Nick Clegg and Theresa May have formed a rare alliance to block Eric Pickles from forcing local authorities to hold referendums if they want to increase council tax by more than 1.5%.
The deputy prime minister and home secretary, who have strained relations over Europe and immigration, intervened to ensure the current threshold of 2% remains unchanged.
The deputy prime minister felt that it would be wrong to impose tighter restrictions on local authorities that are bearing the brunt of government cuts. Cabinet papers leaked to the Guardian last month showed that the home secretary was opposed to the Pickles move on the grounds that police need greater flexibility in funding.
Pickles told cabinet colleagues of the need to tackle what he has called "democracy dodgers" – local authorities that have increased council tax by close to the 2% threshold to avoid a referendum. He was supported by the Tory chairman Grant Shapps who wrote to colleagues on the cabinet's economic affairs committee saying: "I believe we could go further by reducing the referendum threshold to say 1.5%. This would ensure local authorities think again about raising council tax given that a vote … might be regarded as too much trouble."
A Liberal Democrat spokesman said: "The Lib Dems are proud of the fact that measures taken by the coalition government have led to council taxes falling by almost 10% in real terms over the last three years. Local authorities have done an incredible job in continuing to provide excellent public services on limited budgets.
"The Liberal Democrats believe that the 2% cap is effective and it would be unfair on local councils to reduce the referendum threshold at this stage. Shifting the goalposts in this way could have a devastating effect on council budgets and local services at a time when many councils are feeling the strain."