LOCAL authorities had record reserves of more than [pounds]1bn when they increased council tax by 4.4per cent last year, according to the national spending watchdog.

The funds were equal to about [pounds]500 for every household.

Tom McCabe, finance minister, said he wanted councils to maintain adequate reserves, but warned: "There is no case for unreasonably high ones."

Opposition parties said voters could have been spared much of the pain of tax rises if councils had drawn down some reserves instead of raising extra income. They also said claims by councils that they were under-funded would in future ring hollow.

The figures are revealed today in the Accounts Commission's annual report on Scottish local government spending. It shows the 4.4per cent tax rise, which generated about [pounds]80m, was set at the close of a year in which reserves rose 25per cent to [pounds]1.05bn, the equivalent of 10per cent of all council spending.

This was in spite of a warning from auditors the previous year that reserves were "high" after they rose 22per cent to [pounds]839m.

The increase for 2004/05 took the average bill for a band D home from [pounds]1009 to [pounds]1053.

The highest rise, of 9.8per cent, was in Moray, which also had the highest level of reserves. Other councils with high reserves were Dumfries & Galloway, Western Isles, and Inverclyde.

South Lanarkshire had the lowest level of all 32 councils.

The reserves included a dayto-day general fund, the most important when setting council tax, as well as dedicated funds for housing and investment.

Alasdair Morgan, the SNP's shadow finance spokesman, said the report had exposed the continued failure by councils to manage their reserves. "This time last year (the commission) called for action by councils to control money held in reserve.

This new report shows that despite this warning, local authorities have failed to act.

"Council tax payers need assurances that they are not paying over the odds in tax increases for the money to then lie dormant in their local authority's bank account."

Brian Monteith, Tory local government spokesman, said:

"Council tax has soared by 55per cent under Labour and when water charges are added to the bill, band D property owners are faced with paying an exorbitant cost of [pounds]1400 a year." He said people were "entitled to ask why there are increases in council reserves when spending on housing is down, our roads remain in poor repair and council tax just keeps on rising".

Mr McCabe said he agreed with the commission that councils must now produce clear policies on their reserves as part of "robust financial planning", and explain them to the public.

But the Convention of Scottish Local Authorities accused the commission of pursuing a "cheap headline".

Pat Watters, Cosla president, said: "It is wrong to go with an all-Scotland figure - reserves and balances are something that should be treated on a case-by-case basis. They have obviously gone for the allScotland figure to give the media its billion-pound headline. Councils hold balances in accordance with local needs and a strategy for long-term investment."

He pointed out that, in the mid-1990s, councils were criticised for having their reserves too low. "Yet again councils are damned if they do and damned if they don't."

The commission report also highlighted a sharp rise in fraud. The number of cases rose 35per cent from 109 to 147, while the sums stolen rose almost fourfold, from [pounds]166,000 to [pounds]648,000. The cases were in addition to benefit fraud, which dipped slightly to [pounds]5.2m, or 0.35per cent of the [pounds]1.5bn paid out.

The report concluded that councils had generally improved their stewardship of public funds, but needed to do more to improve performance.