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CHANCELLOR George Osborne has announced the biggest council funding shake-up for a generation - with Worcestershire expected to be one of the big winners in a £26 billion pound overhaul.

Under a radical power shift councils will keep every penny of the business rates they collect - taxes levied on shops and other companies.

Local authorities can also drastically slash the fees to revive their High Street and become more competitive - or in some cases up them.

The surprise move, announced during today's Conservative Party Manchester conference, has been lauded by leading county figures.

Under the current system, which dates back to 1988, business rates are collected by councils and handed straight to central Government, which then re-distributes money back out under a complicated formula mainly based on population.

The change, launching in 2020, gives councils a huge incentive to grow their own economies as the more businesses that launch, the more money they get.

It comes after Worcestershire was named the third fastest growing economy in the UK, behind only London and Oxfordshire.

Worcester City Council got £3.4 million in business rates last year - with the leadership today saying that sum would have been around 15 per cent higher if it kept all the money.

Councillor Chris Mitchell, the cabinet member for finance, said: "It's very interesting - it does suggest they want to move to a system like the federal state one in the US.

"For us it could be worth £500,000, if not more. We'll need to look at the detail but on the face of it, it sounds positive.

"It's surprising."

It also means Mr Osborne will phase out the yearly core revenue support grant (RSG) he offers councils, a fund which has plunged around 40 per cent since 2010.

The city council's RSG is worth £1.8 million this year but is expected to fall to just £900,000 by 2019.

Worcestershire County Council is getting £59 million in business rates money this year and a £54 million RSG.

The move by Mr Osborne means councils will be able to be much more self-reliant.

Worcester MP Robin Walker said: "This is a huge leap forward, especially for an area like Worcestershire.

"It goes much further than I expected and is a major shift in the way the whole system works."

Wychavon District Council got £2.2 million in business rates last year.

Councillor Bob Banks, the cabinet member responsible for finance, said: "I welcome the flexibility and I can't imagine anyone who won't be welcoming this.

"It means the local population will be better connected with the local authority which is the way it should be, really."

Wychavon District Council's RSG last year was around £2.5 million but has also continued to fall steadily

Worcestershire County Council is getting £59 million in business rates money this year and a £54 million RSG.

Since 2013, some councils in Worcestershire have been working under a 'pool arrangement' where they only return 50 per cent of the rates they collect, and keep the rest in the county.

But council leaders have continually argued how inflexible and outdated the current system is. Mr Osborne said: "This is what our plan means - attract a business and you attract more money.

"Regenerate a high street, and you’ll reap the benefits. Grow your area, and you’ll grow your revenue too."

He has called his decision a 'devolution revolution', but the Labour Party has already countered it by suggesting areas with worse economies face falling even further behind.

A Labour spokesman today said Mr Osborne had "failed to address a productivity gap" between different regions in the UK.

Only cities with elected mayors would be able to raise the rates to pay for local infrastructure.

They could increase the rates by up to two per cent and would need to win the backing of local businesses.