The move, announced in his pre-Budget report, effectively closes the £800m funding gap identified by the Local Government Association prior to last month's finance settlement. It is being interpreted as an attempt by government to ensure the blame for any large council tax rises next year falls squarely on councils.
It comes in the wake of a damning Audit Commission report which pinned much of the blame for last year's increases on central government (LGC, 5 December).
Both the Treasury and the LGA dismissed any link between the new cash and the commission's report. But one senior local government source said the report had heightened ministers' fear of an electoral backlash over large council tax increases next year: 'The government is doing everything in its power to ensure that if there are substantial council tax increases, the finger of blame is not pointed at them,' he said.
Deputy prime minister John Prescott reiterated his threat to use capping powers where necessary, although he said he will take the results of local referendums into account.
He said: 'The government, and council tax payers, now expect councils to deliver. Given this significant investment in local services and the scope for efficiency improvements, it is my view that next year local authorities can and should deliver council tax increases in low single figures.
'When considering whether to cap authorities, I would have to look at the excessiveness of the budget. I would also expect to look at the size of the council tax increase.
'But it may well be appropriate to consider other matters such as how acceptable the rise in council tax is locally. Council tax payers do not want another round of high increases. If their councils think they do, why don't they allow local people to have their say in a local poll?'
Sir Jeremy Beecham (Lab), chairman of the LGA, welcomed the extra money. But he warned differences in local circumstances made it impossible to guarantee council tax increases would stay below the 7% widely believed to be built into last year's calculations by the Treasury.
'This new money may not be enough to prevent above-inflation council tax rises in many areas, but it will certainly help.
'Councils will do their level best to keep council tax rises as low as possible.'
Mr Brown also used his pre-budget report to announce rewards for councils which successfully promote small business creation.
They will share any additional business rate income, with Mr Brown expecting councils to get an extra £150m in 2005, £300m in 2006 and £450m after that.
He confirmed that as a result of the Lyons Review at least 20,000 civil service jobs will be relocated out of London and the south-east.