Former ministers urge shake-up in town hall finances

Tony Blair will be urged today to use a third term to transform public services by scrapping council tax in its present form, freeing town halls from Whitehall and giving companies the right to run everything from NHS hospitals to social services.

Two of the Prime Minister's closest political allies, Alan Milburn and Stephen Byers, will call for town halls to be allowed to raise more cash from taxes and borrowing from the City for the first time.

The two former cabinet ministers will declare that pushing on with radical reform is the best way for Mr Blair to come out fighting after the Hutton Report and the top-up fees vote this month.

Mr Byers will deliver a speech tomorrow calling for the scrapping of council tax and for councils to be allowed to double the amount of money they raise locally.

In a speech today to Demos, the think-tank, Mr Milburn will insist that New Labour should return "power to the people" by giving councils and neighbourhoods more rights to raise funds locally. In an echo of his own plans to give foundation hospitals the right to raise money on the open market, the former health secretary will suggest that councils should follow the American lead of raising cash from City borrowing and through bond issues.

Mr Milburn will say that the best way to transform Britain would be to devolve power to the most local level possible by creating directly-elected neighbourhood councils with tax-raising powers.

The neighbourhood councils, which would be made up mainly of independent members rather than party politicians, would have the right to charge a precept following a local referendum.

Mr Milburn will point out that for all the recent vogue for "new localism" espoused by Labour, the Liberal Democrats and the Tories, few politicians have come up with detailed policies to enact it. He will state that giving more tax-raising powers to local authorities is the best means of encouraging responsibility and tackling voter apathy.

"When it comes to localism it is time to stop talking the talk and start walking the walk. That is what I hope we will now do," Mr Milburn will say.

England's centralised system of local government funding is "a recipe for confusion and is crying out for reform", he will say. At present, councils raise 25 per cent of their own income and Whitehall gives them the rest. "We should examine whether over time a 50/50 overall split is feasible. Of course that would require local authorities - and perhaps other local services with a local democratic mandate - having the freedom to raise more income locally, starting perhaps with small taxes and charges balanced by popular permission being sought through local referenda," Mr Milburn will say.

One key means of improving local services would be to allow newly-created companies to take over management as well as provision of services.

"In time there could be chains of these management companies specialising in running groups of primary care trusts, hospitals, leisure, social services and other local government services," he will say.

Mr Milburn will also call for boards of NHS Primary Care Trusts to be directly elected and given the power to sack senior executives who have failed to raise standards and performance.