Opposition leader Daniel Andrews announced that under Labor, councils wishing to raise rates above the CPI must appeal to the independent Essential Services Commission.

The ESC will determine whether the rate increase is fair, by factoring in extraordinary circumstances and the council's overall financial position. 

Cr Lyons said the plan was unreasonable and unsustainable. 

"If we don't increase rates, the city won't get the services or infrastructure we need - progress would have to stop," he said. 

"This is a shot in the dark by Labor and it's not sensible at all.

"I don't think any council could sustain these limited rate rises for a prolonged period."

The CPI sits at 2.9 per cent, with City of Greater Bendigo rate increases usually between five and six per cent. 

Cr Lyons said higher rate rises ensured Bendigo remained in an envious position. 

"We need to keep spending on infrastructure and people need their health services and education," he said, 

"And as the rates go up, so do the house prices. It all evens out."

Mount Alexander Shire mayor Michael Redden said capping rates would force the council to rethink its long-term financial plan. 

"This proposal has little reality for councils and I hope that sanity will prevail," he said. 

"This CPI on 2.9 per cent is a domestic one and is based on a basket of goods and petrol prices. 

"Council's costs are considerably more than that. 

Cr Redden said it would see Mount Alexander Shire go backwards. 

"It would have very strong consequences for us," he said. 

"I know the Municipal Association of Victoria will be chatting with Daniel Andrews about the facts of life and the prices councils incur."

Mr Andrews backed the plan, saying under Labor, councils would be required to detail where every dollar was spent. 

"Homeowners and businesses can have confidence that they aren't footing the bill for wasteful or unnecessary council spending," he said. 

Member for Bendigo East Jacinta Allan said there had been concerns about the cost of living with the looming state and federal budgets. 

"Labor is listening to these concerns and is wanting to work with local councils and keep the rates in line with more appropriate community expectations," she said. 

She disputed that councils would not be able to afford infrastructure and services under the plan. 

"It provides council the opportunity to make a case for rate rises and if they are justified, the rate rises will be accepted."

Member for Bendigo West Maree Edwards said councils were well-off financially and residents could not keep funding big ticket projects. 

"The federal and state governments will be able to meet their fair share of funding for big items so it does not continue to fall on ratepayers," she said. 

"They have been hit with rate rises every year for a very long time and this is good news for people in our region and across Victoria."

Member for Northern Victoria Damian Drum said the previous Coalition government had capped local government rates and the previous labor government had removed them. 

"The claim was that caps on local councils didn’t work then and we’re not conviced that they will work today," he said. 

"We will be interested in what local councils have to say about this."