Around 1.6 million council workers in England, Wales and Northern Ireland are to have their pay frozen for the third year in a row.
The "unprecedented" move has been blamed on rising costs and reduced funding for council services.
Employers said increasing pay would mean more job losses and further cuts to services.
But unions said the announcement was a "disgrace" and threatened industrial action if they refused to go to arbitration.
Sarah Messenger, of the Local Government Association (LGA), said: "This has been a very difficult decision to make but it is the right one for council taxpayers and the workforce as a whole.
"Today's announcement represents an unprecedented third consecutive year of pay freeze and we recognise the frustration which will be felt by the workforce."
She added the LGA was "keen" to avoid a pay freeze next year and would like to begin talks with unions to help achieve this.
Brian Strutton, national officer of the GMB , said the union would consult its members over industrial action if employers refused to go to arbitration.
"The politicians who lead local councils are a disgrace to the workforces they employ," he said.
Mr Strutton said councillors' allowances had gone up while carers, dinner ladies, dustmen and other council staff had seen their pay fall in real terms by over 15%.
"Council workers are the lowest paid in the public sector but are the only ones not to be offered even the minimum £250 the Government guaranteed," he said.
"This three-year pay freeze is not an austerity measure, it is a deliberate political choice by local government politicians who want to win votes by keeping their workforces' pay at poverty levels to fund council tax freezes."
Mr Strutton added: "I don't know any other workforce in the economy that has had to bear this and 150,000 job losses and cuts to terms and conditions."
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