Hard times could be in store for Hampshire taxpayers next year and in 2007.

A fortnight ago, the county council announced plans to set its lowest tax rise for 31 years at 3.5% but it has since emerged that residents cannot expect the same good news in the long term.

Early predictions suggest council tax could rise by 6.7% next year and 5.3% in 2007. County treasurer, Jon Pittam, presenting the preview to cabinet members, warned: "We've got big problems stacking up in 2006/07 and 2007/08."

As an example, Mr Pittam said Whitehall was changing the way it funded schools, prividing a specific grant for education and leaving councils with a less flexible budget and reduced funding for other services. "There's going to be a huge distortion in the system. The Government hasn't really worked out what this means," added Mr Pittam.

County documents suggested that, in the case of Hampshire, its overall grant from Westminster could fall by 6.8% in 2006, after a 5% rise this year. The outlook for 2007 is also gloomy, with a further reduction of 0.9% predicted.

HCC leader, Ken Thornber, is lobbying local government minister, Nick Raynsford, for more cash. Westminster gave an extra £636m to councils across Britain this year, said Mr Thornber, who is anxious to ensure it is not a one-off gesture.

The council, with an annual budget of around £1.1bn, has a reserve fund worth £20m. It plans to use it between 2005 and 2007 to minimise tax rises. Just under £6m is being released this year. Without it, the authority estimates council tax would rise by 5% and not 3.5%.

The fund was created in 2003, in anticipation of Westminster moving money away from southern councils to the North, viewed as worse off. Its creation resulted in a 15% tax hike in Hampshire that year.

Deputy leader, Michael Woodhall, said: "It's good to have that money for a rainy day and we seem to get a rainy day almost every year."

Lib Dem leader, Adrian Collett, believes the Conservative administration should not have created the fund, as they had only succeeded in changing what year the larger increases were made.

Council members are due to vote on this year's increase on Wednesday. A rally by protest group, Isitfair, is expected before the meeting.