Worcestershire County Council will have to find £10 million of efficiency savings this year if it is to avoid cutting services.
The local authority's cabinet yesterday agreed to consult on a council tax rise of 4.99 per cent - raising a Band D household by £42.76, up from £857.03 to £899.79.
But unless council officers find another £3.5 million of savings on top of the £6.5 million already identified, resources aimed at delivering key services such as social care, roads maintenance, streetlighting and libraries could be scaled back.
The council's grant from the Government for 2006/07 is £69.7 million.
To continue providing the same level of services, it needs £262.7 million, while a 4.99 per cent council tax rise leaves a gap of £8.7 million.
Reserve cash the authority has kept back is earmarked to reduce this amount by £5.2 million, leaving a funding black hole of £3.5 million.
Councillors hope the money can be found by finding more efficiency savings.
Council leader George Lord (Con Alvechurch) said: "The outlook is grim. We get top marks from the Audit Commission for value for money, one of only three councils in the country to do so.
"And yet we get punished for it by getting less grant from the Government. It's disgraceful.
"We have a proven track record of making efficiency savings over the years and we're considered ahead of the game in this field."
A decision on the council tax rise will be finalised on February 17.
Meanwhile, Herefordshire County Council has hit out at the Government after receiving a poor settlement, claiming it exposes an unfair distribution of support to rural councils.
Herefordshire will receive about £125.1 million from central Government to cover all the services it delivers in 2006/07.
Council leader Roger Phillips (Con Pembridge and Lyonshall) said: "Until the Government recognises that the formula it uses to calculate its spending plans for rural authorities like Herefordshire is unfair, we will continue to face these spending problems year after year." ..SUPL: