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Councils in England will be allowed to keep the business rates they collect rather than paying them into Treasury coffers, under new government plans.

Deputy PM Nick Clegg said councils had no financial incentive to boost growth and prosperity in their areas.

But he said changes would be "fair" and poorer areas would not get less money than they do under the current system.

Business rates are charged on most non-domestic premises, including warehouses shops, offices, pubs and factories.

They are calculated and collected by local authorities, and at present are put into a central pool before being redistributed to all councils in the form of a grant.

The grant is used to help fund local services like the police and fire brigade.

The government hopes the change will make councils less dependent on Whitehall funding. According to last year's spending review, total central government contributions to local government will fall by 26% in real terms over four years.

Mr Clegg told the LGA conference in Birmingham that the tax system was currently "over-centralised" with just 5% of the tax take being raised locally.

"We will localise the retention of business rates. I think everybody here can agree that with hindsight centralising rates back in 1988 in the Local Government Finance Act was a mistake. It set back meaningful localism by a generation."

He said councils now generated less than half of their income but if they had the power to retain business rates, that could rise to 80% or more, he said in a speech to the Local Government Association.

"At the moment you have no financial incentive to promote economic growth and prosperity in your area. You are not rewarded for success.

"By localising the retention of business rates you are given a dramatic new incentive to work with business and with others, in order to boost economic prosperity in your areas."

Poorer areas, particularly in the north, fear that the localisation of business rates could leave them much worse off because they lack a large economic base.

But Mr Clegg said any new system would be fair.

"More deprived areas will not lose out. From the start, no authority will receive less funding when the new arrangements are introduced than they would have done previously.

"The new system will start on a level playing field. How far you progress from there is entirely up to you."

Councils will also have the power to borrow against business rate income to fund local development.

In his speech to the LGA on Tuesday, the body's new chairman, Sir Merrick Cockell, said localising business rates would be "the biggest kick-start to our economies" that the government could give.

He said it would allow communities to benefit directly from their own economic activity and development.

The deputy PM also unveiled plans to roll out so-called community budgets across England after a successful pilot scheme.

The aim of the policy is to help councils manage families with multiple problems who require interventions from a number of different bodies, including the police, social services, doctors and courts.

The government argues that by giving councils one central budget for each of these families, waste can be eliminated and individuals can be cared for better.