Moray Council has scrapped plans to increase council tax by 18% after local authorities were told they could face sanctions if they did not agree to the Scottish Government's freeze.
The council unveiled plans to raise tax in a bid to meet its £11m budget deficit last month.
However, the council has now decided not to introduce the hike, claiming the £5m raised by the increase would have been wiped out by the penalities.
If it had gone ahead with the planned rise, Moray Council would have been the first local authority to increase tax since the freeze was introduced in 2007.
The Herald reported last month that John Swinney had told councils that failure to agree to a council tax and teacher number freeze as well as the Scottish Government's new social care plans would see local authorities share of the combined cash to deliver the policies axed.
Moray Council leader councillor Stewart Cree said: "We simply cannot proceed with the proposal as the extra penalties it would now attract would have a devastating effect on the services people in Moray tell us they want protected.
"These extra penalties revealed last week as part of ‘the deal’ were not there when we looking at the implications of a council tax increase. We were told quite clearly by Mr Swinney that he would take every penny we try and raise from council tax, leaving Moray with a greater deficit and services still under threat.
"So to make ends meet this year the administration have decided to defer certain works and spending, and to draw the remaining shortfall from reserves. We have pledged not to cut services and make any redundancies, and we’ll stick to that.
"But this is for one year only – it is not sustainable. During that year we would expect the Scottish Government to finally make good on it’s nine-year-old promise to reform local government funding."
Last month Mr Swinney warned the Government would move to claw back the total money given to a council for all three elements if they signed up to the deal but then failed to deliver on any element.
The ultimatum was branded 'draconian' by Cosla, the body representing the majority of Scotland's councils.
Last month David O'Neill, leader of Cosla, said: "Make no mistake this is not a matter of choice for councils and this may be perceived as victory for Mr Swinney but it is certainly not a victory for communities or democracy.”
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