Those dreaming kids at the Treasury may have got one thing right the establishment knows it

They held a memorial service for Lord Jay last week. Douglas Jay was a proud man, almost the last of that generation of public-school socialists who built the Welfare State. But he was specially proud of his regional policy at the Board of Trade during the last war.

In those days, as he loved to remember, he was a sort of commis-sar. He would pick up whole industries and deport them to where he considered they were needed, usually "distressed areas" in the north of England, in Wales or Scotland. No nonsense about luring factories with inducements. Douglas Jay did not believe in carrots. He preferred the stick. He told employers where to go, and they damned well went there.

As the post-war decades passed, "regional policy" shrivelled away until in Mrs Thatcher's time it almost ceased to exist. "Direction of industry", in Douglas Jay's manner, had long been unthinkable. Even "steering" industrial expansion became heresy against the free market. Local authorities were stripped of their powers to attract investment by financial sweeteners.

But now, very cautiously, the idea of regional development is creeping back. The arrival of a huge Korean electronics plant in South Wales, announced this month, was achieved largely because Wales offered the Koreans a richer package of subsidies than other parts of Britain - or Europe.

In 1991, the Maastricht Treaty set up a Council of the Regions in which Britain participates, although a junior minister told Parliament that year that "regional government is un-English". In 1992, the European Commission insisted that regional aid should be paid directly to local authorities and not handed over to the Treasury. These were historic victories. They were defeats for the British obsession with sovereignty but also for the stifling centralism of the British state. Even on the right, the thought arose that regional policy - even regional autonomy - might after all be compatible with a free-market economy.

Two years ago, without fanfare, the Government took another step towards English regionalism. The local offices of four departments - Trade and Industry, Employment, Environment and Transport - were consolidated into 10 "Regional Government Offices". These are not quangos, but state agencies whose directors and staff are civil servants. The RGOs oversee the delivery of services in housing, training, transport and planning. They also put together regional bids, with public and private participants, for funds from the "regeneration budget", spent largely on housing improvement.

These RGOs may seem obscure but they are the embryo of something important. Implicitly, the Government has conceded that England has regions, and that the regional level is an appropriate level for administration. They are tiny Whitehalls, baby sisters to the Scottish and Welsh Offices growing up in Merseyside or the West Midlands. And like the Scottish and Welsh Offices, they may eventually generate a demand that they be controlled by elected assemblies.

Last week's leaked Treasury document got a horrible press. Not unfairly, the media and the Labour Party pounced on its ruminations that the state should abandon almost all social responsibility. It was presented as a nightmare in which a pre-Victorian state pays for nothing, not even the workhouse. Few noticed what the document said about local government, which was fascinating.

The authors think that the pendulum swing towards centralisation has reached its limit, and is about to sweep back. They suggest that local government should lose many of its current tasks. Schooling and student grants would be run directly from Whitehall. Roads would be privatised. These changes would virtually halve the size of local government. But the councils would also gain new responsibilities. "Capping" of council tax and business rates would end. Local authorities would take over the RGOs.

And, most extraordinary of all, these dreaming kids in the Treasury suggested giving local authorities the right to raise money through direct taxation. The model here is Germany's variable local tax. (So much for the Government's derision of Labour's "tartan tax", the proposal that a Scottish parliament could marginally raise or lower income tax).

In spite of appearances, there is a sort of consistency here. What we are looking at, I think, is the fruitstall theory of local government. Independent councils will compete with one another. If the goods are overpriced and poor, either taxes are brought down or the customer goes to buy services elsewhere.

The trouble is that the social and geographical variations of wealth in Britain are already gross. The danger of the Treasury's exercise is that "poor area" councils would soon collapse into no-go savagery while "good areas" would be mobbed by better-off citizens trying to buy their way in at almost any price. But not all the implications of the scheme are daft. Here, dressed up in laissez-faire language, is a proposal that Whitehall should relax its grip and allow local authorities to make real choices.

Douglas Jay believed in regions. But for him they were objects, not subjects; targets for the reforming energy of an all-powerful central government. He did not play with the notion that these regions had, or might be given, a democratic identity. Jay saw them rather as "Distressed Areas" defined by statistics of unemployment, poor health or bad housing.

And yet Jay's policy contained one shining assumption which is the soul of all modern federations, which underlies the whole push of the European Union towards regionalism. This is the duty of redistribution - the commitment of central government to level up the difference between rich and poor regions.

Even the Treasury document admits that local authorities, however much home rule they acquire, will demand central funds to "even out regional inequalities". This sort of redistribution is not uniquely socialist. The German constitution, drafted mostly by Christian Democrats, obliges the federal government to "ensure a reasonable equalisation between financially strong and financially weak Lander", in order to achieve "uniformity of living standards in the federal territory".

It is some 15 years since President Mitterrand set up regional governments in France. He amazed the world twice over: first by decentralising the most centralised state in Europe, and secondly because he was a socialist from the Jacobin tradition which had believed that all progress came from Paris. Today, I know from these little signs that regional governments are coming to England too.

This is not just because Labour wants parliaments for Scotland and Wales, and not because politicians seek an answer to the "West Lothian Question". It is because the English establishment, in its reluctant way, is confessing that the centralising game is up.

The Treasury paper itself foresees that its new local authorities would probably clump together into larger units, "the basis for a new regional tier of government". So right and left, for different reasons, are beginning to sail before this new wind from Europe. Labour openly favours the idea of English regions with elected assemblies. But Whitehall too, backed by an intelligent element of free-market Tories, is turning in the same direction.

It was high time. The late Leopold Kohr, one of the prophets of "small is beautiful", used to argue for a Britain divided into "small, translucent and largely self-sufficient regions", because "I am against bigness, not England". His hour is coming.