South-west councils 'handcuffed' by state government rate cap

The government announced the cap in late December, which dictates the overall amount councils can raise municipal rates by. Local Government Minister Melissa Horne said the cap had "made a real difference to household budgets over the past eight years and we'll keep working to reduce costs for families".

Ms Horne also said the rate rise had been "kept to the forecast inflation rate", but that's where things get slightly murky.

Each year the government asks the Essential Services Commission to provide an independent recommendation about the rate cap figure. In December the commission said the cap should be set "equal to the 2023-24 Budget Update forecast of the CPI (consumer price index, or inflation)".

While the state budget in May had forecast CPI for 2024-25 at 2.75 per cent, the commission said a more recent Reserve Bank of Australia forecast in November put it at 3.4 per cent.

"Given the recency of the RBA's forecast, we anticipate that the CPI forecast announced in the 2023-24 Budget Update from the department in December 2023 will be similar to the RBA's," the commission said.

But when the government released its budget update it had kept its 2024-25 CPI forecast unchanged at 2.75 per cent.

These figures are important, because if councils' actual costs rise by more than the forecast 2.75 per cent in 2024-25, they will have to try to deliver the same services with less money to do it.

Moyne Shire mayor Ian Smith said the council's costs had consistently been rising faster than the rate cap and it was increasingly having to do more with less.

"This latest cap is going to make things difficult, because most of our costs are still going up faster than the cap," Cr Smith said.

"I can also see a tightening of both state and federal money through things like grants programs, so that will make it tougher still, but we will just have to work within it."

Corangamite Shire mayor Kate Makin said it was "going to be really hard" because "the prices of everything have gone up" for the council. Materials costs have consistently been well above overall CPI, but Corangamite also faces the prospect of spiralling staff costs as it negotiates a new enterprise agreement in a climate of rising wages.

"We're going to have to look at our budget really closely, we'll have to make sure we budget things really well. It just means that some of those nice things that we would like to do can't be done unfortunately," Cr Makin said.

"Some of those nice things that the community would like to see, we can't do because as we know everything in prices has gone up and we're just a little bit handcuffed with what we've got at the moment."

Warrnambool City mayor Ben Blain said the council had expected the 2.75 per cent cap, but he also argued CPI wasn't the best yardstick for predicting local council costs.

"Rate caps have the potential to place financial pressure on councils due to the fact that they are tied to CPI rather than a figure which better represents the rising costs in areas that council has greater exposure to like construction and building materials," Cr Blain said.

But he said he also understood the cost of living pressures many people in the community were facing.

Under the Fair Go Rates system councils can apply for an exemption to the 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 cap.

None of the south-west mayors said they had any plans to apply for a higher rate rise. Cr Makin said Corangamite Shire Council would simply have to take a pared back approach to operations.

"We just have to continue to do our maintenance and make sure all our buildings are up to scratch and make sure they're all great to go," she said.

Regional city councils like Warrnambool have more diverse revenue raising assets that can potentially soften the bump of a tight rate cap. Warrnambool was able to set its rate rise at 2.95 per cent for the current financial year, more than half a percentage point under the 3.5 per cent cap for 2023-24. It was also able to increase the rebate for ratepayers in financial hardship from $200 to $250.

Smaller councils like Moyne and Corangamite have fewer revenue raising options. Cr Makin said the focus would be on ensuring council assets were maintained, but not funding anything new.

"We're always looking at how we can diversify and get different income streams but it's really hard as a local government to do that as well," she said.

"We just find that we're going to have to look at our budget quite closely and there will be none of those wishful thinking things that perhaps us councillors would've loved on that list.

"We're just going to have to really button down and make sure everything else is up to scratch and we're doing everything well."

Cr Smith said council staff were already well into budget preparations.

"Honestly, we're looking at a very tight budget in 2024-25, which is why our officers are already hard at it, working towards delivering everything we need to with the funds we have," he said.