The government says a rates cap will end ‘dumb’ spending, but critics warn it will only make councils’ infrastructure problems worse, writes Catherine McGregor in today’s extract from The Bulletin.

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Government steps in to force rates increases down

Just days after regional councils were scrapped comes more evidence that Christopher Luxon’s avowed belief in localism and devolution may not be quite as robust as he once claimed. The government has confirmed it will introduce annual caps on council rates increases, limiting rises to between 2% and 4% and tying the bands to inflation and economic growth. Prime minister Christopher Luxon used the announcement to call on councils to “stop doing dumb stuff”, pointing to Wellington’s $2.3 million public toilets and the proliferation of “endless speed bumps”.

The timeline for the reform is unusually long: consultation now, legislation by early 2027, and full implementation not until mid-2029. Luxon warned that councils that implemented higher rates before 2029 would do so “at their peril”, without spelling out what the penalty would be, the Herald’s Adam Pearse reports. Under the new law, exceptions to the cap will be allowed only in “extreme circumstances” such as natural disasters, subject to approval from a government-appointed regulator.

‘A basic failure of accountability’

Writing in The Post in July (paywalled), the Taxpayers’ Union’s Sam Warren argued that caps are necessary to halt what he sees as runaway spending by councils. Rates, he noted, have risen far faster than general inflation, something he attributed to a lack of local government discipline. “At the heart of the issue is a basic failure of accountability. Councils have no true incentive to curb unnecessary spending, as that burden is shifted directly onto ratepayers.” A cap, in his view, would force councils back to “core services”.

What about if councils need extra funding? “In such cases, they would have the opportunity to plead their case for more funding to the public by referenda,” Warren wrote. “If locals are satisfied that additional funding is justified by council, they can approve the spend, adding democratic accountability, while keeping councils responsive.”

The boots theory of council spending

Joel MacManus, writing in The Spinoff later that same month, argued that Warren’s comparison between rates increases and consumer inflation missed a crucial point. Councils do not buy consumer goods; they construct infrastructure. “And construction is really expensive” – more so than ever following the huge spike in building costs post-Covid.

The deeper issue, MacManus wrote, is that many councils are trapped in a kind of poverty trap: unable to spend what is needed today to avoid much higher costs tomorrow. Pulling back on spending may please ratepayers, but it all but guarantees far greater bills later – and often infrastructure crises that are more expensive to fix under pressure. Writes MacManus: “Council budgets need some flexibility for unforeseen circumstances, like when a major pipe collapses, or a library turns out to be a deathtrap, or you face a period of expected cost increases. Putting a hard cap on rates will inevitably mean that important maintenance is deferred, delayed or ignored.”

‘No evidence of success at all’

On his self-titled Substack, economist Craig Renney points to the UK’s long experience with rate capping as a warning. “If rate capping worked, we should be able to see the fruits of that success in the UK,” he writes. “Only we can’t because there is no evidence that it has had any success at all.” Since 2018, a dozen British councils have effectively gone bankrupt, with deep cuts to community services and major infrastructure left unrepaired. Renney argues the underlying problem is that councils are asked to provide essential services without the revenue tools to fund them, and rate caps only magnify that gap.

Should caps take hold here, Renney predicts “open season” on new fees and charges: “User pays will become the norm as councils look to generate revenue in any way they can.” Services “that are not prescribed in legislation will largely end”, with councils doing the bare minimum in order to protect their cash reserves. Given all these potential pitfalls, the government’s promise to force councils to “stop the dumb stuff” may turn out to be rather more complicated than advertised.

Related from The Spinoff:

• Joel MacManus: Christopher Luxon loves localism, until locals have the wrong opinions
• Hayden Donnell: Rates rises are due to people voting against rates rises