IN a damning financial report Petersfield town councillors have been warned they must raise council tax or find themselves in the red.

A report from internal auditor Alan Harland has highlighted his serious concerns over the future finances of the town council.

Councillors were told that to set a balanced budget they either had to raise the tax or cut expenditure.

But the stark message to members of the finance and general purposes committee at their meeting last week was that budgets were already stretched to the limit, and further cuts would harm services. They were strongly urged to change their financial policies to ensure they set a balanced budget in the years to come.

The council's financial officer, Sue Watts, told the committee last week she fully supported Mr Harland's recommendations.

"I think it's a good idea, and urgent, to look at income and try to increase it," she told councillors.

"There are several ways that officers have come up with to increase the income. I think councillors should talk about that."

She also recommended that councillors should look at expenditure within the current year's budget to try to cut down "on what little we have in there".

She warned that the council's finances were facing crisis.

"It just grows worse, and tonight I am listening to councillors talking about virements that are still coming in," she said.

She referred to the latest financial problem facing councillors, who are seeking ways of paying for £2,200-worth of repairs to the ventilation system in the Festival Hall.

They are hoping to use £2,200 earmarked in the current budget for a survey of the false ceiling in the hall. But officers told councillors last week that £700 of that money had already been "vired" away to help pay for the redecoration of the hall.

Reporting to councillors on Thursday of last week, Mrs Watts said that in recent years the town council had had to set "more challenging budgets", and contingencies had also had to be spent to absorb rising costs.

She said the situation became worse when Status Meetings vacated its offices at the Festival Hall, drastically cutting the council's income from rental.

"This has a significant effect on the authority's budget," said Mrs Watts.

She added: "The internal auditor has recently reviewed the accounts for 2003 to 2004, and he has voiced concerns over the fact that reserves have significantly reduced. He has projected that if the town council retains current spending profiles, the authority will be faced with setting a deficit budget in 2005 to 2006 (next year).

She warned that it was against the law to set an "unbalanced" budget, and it was her duty to report to members her concerns if she believed the council was in danger of doing so.

She said the way forward was to agree a strategy to ensure councillors did set a balanced budget.

"In order to do this the authority has no option but to ensure that budgeted expenditure will be fully met by the precept payment," she warned.

And Mrs Watts added: "The authority will have no option but to either increase their precept claim (the amount of council tax it levies from the people of Petersfield) or significantly reduce expenditure.

She warned: "It should be noted that budgets are already stretched and further economies will undoubtedly result in a deterioration or significant reduction in services".

The committee was given three recommendations: to set its precept claim to ensure that a balanced budget was set; to thoroughly investigate the increasing income or the reduction of expenditure; and to monitor finances this year with a view to finding efficiencies and increasing reserves.

But senior town councillor George Watkinson said he had "problems galore" with the internal auditor's report.

He said the report was based on assumptions, including the fact that expenditure next year would be three per cent higher than currently.

"Yes we have a problem, but I don't agree with his recommendation on how much councillors.

Committee chairman Bob Ayer pointed out that one of the problems was the council's rapidly-decreasing general fund balances, which looked set to plummet to £12,000 next year.

"This is fundamentally why the responsible finance officer is making her recommendations, in order to stop the balances dropping to £12,000," he said.

Chris Jenner claimed the council's financial problems began and ended with the vacant offices at the town council.

"It is a source of irritation to me that they are still to be let," he added.

Julie Butler told councillors: "We do need to set realistic budgets, we should be working to avoid virements."

Mrs Watts and the internal auditor were due to meet this week in a bid to come up with a precept calculation which will ensure balanced budgets in the future.