COUNCILLORS fear a Government underestimate of Durham's population could hit council taxpayers.

The Liberal Democrat-controlled city council is seeking a review of its funding allocation because it believes the Government figures for the number of residents and students are wrong.

The complex formula by which the Government issues grants to councils is in part based on population and the number of full-time students who do not pay council tax.

Councillors fear that the underestimate could mean council taxpayers facing bigger bills in April.

Cabinet member for finance Carol Woods said: "The Government thinks our population has gone down by about 1,600 but we think it has gone up.

"The increase isn't in the thousands but it would make a difference to our rate support grant - and everything is needed because our budget is very tight."

The council says that Government figures, based on the 2001 Census, show that the city has 9,858 full-time students.

However Durham University alone - the city is also home to New College Durham and East Durham and Houghall Community College's Houghall College - had 10,253 students in the 2002/03 academic year.

The Government has given the council a 2.2 per cent increase - the lowest increase - in its grant, about £6.6m, on estimated spending of about £11.3m.

Coun Woods said: "We are going to have to look at cutting services and increasing council tax because the Government hasn't given us enough money. It is because we are not being funded correctly. For every one per cent the Government is wrong on the settlement, it adds four per cent on the council tax.

"It is difficult because the North-East always seems to come out badly in these settlements. We need a fairer funding system."

This financial year's council tax rise was 3.5 per cent, set by the previous Labour administration before it lost power to the Liberal Democrats in the May elections.

So far the council has had a £50,000 increase on its original grant for the next year but councillors hope to win more money before the final sum is decided in February.

The Government has increased the total it gives to the region's councils by 4.3 per cent - compared to 4. 7 per cent - which it says is due to falling population.