Reflecting ongoing concerns about the cost of living and the Government's drive to require councils to focus on "core services", the Government has recently announced its plan to introduce a rate cap system by 2029 (with the transition to the new system commencing on 1 January 2027). As the name suggests, a rate cap system would prohibit councils from increasing rates above a specified maximum percentage (subject to some exceptions).
What has been announced?
A key feature of the rate cap system is a target range for annual rates. According to Local Government Minister Simon Watts in his announcement, “analysis suggests a target range of 2-4% per capita, per year".
The target range will be based on the following:
- Inflation at the lower end
- GDP growth at the higher end.
We assume that the exact target range will not be specified in the legislation, but the legislation will give the new rates regulator (which will be established as part of the reforms) the power to set the target range based on those factors. However, that will become much clearer when the relevant legislation is introduced into Parliament.
Under the proposal, councils will be required to increase rates each year by at least the low end of the target range. This is intended to safeguard the provision of essential services such as rubbish collection, council road maintenance, and the management of parks and libraries.
Councils will only be able to increase rates above the high end of the target range with approval from a new rates regulator. Approval will be granted only in exceptional cases (such as a natural disaster), and if a council is given approval to increase rates above the high end of the target range, the council will be required to show how they will return to the target range. Setting a high end for the target range is intended to balance sustainable growth and affordability.
The target range will apply to all rates (general, targeted, and uniform annual charges), but will not apply to water charges and other non-rates revenue such as fees and charges. At this stage it is not clear whether the target range will apply individually to each category of rates, or will apply to all rates cumulatively.
Comparing the target range for annual rates with the rate peg system in New South Wales
When the Government announced in August that it was considering a rate cap system, the Minister of Local Government indicated that the rate cap system would reflect lessons from the rate cap systems in Australia.
One of the key rate cap systems in Australia is the "rate peg" in New South Wales (NSW). A rate peg is the maximum percentage amount by which a council can increase its general income (rates income) for the year. Some services provided by councils are excluded from the rate peg, such as storm water, waste collection, water and wastewater charges.
The rate peg is set by the Independent Pricing and Regulatory Tribunal (IPART) using a methodology/formula that it determines – generally in consultation with councils, ratepayers, and key stakeholders (with some discretion to adjust the rate peg above or below the percentage produced by the formula). Currently, when setting the rate peg, IPART uses a formula that takes into account:
- The Base Costs Change (BCC) by council group (metropolitan, regional and rural) – the weighted average of forecast inflation (CPI and PPI) and the expected increase in employee costs
- A population factor that is based on each council's annual population growth
- An Emergency Services Levy (ESL) factor that reflects annual changes in each council's ESL contributions, lagged by one year
- Costs driven by external factors outside the councils' control as needed.
There are some clear similarities to what is proposed for New Zealand. In particular:
- The exclusion of some charges (including water charges)
- The establishment of an independent regulator
- A council can apply to the regulator for a variation from the rate peg. Those applications are determined by the regulator.
However, it will be interesting to see whether other aspects of the rate peg system also inform the scope and operation of the New Zealand rate cap system. For example, the NSW rate peg system includes the following features:
- If a council's total rates income remains within the set maximum increase, the council can increase categories of rates by a percentage that is higher or lower than the rate peg
- If, in a year, a council decides not to increase its rates by the maximum permitted, the council can "bank" the amount it did not increase the rates by, and catch up on that shortfall over any one or more of the next 10 years
- Although IPART uses a specified formula, it has discretion to adjust the rate peg above or below the percentage produced by the described formula if it considers that that is appropriate
- The regulator can set localised rate caps by taking into account the population factor.
How has the announcement been received
As expected, this announcement has been met with mixed views. Property owners will likely welcome constraints on rate increases, and some commentators consider that the proposed regulatory model will put pressure on councils to limit discretionary spending, reduce administrative overheads, and rein in non-essential projects. However, other commentors are concerned that the rate cap system could pose challenges for councils to deliver essential services, maintain infrastructure, and implement community programmes.
Whether any of those concerns or stated benefits are realised will become evident when the full regulatory model is in force.
Next steps and the transition to the new rates system
The Government has indicated that its next steps in the process are as follows:
- From December 2025 to February 2026 there will be targeted consultation with stakeholders on implementation, local considerations, and legal details
- Legislation will be enacted during 2026 (with some parts commencing on 1 January 2027). During the transition period, councils will be required to integrate the target range for annual rates into their long-term plans and report on financial metrics. During this period the Department of Internal Affairs (DIA) will monitor progress and offer guidance. The Minister has indicated that councils that propose increases above the cap may face intervention under the Local Government Act 2002
- DIA will develop the regulatory framework, including considerations for a permanent regulator
- The target range for annual rates will be operational by 1 July 2029.
The Government’s planned rates cap system marks a significant shift in local government funding, aiming to balance affordability for households with the ongoing delivery of essential services. We will further review the details of the new rating system when the legislation is introduced.
Co-authored by Emma Barnes-Wetere (Summer Clerk).
