Does the rates cap fit?
Saturday, 6 December 2025
EDITORIAL: They say that to a hammer, everything looks like a nail. A week after the shock announcement that New Zealand’s regional councils are to be disbanded entirely, with mayors possibly picking up the slack ahead of total reorganisation, imposed rates caps are another blunt instrument in the Government’s opposition to localism.
Local Government Minister Simon Watts announced that rates must be set at between 2% and 4% from 2029 onwards. There may be very rare exceptions for councils struggling with a natural disaster or other such emergencies, or to make up for past under-investment. In the latter case, councils will have to put their case to a regulator.
The Government explained that the 2% minimum is so councils can continue to provide basics such as rubbish collection, road maintenance and parks and libraries, but they should also be aware the Government will keep a strict eye on them well before 2029, according to the announcement: “Officials will be monitoring rates rises nationwide as soon as the legislation is enacted. Where councils propose increases beyond the proposed cap, this may present grounds for intervention under the Local Government Act.”
Does that sound more than just a little heavy-handed? But on paper, this is surely a populist move. Rates increases have sometimes exceeded double digits and therefore contributed to inflation, which the Government has been adamant about controlling. If the Government had one job, it was to solve the cost of living crisis. Along with cuts to interest rates, this policy can be chalked up as another achievement.
As Prime Minister Christopher Luxon said this week, ratepayers are “tired of having to prudently manage their own budgets while rates continue to go up, only to see their local council fail to demonstrate the same fiscal discipline”.
Voters agree. Most councils that hit ratepayers with double-digit increases found themselves punished at the local body elections in October.
Yet the effects of the rates cap remain hard to predict. Councils may have to start charging more for services, maintenance and repairs may be delayed and some so-called nice-to-haves will inevitably be postponed or abandoned entirely.
Infrastructure New Zealand has warned that rates caps could be a blow to a sector already under immense stress.
Some councils imposed their own rates caps, which were popular with local voters, only to find they had to dramatically hike rates to meet necessary infrastructure costs or else let their services run down. That is one key reason so many councils got into the financial mess that required the previous government’s Three Waters solution, since rejigged as Local Water Done Well.
In some cases, costs have been beyond councils’ control. A New Zealand Institute of Economic Research (NZIER) report commissioned by Local Government New Zealand (LGNZ) and released in 2024 found Government policy imposed extra costs on local bodies in what are called “unfunded mandates”. These are defined as “areas where the central government determines policy, which is then delegated to local government (or other institutions) to implement, and there is no provision for finance for this implementation, or finance does not follow function”.
As well as rates, councils can also raise revenue through debt. But limiting rates rises while paying more on interest is a false economy. Some prominent mayors and councils have argued for other options, such as bed taxes or visitor levies, which would be an obvious answer for councils struggling with costs imposed by tourists and would also return some local control. But the Government has repeatedly ruled out such options and did so again this week.
Former Auckland Mayor Phil Goff suggests councils could have the GST on rates returned to them, which would be an extra $400 million in Auckland’s case. Again, the Government has been unwilling to yield.
As has often been said, New Zealand’s governance is unusually centralised and an underfunded and sometimes poorly run local government sector is a populist whipping boy.
But one of the most unpredictable effects of the rates cap is what it will do to the price of water. The cap will apply to rates but not to water charges, as well as other non-rates revenue such as fees and charges. Under the Local Water Done Well reforms, water charges will be separated from the general rates bill and any increase to those charges will not be subject to the 2%-4% cap.