The poorest councils face the biggest cuts next year under a settlement announced today that left town halls claiming they are now powerless to protect frontline services from a wave of library, social services and leisure centre closures.

Eric Pickles, the communities secretary, today allocated a last-minute emergency £85m fund in an attempt to insulate the poorest areas from the worst cuts next year. But despite his efforts, deprived inner-city areas of London and large cities in the north are facing the most drastic reductions of up to 8.9% this year alone, with the shires and county councils relatively protected by their burgeoning council tax revenue. The Local Government Association labelled the cuts the "toughest in living memory".

Hackney, Tower Hamlets, Newham, Manchester, Rochdale, Knowsley, Liverpool, St Helens, Doncaster and South Tyneside are among the 36 local authorities that take the maximum cut of 8.9%. Meanwhile Dorset gets a 0.25% increase in funding and Windsor and Maidenhead, Poole, West Sussex, Wokingham, Richmond upon Thames and Buckinghamshire all get cuts of 1% or below.

The council settlement came amid a flurry of funding announcements, setting out the fine detail of the government's £81bn deficit reduction programmes for next year, including:

• Each of the 43 England and Wales police forces will see a 5.1% cut in funding next year and a 6.7% reduction in 2012-13.

• The budget for policing the Olympics in 2012 has been unexpectedly slashed from £600m to £475m. The money will still be made available, but ministers believe it can be done more cheaply. The prime minister's spokesman said: "We think that it's possible to be more efficient in many public services. On that specific one we think it is possible to do things more cheaply. The full £600m remains available if it is necessary."

• Next year's budget of £834m for highways maintenance will reduce to £707m by 2014-15 – a 15% drop in spending on road repairs.

•The education budget for England for next year is revealed, including the new "pupil premium", which will give schools an additional £430 for every pupil they admit who qualifies for free school meals. The education department confirmed it could no longer deliver its promise of a 0.1% real-terms year-on-year increase after the Office for Budget Responsibility revised the inflation figures up, meaning that the £3.6bn cash increase would now mean a marginal cut in budgets.

Pickles also published the long-awaited localism bill, announcing 12 new mayors in major cities, and giving councils new powers to set up banks and lending facilities. New measures will be introduced to cut red tape to aid community groups that want to buy council buildings or take over services. But the devolved powers that councils have long been asking for came with the bitter blow of drastically reduced budgets.

The government was also accused of contradicting its own localism agenda by announcing it was going to impose the new mayors, with referendums to ratify them after the event, despite promising that local people would decide beforehand.

The new council budgets were wrapped in with each council's revenues from council tax and car parking charges in a measure of their "spending power". By that measure the maximum cut is 8.9% with an average of 4.4% across the 350 councils in England.

But that masked much higher cuts to the central government "formula" grant, which will be cut by 9.9% on average in 2011-12 and 7.3% the year after. For some councils it amounts to a 17% cut in central government funding next year.

Pickles insisted that the last-minute changes would make the deal fairer. "This will be a progressive settlement and fair between different parts of the country," he told the Commons.

But Tony Travers, local government expert at the LSE, said: "It's clearly shifting resources from relatively deprived inner-city areas towards more affluent shires. It's certainly going to be hard for government to describe it as progressive."

Caroline Flint, the shadow communities secretary, said that Labour would be making cuts, but they wouldn't be frontloading them or imposing them on the poorest areas. "Many people up and down the country will feel let down by this deeply unfair settlement," she said.

"All Eric Pickles's warm words about transitional funds can't disguise the truth – the poorest neighbourhoods will be hardest hit while the better-off will do best as a result of the choices the coalition government is making."

The discrepancy in funding arises from the fact that the poorest areas are the most dependent on central government funding while wealthy areas that receive a lot in council tax are getting extra subsidies after the government promised extra central funding to subsidise a freeze in council tax payments.

Lady Eaton, the Conservative chair of the Local Government Association, said: "Councils now face incredibly tough choices about the services they continue to provide and those they will have to cut. This is the toughest local government finance settlement in living memory.

"We have been clear that the level of spending reduction that councils are going to have to make goes way beyond anything that conventional efficiency drives, such as shared services, can achieve. We have to face the fact that this level of grant reduction will inevitably lead to cuts in services."