Local council demands for more cash from Whitehall were snubbed today - as ministers warned them any extra would have to come from slashing town hall running costs.
Treasury minister John Healey disappointed many English authorities, especially in London, by announcing the Government was sticking to a three-year deal which began in April.
He conceded that the settlement - which means an overall 4.2 per cent increase for 2009/10 - was "tight" but told MPs it remained "fair and affordable".
Councils in the capital had led calls for a funding boost beyond the original deal to reflect the costs of the recession - warning vital public services could be "irreparably damaged" without it.
Rising numbers of people becoming eligible for social care or needing rehousing because of the economic squeeze would escalate pressure on budgets, they said.
London Councils' Chairman Councillor Merrick Cockell said: "The data and formula used to determine this funding were wrong a year ago - and the Government's errors will now be compounded by the current economic climate.
"As the impact of the downturn bites, our residents are likely to rely even more on our services - but the three-year settlement will fail to account for any of this."
But Mr Healey suggested councils were not doing enough to make their operations more efficient, demanding another £3 billion of savings over the next two years on top of £1 billion planned for this year.
"The public has a right to expect better value for money, from both local and national government. And at this time, people expect councils to tighten their belts like everyone else," he said in a Commons statement.
Delivering that level of savings would release an extra £4.9 billion to spend over three years on improving services or keeping council tax down," he said.
And he warned council tax rises next year should be "substantially below" 5 per cent, adding that ministers would "not hesitate" to use capping powers again to protect against excessive increases.
Mr Healey also announced that rules were being relaxed to ensure councils with millions stuck in collapsed Icelandic banks did not have to scale back their budgets next year while they attempted to recover the funds.
They will be able to set spending on the basis that they will recover the money - but then have to offset it in future years if the cash cannot eventually be got back.
More than 100 local authorities had investments in the banks totalling more than £850 million.
Tory spokesman Bob Neill said it was a "thoroughly bad settlement for council tax payers" and that Government figures showed taxpayers faced 6 per cent and 4.7 per cent council tax rises in subsequent years.
Liberal Democrat spokeswoman Julia Goldsworthy said: "If the Pre-Budget Report was intended to tempt shoppers into spending before Christmas, this settlement will leave Council Tax payers with a painful New Year hangover.
"Thanks to poor forward planning by the Government, councils will be faced with a choice between damaging service cuts and tax increases.
"Instead of putting more money into people's pockets, this settlement will mean more large bills landing on overstretched families' doormats."
The settlement - which means a 2.8 per cent rise for policing - was welcomed by the Association of Police Authorities which said it was broadly what it had expected.
But its chairman Bob Jones warned that a significant number of authorities and forces "will face major challenges due to their individual circumstances, and for some there will be extreme local pressures".
Most affected would be whose council tax rises were capped by ministers last year.
"We are keen to work further with the government to explore issues such as efficiency targets, police council tax and earmarked funding so that authorities are able to assess the full picture as they move towards setting next years budgets," he said.
"The APA is calling for more flexibility to enable local communities to invest in local policing through the police council tax. It is clear that a crude national target for police council tax will not provide the local flexibility to support the unique policing needs and aspirations of local communities."