Local councils, public bodies and even some university student unions are to be banned by law from boycotting “unethical” companies, as part of a controversial crackdown being announced by the Government.

Under the plan all publicly funded institutions will lose the freedom to refuse to buy goods and services from companies involved in the arms trade, fossil fuels, tobacco products or Israeli settlements in the occupied West Bank.

Any public bodies that continue to pursue boycotts will face “severe penalties”, ministers said.

Senior government sources said they were cracking down on town-hall boycotts because they “undermined good community relations, poisoned and polarised debate and fuelled anti-Semitism”.

But critics said the move amounted to a “gross attack on democratic freedoms”.

A spokesman for the Labour leader Jeremy Corbyn said: “The Government’s decision to ban councils and other public bodies from divesting from trade or investments they regard as unethical is an attack on local democracy.

“People have the right to elect local representatives able to make decisions free of central government political control. That includes withdrawal of investments or procurement on ethical and human rights grounds.

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“This Government’s ban would have outlawed council action against apartheid South Africa. Ministers talk about devolution, but in practice they’re imposing Conservative Party policies on elected local councils across the board.”

Significantly, and underlining the main target of the ban, the formal announcement will be made by the Cabinet Office minister Matt Hancock when he visits Israel this week.

Israeli companies, along with other firms which have investments in the occupied West Bank, have been among those targeted by unofficial boycotts in the past.

In 2014 Leicester City Council passed a policy to boycott goods produced in Israeli settlements in the West Bank while the Scottish Government published a procurement notice to Scottish councils which “strongly discourages trade and investment from illegal settlements”.

Under the new rules all contracting authorities including local councils, quangos and universities which receive the majority of their funding from the Government will lose the freedom to take ethical decisions about whom they purchase goods and services from. The only exemption will be UK-wide sanctions decided by the Government in Westminster. Government sources said the ban could also apply to student union boycotts but added this was a “grey area”.

A spokeswoman for the National Union of Students said they were “concerned by any external pressure that could prevent student unions taking decisions on any issue that affects the students they represent.”

Mr Hancock said the current position where local authorities had autonomy to make ethical purchasing decisions was “undermining” Britain’s national security.

“We need to challenge and prevent these divisive town-hall boycotts,” he said.

“The new guidance on procurement combined with changes we are making to how pension pots can be invested will help prevent damaging and counter-productive local foreign policies undermining our national security.”

Sarkozy: Boycotting Israel is unacceptable

But Amnesty International’s UK economic relations programme director Peter Frankental condemned the move, warning it could encourage human rights violations. The Conservatives have been accused of turning a blind eye to Israeli human rights abuses in the past.

“All public bodies should assess the social and environment impacts of any company with whom they choose to enter into business relationships,” he said.

“Where’s the incentive for companies to ensure there are no human rights violations such as slavery in their supply chains, when public bodies cannot hold them to account by refusing to award them contracts?

“Not only would it be a bad reflection on public bodies to contract with rogue companies, but it would also be bad for responsible businesses that are at risk of being undercut by those that have poor practices.”

Hugh Lanning, chair of the Palestine Solidarity Campaign, condemned this move as “a gross attack on our democratic freedoms and the independence of public bodies from Government interference”. “As if it is not enough that the UK Government has failed to act when the Israeli government has bombed and killed thousands of Palestinian civilians and stolen their homes and land, the Government is now trying to impose its inaction on all other public bodies,” he said.

“This makes it clear where this Government stands on international law and human rights. Despite the Government admitting that Israel’s occupation and denial of Palestinian rights is plain wrong and illegal, when it comes to it they will insulate Israel from the consequences of its own actions. It seems that for this UK Government, whatever crimes against international law Israel commits, having a military ally trumps the rights of their own citizens and institutions in this country to support human rights.”

Boycott background: Unofficial sanctions

Last April the French-owned multinational water, energy and waste management company Veolia – which collects rubbish for a wide range of British local authorities – announced that it was closing down its operations in Israel.

The decision followed a concerted campaign to persuade it to halt its work in West Bank settlements, during which the Labour-controlled Birmingham council became at least the third to warn Veolia that it might not renew its £35m-a-year waste disposal contract when it ran out in 2019, if the company continued to operate in the occupied West Bank.

In November 2014, Leicester City Council passed a policy to boycott goods produced in Israeli settlements in the West Bank. Jewish groups have recently launched a judicial review of the council’s decision, claiming that it “amounts to a get-of-out-town order to Leicester Jews”.

In August 2014, the Scottish Government published a procurement notice to Scottish councils which “strongly discourages trade and investment from illegal settlements”, though conceding that decisions needed to be taken on a case by case basis. Four Scottish councils have resolved to boycott Israeli goods: Clackmannanshire, Midlothian, Stirling and West Dunbartonshire.