Only Five of 78 Councils Could Meet Government’s Proposed Rates Cap, Mayors Warn

Only five of New Zealand’s 78 territorial authorities delivered a rates increase low enough to meet the government’s proposed annual rates cap of 2 to 4 percent in the most recent year, raising the prospect that almost the entire local government sector would have to restructure its finances if the legislation passes in its current form.

Local Government Minister Simon Watts is preparing legislation that would cap council rates rises at between 2 and 4 percent per year, with a planned start date in early 2027 and a two-year transition period for councils to bring their books into line. The policy was a coalition agreement priority for National, ACT and NZ First, and is framed as a response to a string of double-digit rates rises in cities such as Wellington, Tauranga and Lower Hutt.

But Local Government New Zealand has gone public with serious concerns about both the level of the cap and the index it is benchmarked to. Speaking to RNZ Checkpoint on Thursday, LGNZ board member and Palmerston North Mayor Grant Smith said councils accepted the political logic of restraint but warned the proposed mechanism would not survive contact with the actual cost base councils run on.

“I can understand totally where the concept is coming from and the discipline isn’t really a bad thing,” Smith said. “We share some of those ideas, but it’s got to be balanced.”

The core argument from the sector is that the Consumer Price Index, which the cap is benchmarked against, is the wrong measure for what councils actually buy. CPI tracks the cost of household consumption — groceries, rent, fuel, transport, recreation. Councils, by contrast, spend most of their money on long-life infrastructure that is priced off the construction sector.

“It’s measured off CPI, but councils don’t buy groceries or even a lot of petrol,” Smith told RNZ. “We buy infrastructure, we buy buildings, we build roads and we purchase pipes, and that’s all quite differently indexed.”

He noted that “pipe manufacturers and construction and bridge builders all don’t work off CPI — they work off the open market and, consequently, we’ve been dealt to over a number of years.” Stats New Zealand’s Capital Goods Price Index, which tracks the cost of replacing infrastructure assets, has frequently run several percentage points above CPI in recent years.

The intervention from international credit ratings agency S&P Global has added weight to the council case. S&P warned that the proposed cap “would squeeze councils already struggling to make ends meet” — a potentially expensive signal because several large councils, including Auckland, Wellington, Christchurch and Hamilton, hold S&P credit ratings that flow through to the interest rates charged by the Local Government Funding Agency. Any downgrade ripples across the entire sector, raising borrowing costs even for councils that meet the cap comfortably.

Smith pointed to Australia, where state-imposed rate-pegging has been in place for decades in jurisdictions including New South Wales, as a cautionary tale. “We’ve seen what’s gone on in Australia, where there has been a very hard line and when things start breaking, you get a massive, massive bill,” he said. NSW councils have repeatedly blamed rate-pegging for an entrenched infrastructure renewal backlog that the state government has periodically had to top up with emergency funding.

The timing of the proposed cap is awkward in another respect. The government’s unwinding of the previous Labour government’s Three Waters reforms has handed councils back full responsibility for water infrastructure renewal at the same moment the new policy would limit how much they can raise from ratepayers to pay for it. Water New Zealand has previously estimated the nationwide three-waters renewal deficit at between $120 billion and $180 billion over thirty years.

Smith said councils were already exploring how to deliver more with less, including by reconsidering long-standing patterns of asset ownership. “We’ve always done things traditionally. We’ve always owned things as councils, but possibly we can lease things,” he said. “We all own museums, we own convention centres — do we really need to own them? We could lease them.”

He defended the salaries paid to senior council managers, which have been a regular target for ministerial criticism. “Some of them do incredibly complex work, whether it’s a chief planner in a very big council making billion-dollar decisions for their organisation — you can’t pay those people peanuts,” he said.

The political calculation for the government is finely balanced. Capping rates polls strongly with households, particularly with mortgage holders feeling the combined squeeze of high interest rates and elevated rates bills. But the policy machinery — the credit agency warning, the LGNZ pushback, the construction-cost mismatch and the unresolved water infrastructure deficit — is pulling the other way. The 2 to 4 percent band is also strikingly tight against the actual record of the sector. Five councils out of 78 hitting the target last year is, in effect, an indictment of the entire status quo.

The arithmetic the legislation will need to solve is straightforward. Council revenue would be capped at growth in the range of 2 to 4 percent. The replacement cost of pipes, roads and treatment plants is tracking well above that, and likely will continue to. Either central government finds a parallel funding mechanism to close the gap, or services and renewal programmes will have to shrink. There is not yet a publicly visible answer to that question.

The cap is also the most significant central-government constraint on local government fiscal autonomy in a generation. The shape of the Local Government Act amendments, when they emerge, will determine whether the policy is a genuine fiscal discipline or a deferred infrastructure bill of the sort Smith has warned about.

Do you think a hard cap on council rates is overdue, or are councils right that 2 to 4 percent simply does not match what they actually spend money on? Have your say in the comments below.