Suburban and rural families have been cautioned about the likelihood of facing higher council taxes, as government ministers redirect funding to bolster Labour’s urban strongholds.

This shift in funding strategy comes as the government unveils a new, supposedly ‘fairer’ system that allocates central resources to areas identified as experiencing ‘deprivation’. This move has stirred considerable controversy and backlash.

Under the new plan, more affluent regions in England will increasingly depend on revenue generated locally from residents and businesses. This shift is likely to strain existing financial resources.

County and district councils, many of which are already on the verge of financial collapse, warn that they will be compelled to impose significant tax increases to remain solvent.

The timing of these proposals coincides with growing concerns about the potential introduction of a ‘mansion tax’ targeting high-value properties in London and the South East, anticipated to be announced in the upcoming Budget.

The government justifies the changes by arguing that the current system disproportionately benefits certain councils, allowing them to accumulate financial reserves, while others struggle to maintain basic services.

‘By taking account of the differing ability to raise funds locally, all local authorities will be able to provide the same level of service to residents,’ it added.

The government is facing a bitter backlash after unveiling a ‘fairer’ funding system targeting central resources on areas classified as suffering ‘deprivation’

The funding reforms are part of a wider effort to ‘fix the foundations of local government’ under the Government’s plan for change.

This includes consolidating grants, reducing bureaucracy and enabling councils to invest in prevention to tackle the root causes of rising costs through reforming children’s social care and a new homelessness and domestic abuse grant, the department said.

Communities Secretary Steve Reed said: ‘We are reforming the funding system that led to regional divides, postcode lotteries and substandard public services for too many people.

‘Our changes will make sure cash going to councils is shared out in a fairer way that follows needs.

‘We want every family to benefit from our plan for change and fairer funding means people will soon be able to see and feel the difference in their own local area.’

The specific settlements for councils is due to be confirmed in the coming months. 

Government sources have played down the prospect of abolishing the 5 per cent limit on council tax increases without having a local referendum.

Ministers are understood to be considering relaxing the cap for a ‘very small’ number of central London authorities such as Westminster, which has some of the lowest council tax levels in the country.  

Sources suggested such councils are benefiting from outsized revenue streams, but stressed no final decisions have been taken and there is no announcement scheduled.  

A swathe of councils have been warning they face bankruptcy amid spending pressures in areas like social care and SEND provision.

Earlier this year the Government gave six local authorities in England permission to raise council tax by up to 10 per cent.

The County Councils Network (CCN) accused the Government of backtracking on its funding commitments to rural areas, insisting the reforms will ‘unfairly’ target resources to urban metropolitan cities.

The group claimed an updated needs assessment by the Government, which included a measure of deprivation, showed counties had experienced the biggest increase in demand for support.

CCN finance spokesman Steven Broadbent said ministers had decided to overlook the findings and instead extend a ‘recovery grant’ for urban councils for the duration of the parliament at the expense of counties.

He added: ‘This seriously undermines the principles of the review, with this arbitrary measure not consulted on. This raises questions whether this review has been evidence-led and transparent.’

The CCN also accused the Government of backtracking ‘under pressure from urban councils’ by downgrading funding for the additional costs of delivering services in rural areas.

Mr Broadbent said: ‘The fair funding review was already extremely challenging for many county areas, with some councils set to lose out substantially.

‘Our analysis has shown that county and rural taxpayers are already set to foot the bill for the reforms, with 33 of our councils facing a real-terms reduction in funding unless they increase their council tax by 5 per cent per annum over the next three years.

‘Today’s changes will mean the pressures facing county and rural councils and taxpayers have only intensified. 

The District Councils’ Network (DCN) said the reforms would punish those councils that are the most successful at housebuilding and at growing their local economy, despite them being Government priorities.

DCN finance spokesman Jeremy Newmark said: ‘Instead of delivering the essential financial reform and fiscal devolution that are needed, the Government is merely reallocating an already inadequate funding pot.

‘While it is of course legitimate for ministers to use areas’ deprivation as a factor in determining services, it would be ironic, unfortunate and counterproductive if this led to an increase in deprivation outside of the biggest cities.

‘Money is being diverted from many rural and non-urban councils, and those doing the most to build homes and grow local economies.’

He added that councils will have no option but to close services and scale back preventative work, including fitness programmes and early intervention to stop people becoming homeless.