The extent to which this country has become centralised is, for me, best summed up by one fact. According to evidence collected through the ‘Total Place’ pilots – a series of initiatives aimed at delivering better public services at lower cost by reducing overlap between organisations – only £350 (a mere 5%) of the £7,000 spent per head on public services each year is discretionary spending by local councils. This is the stark reality of localism after 13 years of Labour government.

By contrast, localism is at the heart of everything the Liberal Democrats stand for. It is part of our political DNA. We believe that it is not only better for decisions to be made locally, but also that betterdecisions are made locally.

It is a crucial agenda, never more so than at the present time, with the general election fast approaching and with cuts looming large on the horizon. The key question for me is what the response to the recession will be like after the election. Will the winning party pursue a radical localist agenda, as the Liberal Democrats would, or will there be a retreat from the fashionable rhetoric of recent times?

Difficult decisions will undoubtedly have to be made. With an unprecedented public spending squeeze on the way, local authorities are bracing themselves for the tough times ahead. But the choice we have to make is how much we engage with and respond to the views of local people in taking those decisions – and whether we believe, as I passionately do, that such an approach will result in better outcomes.

Local authorities are about to enter the final year of their three-year funding settlement from central government. But there is huge uncertainty about what the future holds post-2011, as the government has chosen to avoid coming forward with its spending review, due last summer, this side of the election.

The Pre-Budget Report gave us a general indication of what lies ahead – a real-terms freeze in public spending between 2011 and 2015. But add in debt financing, social security and ring-fenced commitments to protect health, schools and overseas aid, and a bleaker picture emerges.

The Institute of Fiscal Studies recently published its annual Green Budget. It estimates that non-protected areas, including local government, will see a 12.9% cut in their budgets over two years. By the time the Conservatives’ plans are factored in, the worst-case scenario is a 22.8% (or £57bn) budget cut over the four years to 2015.

By failing to come clean about what the future holds, the government is giving councils precious little time to prepare for this eventuality. With councils set to begin preparing their 2011-12 budgets this October, it is imperative that they are able to plan as soon as possible – and not just so that they can make the numbers add up.

The challenges ahead pose much broader questions about whether the current system of local government finance is equipped to cope with such pressures. As it stands, the system imposes ring-fencing and gearing, which makes it impossible for councils to focus on their own priorities and leaves them reliant on central government for three quarters of their spending. Although public services are delivered locally, those outside local authority control remain massively and misguidedly driven by central targets.

There needs to be a fundamental change in the current relationship between central and local government, and in the way in which local services are funded.

The first step is to see local government raise a far larger proportion of what it spends – and, for a start, more funding flexibility could be generated by reversing the current gearing system. Business rates could be localised relatively quickly, followed later by a move towards a system of local income tax, initially piloted by interested councils. People should see clearly that the taxes they pay locally go back into local services. At present, far too much local spending power is ultimately dictated by the Treasury. Local government finance has to be a priority, as localism will only work if local authorities are in control of the purse strings and have genuine flexibility about their spending decisions.

When local government is facing a situation that will severely test its existing relationship with central government, I find it staggering that both Labour and the Conservatives have failed to grasp the importance of the localist agenda. While there is no shortage of localist rhetoric, there has been a regression not only in terms of what has been delivered but also in terms of what is being proposed.

Does the government really think that strengthening the role of unaccountable, remote and undemocratic bodies such as regional development agencies is an act of decentralisation? Do local councils really need to be told in eight pages and 3,000 words of primary legislation how to respond to petitions, as was the case in last year’s Local Democracy, Economic Development and Construction Bill?

The Conservatives’ thinking is just as muddled. Their approach to council tax – a regressive tax, lacking in buoyancy, which has risen above inflation virtually every year since it was invented and whose benefit system has poor take-up levels – is to sustain it. They would keep the council tax but permanently rule out revaluation, leaving the basis of taxation decades out of date.

Many councils – including those under Conservative control – will prove unable to deliver the Conservatives’ suggestion of freezing council tax. This proposal will do nothing but reinforce inequalities in the current funding regime, and will result in Westminster having to fund even more local government spending.

Typically, the localist agenda has been hijacked by two parties who don’t really understand what it’s about. Instead of focusing on power, resource and engagement, they appear to have turned it into a bureaucratic process concerned only with delivering efficiencies.

The ‘Total Place’ project mentioned above is a case in point. While these pilots are valuable in highlighting how public money is spent at a local level, they need to be taken further if they are to have a real impact. Local people must be involved in the debate about how public money can be better spent. Not only must local communities be given the opportunity to see the books, they must be allowed to determine the priorities, too.

If the current set-up does not change, central government will impose spending cuts on local communities without properly involving them in the process. Ministers must not assume the worst in local authorities and local people by continuing to believe that they are not capable of acting in their own best interests. During this period of financial uncertainty, it is more important than ever to deliver public services that are designed for and accountable to the people who use them.