Why a rates cap won’t stem the flow of costs
Thursday, 4 December 2025
ANALYSIS: The Government has framed its new rates cap as a firm hand on the tiller — a way to steady councils that, in some places, have driven rates up at an alarming pace.
It sounds like a straightforward fix for spiralling household costs. Yet the closer you look, the harder it is to find much actual relief for ratepayers.
Announcing the policy this week, Local Government Minister Simon Watts said: “Rates are taking up more of household bills, and some communities have faced double-digit increases year after year. This is unsustainable and is only adding to the cost of living for many Kiwis.”
This is undeniably true. Rate rises in much of the country have been punishing, and the strain is widely felt.
On its face, capping rates seems like the obvious answer. But the announced policy includes an enormous exemption that will critically undermine its impact for many households.
For decades, most council services have effectively been funded from a single pot. There’s usually just one council rates bill, rather than separate invoices for wastewater, roads or museums.
That simplicity masked a structural problem. Water infrastructure, hugely expensive and largely invisible, was forced to jostle for funding alongside parks, roads, libraries, and everything else. It often lost.
That era will soon be over. Under the Government’s “Local Water Done Well” reforms, councils must ring-fence water services. Instead of hiding inside general rates, water must be treated like an actual utility, with costs fully and transparently recovered. Local politicians can no longer quietly pinch money from pipes to pay for more visible projects that win votes.
Councils can still choose to fund water through general rates, but only if they recover the full cost. For households, this might mean their rates bill gets split: a $1000 rates invoice today could soon look like $700 in rates and $300 in water charges.
And this is where the rates cap falters. The cap applies only to the general-rates side of that split — the slower-growing portion. The water side, which is projected to grow much faster, sits completely outside the cap.
It has to. Our previous analysis of council forecasts shows that most councils expect household water charges to rise by more than 4% on average annually over the next decade.
Many expect increases closer to 10%. A few, especially in Wellington, are looking at up to 15% increases every year for a decade or more.
In real terms, these translate into startling numbers. An average household in Porirua currently pays $2000 a year for water, which could rise to $7000 a year in 2034. For the average council, household water charges will nearly double. The national median is a $1500 increase by 2034. These are household costs that sit on top of the capped non-water rates.
Some areas are better placed than others. In Christchurch, projected water charges track more closely with its general rates, suggesting both are rising at roughly the same pace. But that is not the norm. Most councils expect water costs to grow much faster than everything else.
This enormous exemption helps explain the unexpectedly mild response from local government. After months of fierce opposition to the idea of a rates cap, the sector has largely set down its pitchforks. Local Government New Zealand noted the policy was softer than overseas versions and commended Watts for taking a “pragmatic route”. Several mayors are already signalling they can stay within the cap without major upheaval.
The policy gives councils breathing room elsewhere. User-pays fees, development contributions, and a range of charges also fall outside the cap.
For some councils, more than half their income won’t be constrained at all. If they need money, they can raise the cost of using pools and museums, increase cemetery plot fees, or lift building-consent charges.
The cap also adjusts for population growth. Fast-growing districts such as Selwyn and Queenstown-Lakes won’t be penalised simply because they have more people to serve. And councils will still be able to seek exceptions, including in cases where previous investment has lagged behind need.
Put together, these features make the policy significantly softer than what many had feared — and open to questions about whether it will achieve much at all.
Even so, councils won’t have unlimited room to manoeuvre. A crucial detail not mentioned in the announcement is that rate increases will be measured against a baseline of only non-water revenue.
Some local politicians may have assumed they could simply strip the water component out of projected rate increases. Under that interpretation, a council taking in $1 billion in total rates and planning to spend an extra $30m on non-water services would show a 3% rise — comfortably within the cap.
The policy doesn’t work that way. It only considers non-water revenue as the baseline. If that same council has just $600m in non-water rates, the $30m increase becomes 5% — breaching the cap.
It’s a technicality with real impact. Larger councils with substantial water budgets will have to keep their non-water spending on a tight leash, even as water charges surge freely on the other side of the ledger.
In time, some councils may begin to look less like broad service providers and more like water utilities with bits tacked on. Some may argue that’s a return to first principles: local government’s core role is to deliver essential infrastructure before anything else.
What the policy will not do is shield households from the biggest driver of rising council costs. On that front, there is no relief in sight.