Every Lambeth household would receive almost £100 in a council tax rebate if alternative budget plans unveiled last week by the Liberal Democrats were adopted.
But Labour-run Lambeth council, which froze council tax in the borough for an unprecedented two years to help residents during the recession, branded the proposal a "deeply cynical opposition stunt".
Labour's council tax freeze is funded by approximately £15m from the council’s £30m reserves.
Liberal Democrat councillors believe an additional £11m is available in unused special funds - independent of the reserve - which could be released for an "efficiency dividend", saving every household £91.69.
Labour Lib Dem leader, Councillor Ashley Lumsden, said the money was earning no interest in the bank, adding: "The council has been prudent to save this money for a rainy day, but that day has now come."
But Lambeth Council leader Councillor Steve Reed said this would “bankrupt” the council and jeopardise its long-term financial stability.
"Lambeth's Lib Dems are dishonest tax-hikers and this latest pantomime fools nobody," he said.
"Lumsden is desperately worried about how popular Labour’s two-year tax freeze is, so he’s come up with a fake refund that would bankrupt the council."
The Lib Dems argue £3m could be released from the chief executive contingency fund and £8m from the Bank of Lambeth invest to save fund.
But Coun Reed said the contingency fund is maintained in case of a civil emergency.
Meanwhile Lambeth's Conservative councillors support a rebate and propose a 1.5 per cent cut in council tax.
Lambeth Conservative leader, Coun John Whelan, said: "Families need a helping hand at the moment.”
And Tim Saker, spokesman for the Taxpayers' Alliance, added: "A freeze is welcome, but the current economic conditions are absolutely crying out for councils to provide cuts."
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