It comes after Local Government Minister Adem Somyurek announced on Friday the 2020-21 cap for Victorian council rate rises would be two per cent. This is a drop from the 2.5 per cent rate cap for the 2019-20 financial year.

Hindmarsh Shire Council increased its rates by 1.9 per cent for this financial year, which was below the rate cap.

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Cr Rob Gersch is a board member of Rural Councils Victoria. He said the shire's residents didn't have the capacity to pay higher rates, but would suffer if it could not raise more revenue.

"I think most councils have reluctantly accepted the rate capping, but the government is looking into a rates review, and I think their hands are tied in how they're going to handle it," he said.

"If we give differential rating to the farmers, then residential and businesses have to pay. What we need, especially in the small rural councils, is some form of assistance.

"Even if we put up our rates by six or seven per cent it's not going to have a big bearing on what we can do. For the last two years we have had the Better Roads program which was $2 million over two years for our council. We've been able to do roadworks we wouldn't normally be able to with that.

"Councils won't go broke, they'll just cut back on services, but it's the community that suffers."

Cr Gersch said the council would likely fund upgrades to footpaths, kerbs and sporting facilities, such as a new grandstand at Nhill's Davis Park, with extra revenue it received.

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Horsham Rural City Council chief executive Sunil Bhalla said discussions about rate increases for the 2020-21 financial year were yet to be had with councillors.

"It does affect our revenue generation capacity. We do have a heavy reliance on rate income (which is) half of our total revenue. It's about how best we can mange that pressure without impacting on the quality of the services," he said.

"The more we can receive by way of grants for projects and programs, it takes the pressure off our own rate income, so that's certainly is the intent.

"One of the key long-term objectives of a lot of the planning work we've been doing, is (to make sure) we are better positioned to apply for grants, so we can put a strong case forward."

Horsham council increased rates in 2019-20 by 2.25 per cent which was below the rate cap.

Yarriambaick Shire Mayor Graeme Massey said he was disappointed the 2020-21 rate cap was lower than the 2019-20 cap.

"We would love to have the flexibility to work it out ourselves, but this is something we just have to live with," he said.

"Although it's only decreasing a minor amount from last year's cap, that is still a 20 per cent reduction which for us is quite sizable.

"We rely heavily on rates; about 50 per cent of our budget is from rates. We offered a farm differential this year, but we have very little room to play with if we drop it again."

Cr Massey said the council had considered requesting an above cap increase in the past.

"But we've never done it. We will address the rate cap at our January meeting," he said.

Yarriambiack council had to lower its rates in 2019-20 after it was revealed it had not complied with the state government's average rate cap of 2.25 per cent in 2018-19.

Its average rates had increased by 2.57 per cent across the shire.

Last month the Local Government Inspectorate released a report detailing revealed serious misconduct at Yarriambiack Shire Council.

The report revealed staff private use of rate-payer funded equipment, the unauthorised sale of plant equipment and consumables and leasing of staff vehicles by council.

"The number one priority for the council is the Inspectorate's report and following those recommendations," Cr Massey said.

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The state government's independent rates review panel is underway, with the findings to form the Local Government Rating System Review.

Cr Massey said he thought the rates review should have been more broad to look at all the ways local governments are funded, not just through rates.

West Wimmera Shire Council applied for a rate cap exemption in 2017-18 to raise average rates by 3.5 per cent for three years.

West Wimmera Mayor Bruce Meyer said 2019-20 was the last year the exemption was valid and that the council would not apply for an exemption again.

"We've got to live with what is set. We've been able to manage our finances in the past," he said.

"It's not ideal but it's fair as long as the state government doesn't keep pushing more costs on us.

"There is no way small councils like us can make more revenue - we can't have parking metres like other bigger councils. It would be virtually impossible for us to increase our staff without having a reduction in capital works."

Ararat Rural City mayor Jo Armstrong and Northern Grampians mayor Murray Emerson were contacted for comment.

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