Government in crisis: Council tax bills set to soar over estimate: Major's shift in economic policy means benefits face squeeze as public expenditure restrictions intensify

COUNCIL TAX bills could soar next April as a result of the shift in economic policy, which will intensify the squeeze on public expenditure signalled by the Prime Minister last night.

Michael Howard, the Secretary of State for the Environment, has failed to secure an extra pounds 2.3bn which he was seeking to reduce the size of the bills when the council tax is introduced next April.

Any chance of an appeal to the Cabinet was removed last night when the Prime Minister made it clear that he would support cuts in revenue spending to protect parts of the public sector spending programme which directly affect jobs.

Mr Major has thrown his weight behind ministers in the Cabinet committee on public expenditure, known as the EDX committee, who have been arguing against cutting capital projects, such as the building of houses, schools and roads, to revive the construction industry and create more jobs.

But to compensate, the squeeze on revenue costs will be intensified. Mr Howard has won part of his bid, but Mr Major's shift means he will not allow more money to be pumped into the local authorities to reduce the council tax bills, which some ministers estimate could average pounds 500 per household - pounds 100 more than the target set by ministers. The average poll tax per couple is about pounds 564.

The squeeze could also mean cuts in social security spending. Treasury ministers would be reluctant to cut benefits, because these feed directly into the economy, as claimants spend and do not have enough to save.

The EDX, which is meeting again today and may report to the Cabinet tomorrow, may look again at the possibility of reducing the entitlement to unemployment benefit from 12 to six months. Invalidity benefit and other non-means tested benefits are expected to be frozen or cut back. Ministers have been considering taxing benefits to target them more closely at the poorest in society, but targeting child benefit would compromise election pledges.

Public sector pay is also certain to be squeezed. Ministers are predicting a freeze on public sector pay rises in an attempt to depress expectations for thousands of town hall staff and hospital ancillary workers.

Some Cabinet ministers are braced for a public sector pay battle, against Nalgo and Nupe, the unions representing council staffs and hospital workers. Other parts of the public sector, such as nurses, will have their pay squeezed, but may be treated more generously.

But ministers are warning their colleagues on the EDX comittee that the public would not be prepared to see the number of teachers cut to reduce the revenue spending. 'It could be worse than the row over the pit closures,' one minister said.

The EDX committee will raise public sector charges to increase income. Prescription charges are expected rise from pounds 3.75 each to more than pounds 4. In preparation for the Chancellor's Budget in March, there is also a row over whether taxes should be increased to compensate for the fall in tax receipts caused by the recession and rising unemployment. The options being considered include the extension of VAT to items such as newspapers, or increasing the minimum rate from 17.5 per cent.

Income tax is regarded as taboo and will not be increased, but some ministers believe increasing any taxes would be a betrayal. However, the Chancellor is expected to propose higher duties on tobacco, alcohol and petrol.