Britain’s larger cities should be in charge of their own economic development and have elected mayors with local tax raising and spending powers, according to an influential think tank report out today.

In particular, Greater Birmingham and Greater Manchester should have elected mayors that control spending on transport, regeneration, skills and the power to raise business tax according to the Institute for Public Policy Research.

The report recommends England’s two biggest ‘city-regions’ should be in charge of their own economic development. It argues for around £1.2 billion a year to be devolved from Regional Development Agencies, Transport Boards and then the Learning and Skills Council.

The report suggests that this could be topped up by a five per cent levy on business rates but that local government must first build a consensus with business over public spending priorities.

International evidence from Bilbao in Spain to Portland in the USA, shows that mayors, with tax raising and spending powers, can significantly improve economic performance and political accountability.

The IPPR report - called City Leadership - says elected, tax-raising mayors could eventually be seen in other "city areas", such as Liverpool, Bristol, Leeds and Newcastle.

Sir Michael Lyons, head of the Lyons inquiry into local government, said: "This report is an important and welcome contribution to the debate on the future of local government."

"I don't agree with all of its conclusions, but we must consider accountability issues alongside questions of what local government should do and how it should be paid for. I would encourage others to read it and to engage in the questions it raises."

David Frost, director-general of the British Chambers of Commerce, said: "This report is right to identify cities as economic powerhouses. It kick-starts the debate, but there are still many questions to which the business community wants answers."