THE scale of the funding headache facing City of York Council emerged today as finance chiefs said the authority was facing a massive £10 million budget shortfall.

Leader Steve Galloway said the council was focusing efforts on the Fair Grant for York campaign, which aims to secure an estimated £7 million shortfall from Whitehall.

But the Liberal Democrat chief admitted if the campaign proved unsuccessful, and the Guildhall then had to find the full £10 million in savings, it could only mean "substantial" service cuts for residents.

However opposition Labour councillors today warned that it was "highly unlikely" the Government would stump up all or even the majority of the shortfall in the middle of a three-year funding review.

Coun Galloway admitted that "challenging" decisions lay ahead in future weeks as finance officers sought to balance the books for 2005/6.

A council report today revealed that the authority was initially facing a £17 million budget gap as part of its £177m budget needs.

But this was slashed to £10 million after a string of potential savings and extra income sources were identified.

Finance director Peter Steed said these measures included a proposed five per cent council tax rise, in line with expected Government capping limits, bringing in £2.65 million from reserves for one-off items, an anticipated reinstatement of a £1.2 million Government grant and a reduction in contingency funds.

Officers are now drawing up further efficiency savings, looking at ways to increase income, and will continue talks with Whitehall officials on the Fair Grant campaign in a bid to shrink the funding black hole.

Coun Galloway said: "The principal thrust of what we are doing at the moment is trying to get the Government to give us the £7 million we think that they owe us.

"That would make the process manageable. If we did have to find £10 million in savings, it could only mean substantial cuts in services."

Coun Galloway hinted that discretionary services, such as some leisure provision, which he said was not a central government priority, could suffer in such circumstances.

The council leader said all Guildhall departments were being asked to make five per cent budget cuts as part of a major spending review.

Residents will be consulted on proposed changes in December.

Labour Group leader Dave Merrett cast doubt on the chances of success for the Fair Grant bid.

He said "careful examinations" of the budget were needed, but said he could not comment further until he saw more detailed information.

Councillors will discuss ways of plugging the budget gap at next Tuesday's executive meeting.

Updated: 13:27 Tuesday, October 05, 2004