COUNCIL tax bills in the North-East would plummet if the Government made the tax fairer by adding extra bands, a report to ministers revealed yesterday.

But the reform, which was floated by Tony Blair 18 months ago, has been shelved because the Prime Minister fears a backlash if bills were to rise sharply in London and the South.

That decision means people in the North-East will continue to pay a higher proportion of their income in council tax than those living elsewhere in England.

They pay 4.6 per cent of their income - compared with only 3.74 per cent in the capital and the South-East.

Last night, the Liberal Democrats condemned the Government's timidity in sticking with the tax despite its unfairness for North-Easterners, in particular pensioners and people who are low-paid.

Sarah Teather, the party's local government spokeswoman, said: "People in the North-East pay a higher proportion of their income in council tax. Extra tax bands could help to reverse that.

"But council tax is simply unfair and no amount of tinkering will change that. We will continue to press the Government to scrap council tax and replace it with a fair local income tax."

The huge benefit to the North-East of adding extra bands is revealed in a report by Sir Michael Lyons, who is inquiring into changes to local government finance.

Sir Michael found that, across England, 30 per cent of homes would move down one band or more, therefore paying lower bills, while 21 per cent would move up at least one band.

But there is big regional variation. In the North-East, 49 per cent of homes would be winners and only 13 per cent would be losers.

In sharp contrast, 40 per cent of London homes would lose out and only 12 per cent would gain.

In the South-East, 24 per cent would be losers and 19 per cent winners.

In summer last year, Mr Blair suggested a revised council tax with ten instead of eight bands was the most likely reform accompanying revaluation, to be introduced in 2007.

The idea was backed by 72 per cent of local authorities giving evidence to Sir Michael, who said it would make the tax more closely linked to property values.

But in September, the Government shelved revaluation and possible extra bands until at least 2010, amid fears of revolt if households in London and the South-East faced higher bills.

In his interim report, Sir Michael does not make any recommendations, but criticises the unfairness of the delay for people who would have benefited.

He adds: "I believe that revaluation will be necessary if council tax is to remain credible as a property-based tax in the long-term."