Tom McCabe announced a 10.5% increase in council funding

The government will hand councils �8.1bn next year, �8.3bn in 2006-07 and �8.5bn in 2007-08, with extra funds creating a total of more than �30bn.

Finance Minister Tom McCabe said council tax would not rise by more than 2.5% in 2006-07 and 2007-08 as he spoke to parliament on Wednesday.

He also announced the poundage for business rates next year will be 46.1p.

The executive's settlement prioritised education, health and community care and the police, with extra resources provided for road maintenance and environmental issues.

Councils will also receive more than �1bn in each of the next three years in revenue grants which will be targeted towards specific initiatives.

In 2005, we expect councils to keep council tax rises as low as possible. Tom McCabe Finance Minister

Under Mr McCabe's plans, direct capital grants will increase by more than 35.2%.

He said: "In 2005, we expect councils to keep council tax rises as low as possible.

"I would also urge them to take all possible steps to improve their council tax collection rates which lag behind other parts of the UK.

"The setting of council tax levels is, of course, a matter for local authorities.

"But ministers have repeatedly said the executive expects councils to keep council tax rises to reasonable levels and that remains the case.

"The settlement is tight but realistic, but I believe local government is up to the challenge of delivering the services people expect and deserve on this level of investment."

Reduced rates

Pat Watters, president of local authority body Cosla, said the settlement was disappointing.

Mr Watters said: "Indicative figures show that authorities are going to have to look very hard at the services they deliver to make more savings.

"There is not an authority in the country that wants to put up council tax, but there is not an authority in the country that wants to reduce services to the public either."

The new business rate is down on the previous level of 48.8p and offsets the effect of a revaluation which kicks in next year and will see rateable values rise.

Mr McCabe said this ensured there will be no overall increase in the rates burden on Scottish business.

He also revealed rural petrol stations, hotels, pubs, shops and post offices will benefit from increases in thresholds for mandatory rate relief.

He added: "Growing the economy is our top priority.

"The executive wants to create an environment where all businesses, large and small, can thrive.

Rather than respite, we can look forward to more council tax rises under Labour Alasdair Morgan SNP

"I can also announce that we are exploring how business rates could be used as an incentive to increase investment in research and development."

The Tories took Mr McCabe's announcement as an opportunity to attack the executive's record on the council tax.

The party's local government spokesman, Brian Monteith, said: "It has become clear yet again that only the Scottish Conservatives will cut council tax.

"It will come as no surprise to many people that this Labour/Lib Dem executive is to force council taxes up even further, but that does not mean that it is in the least bit acceptable."

In the chamber, the Scottish National Party's Alasdair Morgan took the minister to task over the council tax.

No respite

He said: "This tax has already risen by 50% since the Tories were last in office, hitting pensioners and those on fixed incomes hardest.

"What we need is action by the executive to stop increases of this unfair tax, not admissions that it's going to go up.

"Rather than respite, we can look forward to more council tax rises under Labour."

Meanwhile, Liberal Democrat local government spokesman Iain Smith welcomed the news on funding.

He said: "This continuing strong support for local councils means that funding has increased by more than 50% since the creation of the Scottish Parliament.