THIS should be the happiest time of the theatre year at York Theatre Royal; the pantomime season when Dame Berwick Kaler and co draw 48,000 babbies and bairns to Sinbad The Sailor.

Yet chief executive Daniel Bates cannot rest on his laurels, at a time when Arts Council England are applying the squeeze to theatres across the land and, closer to home, City of York Council is asking residents to suggest ways of pruning £1 million from the council budget for the next financial year.

Among the proposals is a cut in funding to the Theatre Royal that would most likely have an impact on the Studio, youth and educational programme work at the theatre: the very work the theatre has been encouraged to develop in a strategy to expand the range of users.

Daniel Bates and artistic director Damian Cruden could be forgiven for feeling frustrated, even angry. Maybe the Theatre Royal is a victim of its own success or of the adversity that always faces the arts.

"It's hard when you're up against gum-chewing removal for cost-cutting, " says Daniel.

"The public may be wondering why it's not some of the other artistic activities in York that are up for the cuts, but we know the answer to that question: our three yearly funding programme is up for renewal this year, and next year it will no doubt be someone else."

Rather than complaining, Daniel prefers to point to the theatre's successes.

"We've done some fantastic productions in 2007 that the public have really responded to. Bringing Dallas star Linda Gray here in Terms Of Endearment was a fantastic opportunity, and the public really embraced it - and they certainly responded to Linda, who couldn't stop talking about it."

Extending the life of productions beyond a run in York has become a cornerstone of the theatre's work.

"At one time last year we had Terms Of Endearment, Limbo, Looking For JJ and Silly Billy all touring the country. To the residents of York that might not mean much, but to the city's status within the industry it's important, and financially there's a small return that helps us to put on the next production, " Daniel says.

Such is the theatre's reputation for its artistic quality - not least in its productions of two Yorkshire plays, John Godber's Bouncers and Alan Bennett's Enjoy - that the Theatre Royal is in discussion with three companies to add to its roster of co-productions: another means of sharing costs.

"We must mention the benefit of the panto, too. There is now research going on into the health benefits of laughter, and if you could bottle the panto magic it would be great, " says Daniel.

"This theatre is now worth £11 million to the economy of York, worked out from who comes into the city, how they get here, their parking, their meal, and then there's the health benefit. You go to the panto and you feel better.

"I don't want to sound too evangelical, but it's good to know it makes a difference."