Whitehall to rank and reward councils

League tables of the best and worst local authorities in England are to be drawn up for the first time under government plans to reward high- performing councils with new freedoms from Whitehall.

All councils will be placed in one of four categories – "failing, coasting, striving and high-performing" – in an effort to spread best practice.

The plan will mean that town halls will join schools and hospitals in performance rankings, with those at the top of the league granted "earned autonomy" to tailor their approach to local needs.

The proposals, which will be outlined on Wednesday in the long-awaited White Paper on local government, will give high performers greater freedom to borrow money and innovate. The best councils will be allowed to sell their services for the first time not just to neighbouring councils but also to the private sector. Services such as telephone call centres and financial expertise could be sold commercially with the surplus raised ploughed back into local priorities.

Stephen Byers, the Secretary of State for Local Government and the Regions, will unveil the plans to categorise authorities according to their delivery of services.

He will also announce that pilot projects for so-called public service agreements between Whitehall and councils will be rolled out to cover all town halls apart from district councils. The agreements set tough targets for services such as education, social services and rubbish collection.

Under the plans, which have been drawn up under the leadership of Nick Raynsford, the Local Government minister, the Audit Commission would rank all councils in the new categories. But the Government has recognised that current inspection regimes are overly bureaucratic and will promise that, once a category has been agreed, a light touch will follow.

Red tape would also be cut in response to complaints from councillors that their work has been hampered by too many centrally imposed regulations.

Mr Byers believes councils are suffering from "inspection overload" and wants to slash the bureaucratic burdens forced on them by Whitehall's determination to inspect, monitor and evaluate targets. The Independent understands that of the 11 strategic education plans that councils currently have to draw up, three will be scrapped and the other eight put under review.

Councils will be given few new powers to raise local taxes, although business improvement districts, where firms can help pay for regeneration, will go ahead.

Mr Byers promised earlier this year that there would be no capping of councils and committed himself to the idea of local authorities being given more freedom in return for agreeing to pursue nationally negotiated priorities.

The new approach in the White Paper would reverse 20 years of increasing centralisation of local government and is sure to be welcomed by most councils. It is also in tune with Tony Blair's determination during his second term to devolve powers to the best- performing public services, whether that involves schools, hospitals or councils.