Big city councils will be allowed to raise hundreds of millions of pounds for major building projects under plans announced by Deputy Prime Minister Nick Clegg.
The dramatic change to local government finance is a victory for Birmingham City Council leader Mike Whitby, who has been pushing for the reforms for many years.
Speaking at the Liberal Democrat annual conference in Liverpool, Mr Clegg said: “It is the first step to breathing life back into our greatest cities.”
Councils will be encouraged to raise money for major infrastructure schemes, such as business parks or transport improvements.
They will be allowed to borrow the cash against future increases in business tax which the new infrastructure will bring in.
For example, Birmingham could borrow money to pay for a new railway station, which would attract employers and boost the local economy.
It could then use the extra taxes paid by employers to pay off its debts.
Coun Whitby urged the previous Government to introduce something similar in 2006 and 2007, when the council was campaigning for funding to rebuild Birmingham New Street station.
The measure, known as Tax Increment Financing, will be one of a range of policies included in a new policy paper setting out measures to improve the economy outside London and the south east.
But although it will allow councils to raise money, it will not prevent them from needing to make drastic cuts.
Birmingham City Council expects to make cuts of £230 million by 2014, and has written to 26,000 employees asking them to accept flexible working contracts - risking a showdown with unions.
The new government scheme can only be used to pay for infrastructure, such as major buildings. It will also require councils to find a lender, such as a bank, willing to share the risk of the project failing to bring in the expected increase in business taxes.
It will also add to Britain’s debts - at a time when the Government says cutting the budget deficit is a top priority.
Speaking to delegates at his party conference in Liverpool, Mr Clegg said: “We will put local government back in charge of the money it raises and spends. That’s why in our first budget we unlocked more than a billion pounds of ring-fenced grants.
“That’s why we will end central capping of Council Tax. That’s why we will allow councils to keep some of the extra business rates and council tax they raise when they enable new developments to go ahead.
“And I can announce today that we will be giving local authorities the freedom to borrow against those extra business rates to help pay for additional new developments.”
He added: “In every city in the UK, what matters most is that finally, they will be in the driving seat, instead of waiting for a handout from Whitehall. Local people, local power, local change.”