THE Victorian Government has announced a three per cent rate cap for the 2025-'26 financial year, for the Alpine Shire and all other 78 councils in Victoria.

The government accepted the recommendation of the Essential Services Commission regarding the cap, which is equal to the forecast Consumer Price Index for 2025-'26.

The cap limits the amount councils can increase their total revenue from general rates and municipal charges, which is used to fund services and facilities like local parks, libraries, community centres, roads and footpaths, kindergartens and sporting facilities.

Councils may apply to the Essential Services Commission for a higher rate cap if they can demonstrate a critical need for spending on services or projects that would require a rate rise above the capped amount.

Victoria's peak body for councils - the Municipal Association of Victoria - has called for a review of the rate capping system.

MAV president Jennifer Anderson said using the CPI to inform the rate cap simply doesn't work for councils.

"It's not a true reflection of the increased costs our sector faces in construction, materials, staff wages and services," she said.

"The MAV is working on a more accurate Local Government Cost Index for Victoria, and is keen to share this work with the State Government to improve how the rate cap can be reimagined in the future."

The MAV said the current rate cap does not take into account Victorian councils' different needs.

"Some councils are still facing exhaustive repair bills from natural disasters, others are in desperate need of upgraded or new infrastructure," Cr Anderson said.

"Setting a single rate cap does not account for the broad variety of these challenges, let alone the role that local governments play in supporting the economy.

"Beyond a more accurately calculated rate cap, the MAV is committed to working with both state and federal governments to ensure the financial sustainability of councils in 2025."