The Government should consider cutting regulations imposed on local councils rather than capping rates, says Wellington Mayor Kerry Prendergast.
Local Government Minister Rodney Hide says he will ask Cabinet to form a committee to look at ways to rein in what he calls councils' excess spending.
Ideas include capping rates increases at the rate of inflation and making councils hold a referendum if they want to exceed that limit.
Ms Prendergast says referendums are costly and local government has to consult far too often already.
She says the Government should focus on reducing regulation and compliance costs and stop passing legislation that local government must implement without the funding to do so.
Mr Hide has prepared a raft of reforms aimed at controlling local government spending and keeping rate rises to a minimum.
He says a cap on council rates could be circumvented by debt or council charges, so simpler controls may work better.
Other possibilities include reducing what Mr Hide says are onerous burdens imposed on local bodies by the previous government.
Mr Hide says another idea would be to allow ratepayers to tick a box during elections that would require councils to increase expenditure by no more than the rate of inflation.
He says local and central government have in the past taken a lot of money from people and it is time to get this under control.
Mr Hide says the Government must take responsibility for a number of extra costs it is forcing on local councils.
Lobby group will not oppose reforms
Local Government New Zealand head Lawrence Yule supports the proposal, saying councils were lumped with expensive tasks by the previous government without adequate support.
Mr Yule, mayor of Hastings, says he favours relaxing obligations on local government that are imposed without adequate funding.
He says the extra costs come from new air and water requirements and consultation protocols that would make it impossible to keep spending rises within the rate of inflation.
Spending cap alone inadequate - group
But lobby group NoMoreRates says a cap on expenditure alone will not solve the long-term funding problems for local councils.
The group's founder, David Thornton, says councils have in the past ignored advice to curb rates when households are struggling financially.
Mr Thornton says councils must be forced to curtail their expenditure.