The National Commission of Audit this month recommended that the government stop the grants and push much of the funding responsibility back onto the states.

The federal government provides $1.1 billion in untied financial assistance grants for general purpose use and roads to councils nationwide each year.

Launceston City Council general manager Robert Dobrzynski in a council policy and planning meeting yesterday expressed concern over a cut to grants.

``There is a significant risk that the federal government will stop funding local government,'' he said.

``That would be a bridge to structural reform. It would force local government to be more efficient.''

Tasmanian councils received $72.3 million in federal financial assistance grants this financial year, which included $35.4 million in general purpose grants and $36.9 million in road grants.

Northern councils received $23.7 million in grants, and the Launceston City Council received $4.1 million.

Launceston aldermen yesterday discussed the federal government's budget decision to freeze indexation on financial assistance grants for the next three years, and stop prepayment of the grants.

Launceston City Council corporate services director Michael Tidey predicted that the council could lose $96,000 in its first year without a 3 per cent indexation.

The Local Government Association of Australia has predicted the freeze in its first year would result in a $96 million loss to councils.

Local Government Association of Tasmania president Barry Easther said he doubted that the federal government would completely pull away from funding council financial assistance grants.

``And what's more, amalgamations won't fix the funding problem anyway,'' Cr Easther said.

Cr Easther said many councils would have been caught out by the government's decision to freeze grant indexation.

``Most councils in Tasmania would have provided for an increase in their budget on the basis of a CPI increase,'' Cr Easther said.

``There is some talk that councils will either need to increase rates or decrease services . . . but rates have reached such a level now that people's ability to pay has been affected.

``I don't think it's quite as bad as that but the councils will need to consider how to absorb the additional cost,'' Cr Easther said.

``It's an ideal opportunity for councils to look more seriously at their expenditures, if they haven't done so already.''