A LOOMING shake-up of town hall finances will be a devastating transfer of economic power from the North- East to the “wealthy South”, MPs were warned yesterday.

Council leaders raised the alarm over plans to end the 21- year system of the Treasury collecting and redistributing all business rates – allowing local authorities to keep the income instead.

They said all 12 North-East councils were net gainers from the system, which meant they stood to lose £500m a year if full localisation of business rates was adopted.

That is now thought to be off the table, after ministers gave a “cast-iron guarantee”

that no local council would lose out financially, when full proposals are unveiled later this month.

However, the Government will still propose that councils be allowed to keep any extra business rates generated by economic growth, a change to be introduced from 2013.

Furthermore, they will be free to offer discounts – to attract more companies – which would lead to areas having different levels of business rate for the first time in two decades.

Such an option would be attractive to some wealthy councils in the South – but impossible for the likes of Durham County Council, hit by massive cuts in government grant.

Yesterday, in a presentation at Westminster for MPs, Simon Henig, Durham’s Labour leader, said: “Business rates will accelerate in areas that are already affluent.

“We will end up in the situation where the Westminster City Councils of this world can cut rates – and we will get into a spiral where the richer areas become richer and the poorer areas become poorer.

“We are talking about big sums that will have major implications for local government in the North-East and for the communities that rely on our services.”

A document produced by the Association of North-East Councils, for the Government’s review of local government finance, called for future business rate retention for poorer councils only.

And it highlighted how the Government has already quietly ditched the policy of “resource equalisation”, in a grant settlement that hit Northern councils the hardest in 2011-12.