Northern Grampians Shire Council is still struggling to come to terms with the impact the federal government's freeze on indexation of its Financial Assistance Grants will have financially.
Council has just released its draft budget for 2014-15 and took pride in the fact the rate increase was able to be kept to just five percent.
This was despite a commitment from council to still deliver core services and targeted projects.
However, Mayor Cr Kevin Erwin said he had real concerns as to what impact the federal government's announced freeze on indexation of the grants will now have on councils such as the Northern Grampians.
"The options for us aren't good at all. It's either cut services, or up our rates and that's not ideal for any rural council," he said.
Councils across the region were shocked by the announcement in the recent federal budget, many standing to lose up to $1 million in funding.
Northern Grampians Shire Council expects it will lose $576,000 over the next three years as a result of the freeze.
It has left council scrambling to revise its budget and spending plans for the new financial year.
"The federal government is saying this will be balanced out by increases to Roads to Recovery funding," Cr Erwin said.
"However, the Financial Assistance Grants are untied grants that are paid to councils and are very flexible. Basically, they can be used on anything.
"The Roads to Recovery grants are tied to spending on roads only. It's just bot a good situation to be in."
Cr Erwin said a push by State Labor to have rate increases capped across the board would hurt councils even more.
"It certainly doesn't help to have State Labor coming out and saying they will cap rate increases," he said.
"That would really put a squeeze on councils who are doing it tough now. The only alternative for us to prevent from going broke, would be to cut services.
"It has already been identified we are not spending enough now on our roads and assets, that there is already a $4 million gap in spending per year.
"This would just force us to cut services even more. It would be our only option, particularly if there was a cap put on rate increases."
Cr Erwin said he would feel most disappointed for ratepayers who will be disadvantaged by rate increases and service cuts.
"It would be easy to come out and say we will up our rates further, but we have to be mindful of our communities, of the capacity to pay by our ratepayers," Cr Erwin said.
"If we impose huge rate rises, people will have no capacity to pay, so it really puts everyone in a difficult situation.
"It certainly doesn't help small rural councils like us, not when we have already been identified in the Whelan report as being unsustainable."
The Local Government Financial Sustainability Review was released in March last year by Merv and Rohan Whelan and detailed factors behind councils in rural Victoria being unsustainable.
In the case of Northern Grampians Shire, the factors impacting on costs included population size, remoteness and density.
The report found 'there is an indisputable relationship between cost per head and size of population, large populations support the achievement of economics of scale, resulting in lower
It said the increase in recurrent cost per head from large to small municipalities accelerates as population falls below 50,000, and becomes far more pronounced below 15,000.
Cr Erwin said the situation only appeared likely to get worse.
"I don't think people really understand the repercussions of these cuts that are being proposed," he said.
"We now are not only battling the freeze by the federal government, but if rate increases are also capped, we will find ourselves in a very difficult situation."