Council rates have increased sharply in recent years. In the 20 years before 2022, the average rates rise across New Zealand was 5.7% per year. In 2023, this jumped to 9.8%, and there was a significant median increase of 14.2% in 2024, before dropping back to 9.2% for 2025/26. Yesterday, the Government introduced legislation designed to prevent increases of this magnitude.

Under the Local Government (Rates Capping) Bill, councils will be subject to a “target range” of permissible rates increase each year. The cap will apply to a council's overall "rates price", being its total rates revenue (excluding rates for water supply, wastewater and stormwater - which are subject to separate economic regulation) as divided between the projected number of rating units (properties) in the district. The cap therefore applies at the level of the council’s overall rates revenue and not at the individual property level. Councils will still be free to design rating policy, including differential rates, as they wish, so long as they keep overall increases within the cap.

Setting and reviewing the rates cap

The initial target range will be 2% to 4%. Councils must have regard to this range when preparing their next (2027-2037) long-term plan and setting rates in 2027/28 and 2028/29: it will not be fully binding at this stage. However, there must be full compliance from 1 July 2029. From 2030 onwards, compliance will generally be assessed against the average rates increase over the first three years of a long-term plan, allowing councils to exceed the range in individual years provided the three-year average remains within the target range.

Future target ranges will be set by the Minister of Local Government every six years, after considering local government cost pressures resulting from government decisions and legislative changes, unanticipated economic trends and indicators, and advice from the “regulator” established under the Bill.

Scope for exemptions from the cap

The Bill includes several mechanisms for authorising rates increases outside the target range. Councils may seek an exemption from the Minister where there are exceptional circumstances (such as natural disasters or major infrastructure failures). Exemptions can also be granted by the regulator where an increase outside the target range is demonstrated to be financially prudent (examples given are reducing natural hazard risk or improving financial sustainability). There are also possible exemptions available transitionally: to fund significant capital works projects already underway or where councils are in financial difficulty. However, these latter two exemptions are at the invitation of the regulator only.

Discussion

In introducing the Bill, the Government has acknowledged that councils face genuine cost pressures but has placed primary responsibility for this on the councils themselves, referring to insufficient fiscal discipline, including spending beyond core local government functions, inefficient service delivery and underuse of alternative funding and financing tools. However, whether councils will be able to meet community expectations for services while remaining within the proposed cap is open to serious debate.

The rates capping announcement comes amid significant change affecting the local government sector, including local government reorganisation through the Government’s Head Start and intended Backstop pathways; the reform of water services delivery and the establishment of new water organisations in some areas; and recent and proposed changes to the RMA including facilitation of fast-tracked consents which create pressure for (formerly unanticipated) council-provided infrastructure. In addition, the full replacement of the RMA will lead to a multi-year transition, and significant costs in developing the new planning instruments.

All of these reform programmes impose substantial compliance and transition costs simply to keep pace, let alone maintain core services. Local Government New Zealand has warned that rates capping will necessarily affect essential services, saying that councils can’t be expected to deliver more infrastructure, support growth and meet communities’ expectations with fewer levers to recover revenue.

Beyond the question of whether rates capping is the right solution to the issue of high rates, there may also be concerns that the Bill represents a significant intrusion by central government into local democratic decision-making. Through the Minister’s power to set the target range for permissible rates increases, the Minister will decide how much local government’s “workload” - due to central government decisions or legislation - justifies increased rates. This is effectively determining what is and is not legitimate subject matter for council expenditure, despite the Local Government Act outlining the purpose and role of councils, and assigning decision-making to elected members (in consultation with their communities).

The Bill also places substantial power in the hands of the regulator, who will advise the Minister on target ranges; decide certain exemptions - including whether rates increases outside the range should be allowed on the grounds of financially prudent management; monitor compliance; and have powers to direct councils to replace rates decisions or long-term plan forecasts that do not comply with the regime. Under the Bill, the regulator must be an employee of the Department which administers the Act and will therefore not be institutionally independent of Government.

The Bill may be popular from a narrow ratepayer perspective, because most ratepayers would prefer lower rates. However, from the wider community perspective - as users of council services - the issue is more complex. If recent rates increases reflect imprudent financial management, capping may impose useful discipline. But if they reflect expanding council responsibilities without adequate alternative revenue tools, the cap may simply force reductions in services or defer necessary investment (on top of existing deficits). There is also a legitimate debate about whether now is the right time to tighten rating constraints, when rates increases have already eased in response to ordinary local democratic pressures and funding tools promised by the Government to help reduce pressure on rates, such as development levies, have not yet been rolled out or shown to be effective.