Householders face big increases in council tax or cuts in services after what council chiefs said was the worst settlement in a decade.

The Local Government Association said that the 1 per cent-a-year increase in funding for the next three years would inevitably lead to council tax rises above this year’s 4.2 per cent.

Alistair Darling told authorities that they would be capped again if council tax rose by more than 5 per cent but the association gave a warning that this would be at the expense of cuts in social services and elderly care.

“This is the worst settlement for local government in a decade,” said Sir Simon Milton, the association’s chairman. “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 Government has repeatedly deferred any reform of council tax despite a nearly 100 per cent rise in the payments since Labour came to power in 1997.

This week the association published figures suggesting that spending on new government policies and the growing costs of the elderly population would add £9.3 billion to town hall bills within three years. By April these extras will cost £9 million a day, the association claims.

The detailed figures show that plans for extended school hours and additional recycling would cost £5.8 billion and £1.2 billion respectively over the next three years.

An extra £2.3 billion will be needed in the next three years to cope with the growing demand on social care services to cope with the elderly population making a total of £9.3 billion by 2011.

The association claims that there will be 400,000 more older people over the next three years, many of whom will require social services at home or in residential care.

Councils have already had to restrict the eligibility criteria for social care at home.

John Healey, the Local Government Minister, said: “This is a fair and affordable settlement for local government in a tight spending round. Councils will also receive further investment through area-based and specific funding which will be announced by the end of the year.”

Local authorities could also gain by two new taxes suggested by the Chancellor yesterday.

In a White Paper the Government proposes to allow local authorities to charge businesses in their area up to an extra 2p in the pound of rateable value to support local development projects. The rate supplement, which would apply only to properties worth more than £50,000, could raise up to £600 million.

Authorities would be required to consult on the proposals in their area and to ballot businesses on the supplement if it provided more than a third of the cost of the new project.

The British Retail Consortium said that business rate supplements would cost retailers £100 million more in tax a year and could be open to abuse. Edward Cooke, of the organisation, said: “Today’s announcement is potentially disastrous. Retailers already contribute more than £4.5 billion to the public purse each year through business rates alone. It is unreasonable to demand they pay even more to fund projects which should be paid for from existing revenue.”

Mr Darling also announced plans to legislate to allow local authorities to charge developers a locally agreed tariff to support the development of infrastructure in their area. Ministers have dropped a plan to impose a tax of 20 to 25 per cent on all land sold with planning permission.

The move was broadly welcomed by developers and local authorities.

Case study

Craig Bennett, 26, and Gemma Plant, 24, moved into their three-bedroom house in Stourbridge a year ago. Mr Bennett earns £19,000 as a sports lecturer and pays £800 a month towards the mortgage. As a new home owner, he has found council tax to be particularly expensive. “It would be great if first-time buyers could be given some leeway for the first few years.” Mr Bennett voted Labour last time.

Impact £8 better off due to changes in income tax already announced

Verdict “I hope the increases in grants to local authorities means that council tax increases will be kept to a minimum. It was great that the education and skills budget will be rising. As a further education teacher I can see that the calibre of students coming out of secondary schools is falling ever year. The money needs to be there, but the way that the money is managed in our schools has got to be improved as well.” (James Charles)

Explore Economics

• Autumn Budget 2007

• Budget 2008

• World Economic Forum

• The Times MPC

Times Recommends

• Bovis and Redrow axe close to 1,000 jobs
• Irate M&S shareholders demand fresh talks
• Investors rally to B&B amid fears of contagion