The government urged councils to focus on 'sensible savings' as it unveiled its latest finance settlement.

Communities secretary Eric Pickles made the plea as he published the government's provisional local government settlement for 2014 to 2015.

Councils could modernise services while saving money, he claimed.

But the Local Government Association said councils would continue to be at the sharp end of public sector spending cuts, despite some signs the government was listening to their plight.

The money government gives to councils to run local services will fall by 8.5% cent over the next two years, it believes, although there will not be an additional reduction on top of this.

Mr Pickles insisted that this year's settlement was fair to all parts of the country – rural and urban, district and county, city and shire.

It meant councils could deliver sensible savings while protecting frontline services, he claimed.

The funding deal armed councils with a significant average spending power of £2,089 per household, said Mr Pickles.

The Autumn Statement also protected local authorities from further spending reductions for 2014 to 2015 and 2015 to 2016.

Overall the average spending power reduction for councils in 2014 to 2015 was expected to be limited to just 2.9% per household.

Every bit of the public sector needs to do their bit to pay off the inherited deficit including local government which accounts for a quarter of all public spending, said Mr Pickles.

With English councils spending £117 billion this year, ministers believed councils must continue to focus on cutting waste and making sensible savings.

Mr Pickles said: "The coalition government has tried to be fair to every part of the country – north and south, rural and urban, metropolitan and shire.

"Unlike the old funding system which encouraged councils to talk down their local areas to win more funding, the decentralisation of local government finance now puts councils in the driving seat – rewarding them for supporting local enterprise, building more homes and backing local jobs."

LGA chairman Sir Merrick Cockell said settlement confirmed that councils would continue to be at the sharp end of public sector spending cuts up to 2016.

But the government has started to listen to local authorities and made some important concessions without which local services would have suffered.

The introduction of the Better Care Fund and the government's decision to reverse potentially costly changes to the New Homes Bonus would help some councils protect services.

"The next two years will be the toughest yet for people who use and rely on the vital everyday local services that councils provide," said Sir Merrick.

"By the end of this Parliament, local government will have to have made £20 billion worth of savings. Councils have so far largely restricted the impact of the cuts on their residents.

"They have worked hard to save those services that people most value and have protected spending on social care for children and the elderly, but even these areas are now facing reductions.

"That impact will only increase over the next two years."

The LGA believes the current public sector model is inefficient and will struggle to function in the context of long-term reductions to public spending.

It wants it replaced with a fairer way of funding local authorities which delivers adequate money, distributes it fairly and provides long-term certainty so councils can plan for future demands.