Councils should be able to choose between letting their own staff do a job or asking outsiders to bid for it - in which case they would be obliged to give in-house staff the chance to bid too.
"The Government's rules assume that what is cheapest is always best and prevent councils going instead for higher-quality bids, many of which are actually more cost-effective," the document says. "Labour believes that the public will get a better quality service and better value for money from a properly paid, stable, well-trained and committed workforce, whether they are employed by a contractor or in-house."
The document, called Renewing Democracy, Rebuilding Communities, laments the erosion of local power that has taken place under the Conservatives. Over the past 15 years, it says, power over local councils has been concentrated in the hands of central government and control of many local services has been passed to unelected quangos appointed by central government, with the result that local people no longer have the right to be represented on the governing bodies of further education and sixth-form colleges, for instance.
Labour promises to reverse this trend, "to get power out of the hands of the appointed and into the hands of the elected". It wants to restore public interest and involvement by holding annual council elections, with a third of councillors up for election each year. The party would allow pilot schemes for new arrangements, such as directly-elected mayors.
It says central Government should set standards and have fall-back powers to be used in extreme situations but should stop its detailed interference in councils' day-to-day affairs.
Among the areas where central government would set standards would be the nutritional content of school meals and the provision of nursery education. These areas could be monitored by the Audit Commission. Where councils failed to meet standards, or where one or more services was costing far more than could be justified, the Audit Commission would have the power to require a plan from the council for putting things right to an agreed timescale. If this, too, failed, the Commission could ask the Secretary of State to intervene and send in a management team to take over the service.
The party points out that the share of council spending raised locally has fallen from 50 per cent in the early 1980s to less than 20 per cent today. It would make for a healthier democracy if councils were responsible for raising locally a much higher proportion of the money they invest and spend, the document says.
The main change it proposes is the return of the business rate to local control rather than the national system introduced by the Conservatives. Otherwise the party has only minor changes to suggest, such as making the process by which the central Government grant is shared out to local councils "open and fair". It would also make the calculation of council tax less favourable to the very well-off.
Labour is unable to resist keeping the power to cap an individual council's spending, but would use it only in exceptional circumstances and after exhaustive enquiries by the Audit Commission.
The document also proposes making it easier for councils to borrow money for capital works by ending the present system which makes such borrowing count as part of public expenditure.
* Evidence that the public may not want local government to play a bigger role has been uncovered by a new poll, which found that a large minority of people would like councils to be less involved in running schools than they now are.
The Harris poll, commissioned by the Association of Teachers and Lecturers, found that 39 per cent of adult voters wanted councils to have a smaller say, a figure that rose to more than half in the North. Nationally, half said they did not want councils to be less involved in running schools and 11 per cent did not know.
The finding suggested there was "a vacuum in which the debate on opting out was taking place," Peter Smith, the association's general secretary, told a fringe meeting at the Liberal Democrats' Conference in Glasgow last week.
Certainly the party's debate on local government, squeezed into half an hour between Paddy Ashdown's speech and the debate on education, did not set the conference alight.
Only two speakers objected to a motion that seemed to lay more stress on adopting the European Charter of Local Self-Government and setting up a Royal Commission on councillors' pay and duties than on the decline of a sector which has traditionally been the Liberal Democrats' power base.
Ian Sharp of Watford said he was afraid the party, having been the party of local government, was now becoming the party of Royal Commissions.
Renewing Democracy, Rebuilding Communities is available from the Labour Party, John Smith House, 150 Walworth House, London SE17 1JT