Audit Commission chairman James Strachan said: 'This year's record rises have caused intense controversy which have generated more heat than light. Our study explores the funding in detail and we hope it will significantly inform the debate.
The report recommends that a review of local government funding already underway should seek to reduce the proportion of funding coming from central government. It also urges greater transparency of how government calculates its annual grant.
If there are differences of opinion between the central and local authorities about the size of overall local budget, the effect of council tax increases can be very significant. Because less than 25% of a council's funding comes from council tax, it alone has to make up the difference.
Council spending was 9% above last year's, an increase of one per cent greater than the additional central government grant. Because of the 'gearing effect', caused by local government deriving most of its funding from central government, that contributed to average council tax increases of 12.9%.
The commission's report found that local authorities faced significant additional cost pressures this year, including increased expectations from the public, government and regulators. The government increased its grant to take account of specific factors s uch as the rise in employer national insurance contributions. But the Audit Commission was not able to assess whether the extra funding fully compensated councils because the government does not disclose how it reaches those decisions.
This year also saw significant changes to the grant distribution formula, with authorities in the Midlands and the north broadly benefiting while London and the south-east were disadvantaged. There was a clear association between the size of grant increase a council received and its increase in council tax - the greater the increase in grant the less was the increase in the council tax.
According to the report, the additional local government spending this year should improve services and much has been directed towards meeting government targets, for example those on recycling. The impact of education was significant as well. The combined effect of the passporting requirement, designed to ensure that all councils increased spending in line with government requirements, and local choice to spend above the passported amount, led to spending in aggregate increasing by £200m more than the government had allowed for.
Most councils did identify some savings. However many did not look hard enough for measures to reduce the burden on the council taxpayer. 'Peer pressure' on councils to moderate spending and council tax rises was weak, partly because of the unusual circumstances created by the grant redistribution.
Thirteen of the 20 highest increases were police authorities. They are an example of a precept authority: one which sets a budget and then passes its funding requirement on to the relevant local authority for inclusion in the council's overall council tax. In a single service authority such as police authority it can be more difficult to address pressures by offsetting against savings elsewhere. But the report also notes that police authorities are not directly elected and do not have responsibility for collecting the tax. That, the report says, means they are less directly affected by pressure from council tax payers.
Council tax rose by an average of 12.9% in England this year - a record since the tax's introduction a decade ago and well ahead of the 7.2% average rise in 2002/03.