Councils will see their Whitehall funding rise by £3.1 billion to £65 billion next year, local government minister Phil Woolas has announced.
He said the 4.9 per cent increase represented a "good settlement" and warned local authorities there was no excuse for hikes in council tax or cuts in services next year.
"By the end of this spending review we will have delivered an above inflation grant increase to local government for the tenth successive year," Mr Woolas told MPs.
"Given this substantial investment, we expect to see the average council tax increase in England to be below five per cent."
He warned: "Local government should be under no illusions - if there are excessive increases, we will take capping action, as we have done over the last three years. Councils know that we are prepared to take even tougher action if that proves necessary."
However, the Local Government Association (LGA) said councils which received the minimum 2.7 per cent increase in funding would experience "very real difficulties".
"It is the council-tax payer that has funded the 'unprecedented increase in spending', as government grant has not kept pace with the demands on local government, including rising demand and the costs from new legislation," said chairman Sandy Bruce-Lockhart.
"Over the long term, this cannot cover the rising demand from increasing numbers of elderly people and the extra costs collecting and disposing of waste arising from the landfill tax and European legislation."
Shadow local government spokesman Eric Pickles blamed a series of government initiatives for increasing the financial burden on councils.
"The government should either finance these - and admit the implications for national spending - or not implement them at all and allow local discretion and local priorities to be paramount. The minister can't have it both ways," he said.
Liberal Democrat local government spokesman Tom Brake said councils would be "disheartened" by today's settlement and would either have to put up council tax or cut services "because of burdensome red tape issued from Whitehall".
Central government funding makes up 75 per cent of council income - the remaining quarter comes from council tax. This is made up of bids from all the different tiers of local government, from fire authorities to parish councils.