SNP council tax freeze under threat

• John Swinney: planning 3.7bn cuts

Finance secretary John Swinney is expected to signal his willingness to do a U-turn over council tax when he holds his first budget talks with opposition parties this week.

Swinney is preparing for the Scottish Government's budget to be cut by as much as 3.7 billion over the next four years and he needs to trim spending accordingly.

He will tell his political opponents that there are several SNP policy areas in which he will not make cuts, including free care for the elderly, concessionary travel for pensioners and planned increases in spending for the health service.

However, Scottish Government sources told Scotland on Sunday that the money for the fourth year of the council tax freeze was not being "ring-fenced" in this way and, as such, would now be open to negotiation.

The new approach represents a major shift in position from the Scottish Government which had previously insisted it wanted to bring in another year's council tax freeze from next April.

Ministers are still holding to that line in public but it appears they have now realised that the looming public sector cuts mean they cannot protect every spending item in their budget. The extra 70 million that needed to be found for the council tax freeze does now appear to be a commitment too far.

Swinney is also looking at a new model for Scottish Water ownership – a move that could raise more than a billion pounds. The change will fall short of full privatisation, but will see ownership transferred to a "public interest" board with powers to borrow from the banks rather than relying on taxpayer funding. Union leaders representing local government workers and representatives from Scotland's councils welcomed the shift in position over council tax.

Matt Smith, the Scottish secretary of Unison, which represents most members in local government, said: "We have never supported the council tax freeze since its inception.

"We always thought it was wrong and have called for it to be removed.

"We would welcome any move in that direction because it would help the funding situation in local government."

Pat Watters, the president of local government umbrella group Cosla, said he would also welcome any moves to end the council tax freeze but councils should still be able to keep the 70m annual payment that they receive to implement it.

He said: "We would be very anxious to retain the 70m in our budgets. We believe that, having had it for the last three years, it makes it part of our budget settlement. We would want to retain that given the financial crisis that the whole of the public sector is facing."

He added: "We believe that councils should have every tool available to them to try to offset some of the worst effects of the coming squeeze and that means the ability to vary council tax rates."

Last week, in an interview with Scotland on Sunday, Gordon Matheson, the leader of Glasgow City Council, also called on the SNP government to ditch the policy, saying he needed the option of raising the charge to help offset "brutal" spending cuts.

The council tax freeze was pioneered by the Scottish Government in 2007 as part of a three-year deal with councils. Ministers agreed to give councils more freedom over spending and an extra 70m a year. In return, they asked for three years with no council tax rises.

The councils agreed but there is so far no agreement in place for a fourth year.

SNP ministers were keen to avoid council tax rises next year because they will coincide with the run-up to the 2011 elections to the Scottish Parliament next May but it now appears that they may have no choice but to allow councils to raise tax rates in April.

At present, Scottish Labour is ahead of the SNP in the opinion polls.

If the freeze is dropped, it will be against the wishes of business leaders in Scotland, who said last week it was helping bring about "fairer" levels of tax across Scotland's 32 local authorities.

CBI Scotland said council tax rose by 47 per cent in the ten years before the freeze, well above inflation.