Victorian councils are calling for an independent review of the rate capping system after the state government lowered the cap for the coming financial year.

The government announced in December that council rates will be capped at 2.75 per cent for the 2024-25 financial year in order to reduce pressure on household budgets, in line with the forecast CPI.

But the Municipal Association of Victoria says the new rate cap – which is down from the current benchmark of 3.5 per cent – will only increase the financial pressure on already struggling councils.

“Councils are dealing with spiraling costs on multiple fronts. To decrease the rate cap at this time means many councils will be struggling to deliver the services and infrastructure our communities rightly demand,” MAV president David Clark said.

 “While local government goes backwards by 30 per cent compared to CPI since the introduction of the rate cap, the State and Federal budgets increase far beyond this. For councils to be stuck at 2.75 per cent is going to be challenging in the extreme.”

Cr Clark says the decision underscores the need for a review of the way the rate cap is set, describing the current system as a blunt instrument that provides no room for the diverse needs of individual communities.

A more flexible approach that recognised individual infrastructure challenges, state government cost shifting and the real cost of council services would provide a better alternative than the current mechanism, he said.

Local government minister Melissa Horne says the decision was made under the Fair Go Rates system which was introduced in 2016 to address cost of living challenges and followed the recommendation of the Essential Services Commission.

The average rate cap between 2016-17 and 2023-24 was 2.25 per cent, the minister added.

In the decade before the introduction of the rate cap, council rates increased by an average of 6 per cent per annum, she said.

“The rates cap has made a real difference to household budgets over the past eight years and we’ll keep working to reduce costs for families,” Ms Horne said.

Councils are able to apply for a higher rate cap if they can demonstrate community support and a critical need for spending on services or projects that require a rate rise above the capped amount.

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