City of Newcastle could pocket an extra $17 million a year to spend on roads and community infrastructure if the federal government restores funding to councils.
But councillors say the bigger question is whether smaller, struggling councils across the state can survive without it.
This week, Newcastle councillors welcomed the Australian Labor Party's commitment to develop a five-year Federation Compact with local government.
While it is not legislation yet, the Federation Compact would increase federal funding assistance to help local government with service delivery and allow Roads to Recovery funding to be used to purchase plant and equipment.
Labor councillor Declan Clausen said as a sector, local government was essentially asking the government to commit billions of dollars in revenue.
"I hope that, as a result of funding doubling to the sector, we will deliver amazing programs on behalf of the communities we represent, and make it impossible for government to take that money away from us," Cr Clausen said.
"We could see our city benefit by an extra $17 million in funding a year.
"That is a significant amount of money for local roads, footpaths, for sporting facilities, libraries and community infrastructure, and all of the other services our community expects us to provide."
Financial Assistance Grants have provided funding to councils since 1974 and are an important source of money for infrastructure and essential community services.
Liberal councillor Callum Pull said while the compact is a significant development, it should not be overstated.
"City of Newcastle needs to remain firm on our ask, which is to restore Financial Assistance Grants to one per cent of Commonwealth taxation revenue," Cr Pull said.
The grants historically represented one per cent of Commonwealth taxation revenue in 1996 but have been slashed by about half, or 0.49 per cent, in 2026-27.
Greens deputy lord mayor Charlotte McCabe said Newcastle is lucky in that it has a significant rate base and receives substantial developer contributions which allow the council to deliver critical services.
But she said, not every council is so lucky.
"We are in a state where there are councils that are seriously at a critical juncture for their financial sustainability," Cr McCabe said.
"That hits home for me, because I know that communities are giving up on democracy when they look at their councils and they say, 'you can't even give us the basics', and then they make the decision that democracy doesn't work for them.
"That is not true, because councils, in no way, can deliver the services and the infrastructure that their communities need on their rate base alone."
City of Newcastle will write to federal Newcastle MP Sharon Claydon, among other politicians, welcoming the commitment and urging the government to implement it as soon as possible.
The council will ask for any increases in Financial Assistance Grants to be meaningful, untied and not offset by reductions to other Commonwealth funding programs available to councils.
