rates.

The fact that the review is looking at how these reforms and alternatives might work does not mean the government favours any of them. There is a lot of work to be done before the group reports this summer and as I have said, there are no easy answers.

But the government is determined to develop practical and fair arrangements to improve on the present system, without creating new injustices and anomalies. In the meantime we will continue to work to ensure that councils budget prudently and minimise the demands they make on their council taxpayers. Quality services delivered in a cost-effective way are our overriding priority.

Nick Raynsford is Labour MP for Greenwich and Woolwich, and local government minister.