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The government should lead a "clear national debate about how we want to manage social care for older people" in the face of mounting pressures, according to an inquiry into the future of local government.

The Lyons Inquiry final report, published last week alongside the Budget, said the debate must ask how far care should be funded through local or national taxation or individual contributions, and question who should make decisions about levels and standards of care.

The report argued that councils currently had much of the responsibility for managing funding pressures in the system but "limited tools" to cope with them, such as restricting eligibility criteria.

This was due to a "hybrid model" where authorities set eligibility criteria and bore the costs, while central government set care standards and means-testing criteria for residential services.

The inquiry, chaired by former Birmingham Council chief executive Michael Lyons, also called for automation of the council tax benefit system to ensure the £1.8bn in currently unclaimed council tax benefit reached its intended recipients.

It also recommended giving greater flexibility to local authorities by reducing specific and ring-fenced grants and proposed the government use fewer "soft controls" on local government, such as guidance.

The inquiry proposed an end to council tax capping and, in the medium-term, suggested current property bands be updated. It also called on the government to consider assigning a fixed proportion of income tax to local government.

However, the government rejected Lyons' proposals on capping and said properties would not be revalued for council tax until 2011 at the earliest.

Lyons was commissioned in 2004 by the government to make recommendations on how to reform local government finance but the remit was subsequently extended to council functions.