David Curry

What brings together a little old lady from Devon, the publicist Max Clifford, a political party dedicated to taking Britain out of the European Union and the Daily Mail? And what has it all got to do with John Prescott? It sounds like a question from that most cerebral of radio shows Round Britain Quiz. The answer, of course, is council tax.

Council tax is suddenly big politics. The Labour government sees looming shadows of the poll tax. Rebellious pensioners plan marches on London. Nick Raynsford, the hapless local government minister, calls in councils by the busload to threaten them with capping if they dare set a budget beyond a "prudent" level.

What has gone wrong? The answer is surprisingly simple. Gordon Brown has stepped on the accelerator of public spending. Significant spending goes through local councils – especially education, where the big chunk is teachers' salaries. But Brown has failed to match his demands for increased spending with the higher levels of grant to fund it, leaving councils with no option but to find the missing millions in the wallets of their council tax payers.

A Halifax survey lists council tax as one of the pressures on the ability of young people to sustain home ownership. With Band D levels now commonly in the range of £1200 to £1300, this is not fantasy finance.

It is pretty well agreed that the council tax cannot remain as the only local tax. But property taxes have a perfectly sound pedigree: council tax is easy to understand, simple to collect and difficult to evade.

Only the Liberal Democrats envisage the complete abolition of the council tax in favour of a series of local taxes on income, including investment income. Whether people want their councillors determining final tax rates is a matter for debate. Households with two wage-earners (and actually there are many households with more, as young people find it hard to set up on their own) would be hit. And even the Liberal Democrats accept that professional people, such as doctors, would pay a lot more. They estimate the tax need at something below 4p on top of existing rates: others have no difficulty getting the income tax add-on to about 7p.

If this route is discounted, what is the answer? One option is to take certain functions away from local government and manage them nationally. A favourite candidate is school funding on the grounds that effectively the government has already done so via the mechanism of "passporting" – passing funds directly from local authorities to schools.

The other option is to widen the tax base. There is a favourite here too: business rates. The national collection at an inflation-pegged increase of business rates has meant that it has contributed steadily less as a proportion of the local kitty while council tax has furnished progressively more. The householder has, in practice, subsidised the businessman. To forestall the inevitable howl of business outrage it would be necessary to build constraints on council abuse into the system (for example, link the annual business and council tax rate rise). The advantage would be to link business more closely to the development of the community and the provision of the infrastructure it both uses and needs. It would also enable councils to compete for business investment, even though a strong redistributive mechanism would have to be retained because of the disparity in the local tax base even allowing for the equalising effect of government grant.

On top of that, council tax valuations and banding could be adjusted. Revaluation is due in 2007 in any case. In areas of high house price inflation the lower bands could reach much higher into the price pyramid, while new bands could be introduced at the top end of the market where there are far more properties than at the time of the original valuation. In areas of housing failure, new super-low bands could be introduced. Any politician embarking on revaluation will need a large tin hat: winners never say thank you and losers always complain.

The government's own review into the funding of local authorities is not due until July, which means there is no chance of change before the general election. That is why Raynsford is threatening the big stick and desperately blaming councils for wilfully extravagant increases in council tax. The government is in serious panic. If one thing puts the fear of God into politicians it is a combination of little old ladies rampant and the Daily Mail. That is a real weapon of mass destruction.