George Osborne was accused of plotting a fresh round of council cuts today as he unveiled the biggest change to town hall funding since the poll tax was axed.
In a keynote speech aimed at wooing Labour voters, the Chancellor announced that councils would be allowed to keep hold of £26bn in business rates that are normally sent to Whitehall.
Local areas will also be allowed to cut business rates to compete with their neighbours, and elected city mayors will get new freedoms to raise a local infrastructure levy.
Yet although many councils have long called for devolution of powers from London, including an end to Margaret Thatcher's 'uniform business rate', Labour and the TUC warned the changes could mask deep cuts and could widen the income gap between rich and poor towns and cities.
Mr Osborne pitched his reforms as a 'devolution revolution' that would put boost his 'Northern Powerhouse' plan with "the biggest transfer of power to our local government in living memory".
"So this is what our plan means. Attract a business, and you attract more money. Regenerate a high street, and you’ll reap the benefits."
Asked if the changes could lead to one area trying to poach trade and businesses from a neighbouring area by undercutting business tax rates, a Treasury source said: "Yes".
Although £11.5bn would be handed back to councils between now and 2020, Treasury aides revealed that £9.5bn in core grants would be 'phased out'.
The missing £2bn, and possibly more in cuts, is set to be recouped in the coming spending review. Mr Osborne warned today that as councils would get 'extra responsibilities' as well as extra powers, a line that sparked fears of further spending reductions.
Mr Osborne also hinted at further spending cuts when he said "everyone knows this country has to live within its means - and that means savings in local as well as national government".
Treasury aides insisted that a new 'Safety Net' system would be created to ensure those councils who don't have much business rate income did not lose out to richer cities.
They insisted that the fastest growing areas for business rate were the East Midlands and Yorkshire and denied claims that the new system would benefit London and the South East.
But Labour said Osborne had poached yet another of their 2015 election manifesto pledges, but without the safeguards.
Shadow Chancellor John McDonnell said the Chancellor looked like he wanted a 'race to the bottom' with councils undercutting each other and warned the poorest areas could get hit most.
"We need to ensure that the right safeguards are in place so that poorer areas of the country do not lose out on vital revenue. We run the real risk of seeing the explosion of Tory tax haven councils."
TUC General Secretary Frances O'Grady said: "We all want more decisions to be made locally. But by devolving business rates without any national safeguards, regional inequalities will get wider.
"The communities that most need investment are often those with the weakest business revenue base, so it is vital that the Treasury retains a significant role in regional economic development.”
Andy Burnham, who has long suspected Osborne's devolution agenda is a bid to fragment local services, tweeted his own doubts.
Big contradiction at heart of Osborne speech. Says wants to close North-South divide. But then announces taxation reform that will widen it.— Andy Burnham (@andyburnhammp) October 5, 2015
One council insider told HuffPostUK: "this is all about 2020, but there is a local government funding crisis right here and now".
Gary Porter, the Tory chairman of the Local Government Association, welcomed the return of business rates to local control, but said there were clear pitfalls to be avoided.
“While this is good news for councils and businesses, local authorities will face almost £10 billion of cost pressures by 2020 so we will now seek to work with government about how this proposal can be introduced more quickly," he said.
“We would expect measures to ensure local areas with less ability to generate business rates income do not suffer as a result of these changes and all councils are also given leeway to vary business rates up as well as down."
In his speech, Mr Osborne admitted that many Labour voters in May "didn’t quite feel able to put their trust in us" but promised that he wanted to "extend our hand" to attract them now that Jeremy Corbyn had been elected leader.
"To these working people who have been completely abandoned by a party heading off to the fringes of the left let us all here today extend our hand," he said.
"Do you know what the supporters of the new Labour leadership now call anyone who believes in strong national defence, a market economy, and the country living within its means? They call them Tories. Well, it’s our job to make sure they’re absolutely right."
He added "My message to today’s Labour Party is this: You head back to the 1980s. We’re heading forward. You listen to the few. We’ll govern for the many."