Deputy prime minister Nick Clegg has announced that local authorities will be given the freedom to borrow against future tax increases in order to fund development.

In a speech to the Liberal Democrat conference today in Liverpool, Clegg said that Tax Increment Financing (TIF) would be introduced in England as part of measures for “breathing life back into our greatest cities”.

The announcement is part of a wider set of reforms that will give more councils more flexibility over how they spend taxes and business rates.

TIF has long been talked about as a possible way of funding regeneration during the downturn. However, councils have not had the borrowing powers to get finance for schemes based on predicted increases in tax revenues.

That is set to change as part of the decentralisation and localism bill, which the coalition is not expected to publish until early next year.

More detail over how TIF will work in practice is expected in the regional growth white paper, which is set to be published at the same time as the October spending review.

Nick Clegg said the coalition was determined to put local government back in charge of the money it raises and spends.

“That’s why in our first budget we unlocked more than a billion pounds of ring-fenced grants.

“That’s why we will end central capping of council tax. That’s why we will allow councils to keep some of the extra business rates and council tax they raise when they enable new developments to go ahead.

“And I can announce today that we will be giving local authorities the freedom to borrow against those extra business rates to help pay for additional new developments.

“This may not make the pulses race, even at a Liberal Democrat conference. But I assure you it is the first step to breathing life back into our greatest cities.”

Under the previous government, local authorities had been instructed to bid to become pilot areas for the TIF mechanism.

More than 100 expressed an interest in using the model and pilot schemes, introduced to so-called Accelerated Development Zones, were planned.

In Scotland, three TIF-based schemes are already underway.

BPF chief executive Liz Peace said this was a “far-sighted” step to ensure new infrastructure would be delivered.

“Ministers should be congratulated for offering industry what would appear to be absolutely brilliant news, although obviously the devil will be in the detail.

“A huge amount of work and expertise has gone into lobbying for TIFs, over a campaign lasting many years. We look forward to working with government to ensure that the emerging TIF regime is workable and effective.”

In England, the extension of the Northern Underground Line to the Nine Elms area is among the most talked-about bids.

Jackie Sadek, former chair of the British Urban Regeneration Association and acting chair of UK Regeneration, said it was “truly excellent” and “totally unexpected” news.

She said: “For some time I have been lamenting the fact that we didn’t bring in TIF measures during the boom times, as I believed the government would not sanction more debt mechanisms in the bleak times.

“I am very glad I was proved wrong.  I am impressed and thrilled that the deputy prime minister has managed to effect this amazing announcement at the Lib Dem conference.

“This really will breathe life back into several stalled projects and is the beginning of the turn around for the regeneration sector. I am over the moon about this.”

Mike Whitby, leader of Birmingham City Council, said the government had “laid down the gauntlet” to the Public Sector to do more with less, and called on the government to use Birmingham as a pilot scheme for the TIF model.

“We have already put forward several proposals for how [TIFs] could operate within the West Midlands, and our models demonstrate that there could be a huge impact in terms of job creation and economic output – unleashing our capacity to become true drivers of the UK growth agenda.”

John Beresford, development director at Grainger, said the news was welcome for regeneration and investment.

“While we very much welcome tax increment financing as a new vehicle to stimulate regeneration and investment, we urge the coalition to focus the same effort on fixing the planning system, which is currently in a chaotic state.

“Without a working planning system, TIFs will have a very difficult time supporting economic growth.”