Councils will face restrictions on the use of covert surveillance measures to stop them targeting "trivial" offences, Home Secretary Jacqui Smith said.
Local officials have been condemned as "Bin Stasi" for using the powers to target people who put their bins out on the wrong day or let their dogs foul in the street.
Councillors or senior officials might in future be required to approve their use, under plans set out in a review of changes to the Regulation of Investigatory Powers (RIPA) Act.
RIPA powers have been criticised as an extension of the "surveillance state". Councils were found to be using them to investigate parents accused of lying about where they live to get their children in to better schools.
The Tories have called for the use of the powers to be restricted to offences that carry a prison sentence.
Home Secretary Jacqui Smith said it was right they could be used for combating fly tipping and rogue traders as well as serious crime and terror
She said: "Our country has a proud tradition of individual freedom. This involves freedom from unjustified interference by the State. But it also includes freedom from interference by those who would do us harm.
"The government is responsible for protecting both types of freedom. In order to do this, we must ensure that the police and other public authorities have the powers they need. But we must also ensure that those powers are not used inappropriately or excessively.
"The government has absolutely no interest in spying on law-abiding people going about their everyday lives. I don't want to see these powers being used to target people for putting their bins out on the wrong day or for dog fouling offences.
"I also want to make sure that there is proper oversight of the use of these powers which is why I am considering creating a role for elected councillors in overseeing the way in which local authorities use RIPA techniques."
