Londoners in a string of wealthier boroughs face rising council tax bills or a hit to local services under a £2 billion change to town hall funding.
The reforms aim to channel funding into more deprived areas and rural districts and are set to benefit the North and Midlands.
They will also reset the business rates retention system to “incentivises” councils to help local economies “grow by better matching the system to local need”.
This change could hit London boroughs which collect large amounts of business rates compared to many other parts of the country.
Announcing the major shake-up, local government minister Jim McMahon said: “We will work with councils to fix what is broken, moving around £2 billion of funding to the places and communities that need it most and modernising council tax administration.
“No-one will suffer from deteriorating services just because they live in an area with low house prices or high demand for social care, or in a rural part of the country.”
But leading economists warned that “leafier suburban” boroughs, such as Kingston, Richmond, Bromley and Barnet in London, could lose out.
They also believe that ministers may give boroughs such as Westminster and Wandsworth special permission to raise council tax by more than five per cent if their finances are very hard hit.
“Under the new system, councils' funding from central government will reflect how much they could raise themselves from council tax if they set their bills at the national average of around £2,000 a year,” said Kate Ogden, senior research economist at the Institute for Fiscal Studies.
“Some inner London councils, particularly Wandsworth and Westminster, set much lower bills than this currently, and might see large cuts to the amount of funding they receive from central government.
“They may need bespoke arrangements to transition to the new system over the next three years.”
A Westminster City Council spokesperson said: "Like all councils we will need some time to work through the funding reform data and proposals, so won't be able to comment until we have completed that work."
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The proposed reforms will put upward pressure on council tax in wealthier parts of London, its commuter belt and the wider South East.
But if the local authorities are already increasing it by the maximum 4.99% they will generally not be able to put it up further and instead will suffer a blow to their overall budget.
Many councils in London, and beyond, are already dealing with financial crises.
Professor Tony Travers, local government expert at the London School of Economics, said there was a strong case to update the “need” criteria for council funding.
However, he stressed: “With the Spending Review, Infrastructure Plan and now this local government funding proposed reform, all of them produce the strong sense that the Government is prioritising the needs of the rest of the country over London.”
Elizabeth Campbell, leader of Kensington and Chelsea Council, added: “I find it incredible that the capital city of the UK, home to 59 Labour MPs, including the Prime Minister himself, is seemingly being abandoned by this Government and its policies.”
Grace Williams, Deputy Chair of London Councils, said: “Change is long overdue – current funding certainly does not reflect the costs of sustaining London’s local services.
“But if we don’t get this right, we risk more boroughs being pushed towards effective bankruptcy.”
There are also proposed changes to the administration of council tax so that it can be paid over 12 months rather than ten, its collection and enforcement, including to stamp out “unacceptable aggressive” practices.
