'Significant flaws' in council rate hike crackdown, expert says

The council has not discussed ways to alter the state's strict controls on rate rises as a briefing paper circulates the local government sector on potential reforms.

But its director of corporate performance has left the door open regarding the way the state government stops ratepayers' bills spiking too steeply from year to year.

"The city would welcome participating in discussions that look at the way rates are set and the pressures councils are under, including looking at the different challenges for regional Victoria and metropolitan councils," corporate performance director Jessica Howard said.

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Councils including Greater Bendigo are grappling with high inflation, spiralling costs for materials used for community builds and a skills shortage making it harder to attract high skilled talent.

Critics say rate caps are adding to the problem because they are not keeping pace with inflation, even though that is pretty much the point of Victoria's system.

The cap has held council rate rises back to 1.75 per cent this year despite inflation lurching at times to 7.8 per cent.

It remains to be seen whether councils will recoup their losses. The cap will rise to 3.5 per cent next financial year.

"Significant flaws" in Victoria's system fuel a long term problem, briefing author and University of Technology Sydney expert Graham Sansom said.

"If income from rates - local government's only tax - fails to keep pace with expenditure needs, then potentially less equitable and stable sources of revenue, such as fees, charges and commercial ventures, have to do more of the heavy lifting," he said.

Or state and federal governments may have to spend even more than their already sizeable contribution to council coffers.

That might invite questions about whether state governments should cut out the middleman and take over councils' responsibilities, which could have profound implications for democratic local decision-making, Professor Sansom said.

Councils do get a chance every 12 months to ask if they can go higher than the cap.

But asking for such a break puts councillors in a political bind that suits any state politicians eager to appear tough, Professor Sansom said.

"Councillors fear the glare of adverse publicity associated with the potentially unpopular decisions necessary to ensure long-term financial sustainability," he said.

Professor Sansom has conceded it is impossible to get rid of rate capping altogether because Victoria and NSW have "convinced themselves that [it] is politically indispensable".

He and the LGIU want both states to find a compromise like South Australia's.

There a commission reviews council finances every three years, to make sure they are abiding by decade-long strategic plans.

Victoria could also look at ideas being considered in Tasmania giving independent council audit panels more power.

"As in South Australia, this package reflects the state government's evident concern to keep rates increases to a necessary minimum, but a willingness to achieve that objective at arm's length," Professor Sansom said.

It is worth noting the models in SA and Tasmania's were not necessarily those governments' first choices.

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Tasmania has abandoned an earlier proposal for one of its commissions to play a larger role in rates decisions, while South Australia's upper house knocked back Victoria/NSW-style caps in 2018.

Victorian changes would face an additional hurdle. The Andrews government introduced the current rate cap system in 2016.

"The Fair Go Rates System limits uncontrolled rate hikes and reduces cost-of-living pressures for Victorians," a government spokesperson said on Friday.

"In the decade before the introduction of Fair Go Rates, council rates increased by an average of 6 per cent a year."

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