Its recommendations, published this morning, include an end to routine capping, relaxation of Treasury controls, a 'power of local competence', a review of the necessity for CCT, and a new concordat spelling out councils' rights to be consulted on government policy.
The local government associations welcomed the 71-page report, Rebuilding trust, saying it 'makes a comprehensive case in support of local government's role at the heart of the nation's affairs'.
Association of County Councils chair Ian Swithenbank said: 'It reflects the real concern about the erosion of local government's powers, the centralisation which has taken place over the past 20 years, and the need for a new deal for local government.
The cross-party committee of peers warns: 'There is a risk of a continued attrition of powers and responsibilities away from local government until nothing meaningful is left. We hope this report will help to alert the public to this danger, and lead to a more constructive partnership and the rebuilding of trust.'
The committee had found the concordat agreed between prime minister John major and local government in November 1994 had done little to improve relations between local government and Whitehall. It called for it to be replaced with a comprehensive agreement spelling out the constitutional place of local government and the financial rules underpinning it, the establishment of a forum for ministers and local government leaders to agree and review the processes governing central/local relations, and a commitment from ministers to consult on all policies and legislation affecting local government's responsibilities.
A permanent Parliamentary body would review relations between the two sides.
The peers want ministers to sign the European Charter of Local Self-Government as 'an important symbolic first step towards better relations'.
The committee recommends routine capping should be scrapped, with a reserve power retained for extreme cases, and a power of local competence introduced to free councils from many financial restrictions.
Standard spending assessments should be simplified, and business rates returned to local control.
It endorses calls made by many local government witnesses to the inquiry that councils should be given more freedom to experiment with different structures and democratic models.
In an interview with LGC just before the report was published, Lord Hunt said: 'I think there is a wish for better relations, and a recognition that it is in everyone's interests. Whether that means the government will accept any of our recommendations is another matter.'