Scrapping Section 28 is shelved in favour of reforming town halls

Further Tory divisions over gay rights and Section 28 are certain to be exploited by Labour MPs after the announcement yesterday of a new local government Bill.

The Bill will not include any reference to the 14-year-old ban on the "promotion" of homosexuality in schools but backbenchers are sure to table amendments abolishing the controversial clause.

John Prescott, the Deputy Prime Minister, left out possible repeal of Section 28 to concentrate instead on an overhaul of town hall financing. He will also bring in a Bill to pave the way for directly elected regional assemblies in England and a planning Bill to simplify the current process.

Mr Prescott was thought to be worried that if repeal of Section 28 was in the Local Government Bill from the outset its progress could be hampered or jeopardised altogether by Lords opposition.

By leaving it to backbenchers to press for repeal, the Government keeps open the option of dropping the amendment if it proves too problematic.

After Iain Duncan Smith's decision to impose a three-line whip opposing adoption by gay and unmarried couples, the Tories' strategy on Section 28 is certain to be another test of his leadership. Under the proposed Local Government Bill, high-performing councils will be granted greater freedom to borrow capital for costly projects "within prudent limits" set down by the Treasury and the Office of the Deputy Prime Minister.

In an attempt to encourage innovation and roll back power from Whitehall, councils will also be allowed to trade and to charge for discretionary services, as well as to work in partnership with businesses to improve town centres and commercial areas through new Business Improvement Districts. The Bill will provide for a fixed 10-year cycle of property revaluations for council tax, and allow the creation of additional value bands. A rate relief scheme for small business will be introduced.

The Bill on planning is intended to speed and simplify the planning process, and to make the compulsory purchase system simpler, fairer and quicker.

The Regional Assemblies (Preparations) Bill will allow referendums to be held for the creation of mini-parliaments in English regions that want them. The Bill, which carries forward the regional governance White Paper announced by Mr Prescott in May, will set out the question of the referendum, who would be eligible to vote and the conditions to be met before the Government could require a regional referendum to be held. Initially, referendums might be held in only one, two or three regions. Favourites for the first referendums are the North-east and the North-west.

In the White Paper, the Government said regional assemblies would have powers over economic development, housing, sport, culture and tourism, planning and public health. Each assembly would have between 25 and 35 members, elected through a form of proportional representation.

Sir Jeremy Beecham, chairman of the Local Government Association, said the new Local Government Bill signalled a relaxation of central control over local affairs. "Many of the proposals are an essential first step if the Government is to travel the road towards freedom and flexibility for local councils," he said.