The Government announced its promised rates cap policy this week, adding to the distress caused councils by its previous week’s local government reorganisation plan.

Combined, the Government has unleased a human-made cyclone on our local and regional councils. There will be little ‘business as usual’ at HB councils over the next two years, effectively the window the Government has given for councils to shape up to Government expectations.

First the details, such as they are at present. Then some observations.

The planned rates cap is actually a floor and a cap. The floor to be based on “long-term economic indicators like inflation”, which the Government says would translate today into 2%. The upper end would be tied to GDP growth, which the Government suggests today would set a 4% cap.

Why a floor? “A minimum increase is necessary so councils can continue to provide essential services like rubbish collection, council roads maintenance and the management of parks and libraries.”

And the top cap? “Councils will not be able to increase rates beyond the upper end of the range, unless they have permission from a regulator appointed by central government. Permission will only be granted in extreme circumstances, such as a natural disaster, and councils will need to show how they will return to the target range.”

That said, and particularly relevant to Hawke’s Bay one would think: “Where councils need to raise revenue to pay for things outside of extreme circumstances, such as catching up on past underinvestment in infrastructure, they will need to apply to a regulator for approval. Again, councils would need to provide justification and explain how they will return to the target range over time.”

Very importantly, the cap will apply to all sources of rates – general rates, targeted rates and uniform annual charges, but will exclude water charges (you’ll pay those to our new regional water entity if you live in CHB, Hastings District or Napier) and other non-rates revenue like fees and charges.

Implementation will begin from 1 January 2027 (I believe that’s after the next election). “From 2027, councils will be required to consider the impact of rates caps on their long-term plans and report on areas of financial performance, like the cost of wages and salaries, council rates as a percentage of local house prices and estimates of local infrastructure deficits.” 

And this monitoring comes with a warning: “The full regulatory model will take effect by 2029. However, officials will be monitoring rates rises nationwide as soon as the legislation is enacted. Where councils propose increases beyond the proposed cap, this may present grounds for intervention under the Local Government Act.”

The Government’s own implementation schedule:

• Consultation with stakeholders to work on the details – to February 2026
• Legislation enacted in 2026 and becoming law from 1 January 2027
• During this window councils report financials to Department of Internal Affairs (DIA)
• DIA works out regulatory framework and details of the permanent regulator
• Full model in place by 1 July 2029

Observations

• Sincere Government interest in profound local government structure and finance reform would seem to mandate some level of consultation and buy-in from the opposition. Otherwise all that’s happening is local government in turmoil and paralysis for a year, while hoping for potential ‘rescue’ by the next parliamentary election. However, there’s no sign of any effort by National to do more than throw a couple of disruptive grenades into NZ local government.

• No sign that the Government has taken a serious look at what the full funding picture for local government should look like going forward (including such options like paying rates on Crown-owned property, or returning to councils the GST paid on rates) measured against what future role and responsibilities should be retained at a local/regional level.

• Meatime, more burden is immediately heaped on local government to prepare paperwork for DIA, followed by a new central government regulator, taxpayer funded, to analyse, monitor and bless (or not) local plans.

• Without other funding options being surfaced, councils might need to impose new or heavier ‘user fees’ on their current services – use of libraries, pools, other community facilities, rubbish collection, consent processing, development charges, etc. 

• Taking that a step in the opposite direction, to get expenses off their books, councils will explore selling off public facilities to private commercial interests, as the Napier City Council is already attempting (e.g., Aquarium, Mini-golf, Kennedy Park). This will bother some; others not at all.

• Using any consumer inflation metric to set a rates floor or cap ignores the reality of the actual inflation-increases councils must bear for what they purchase – e.g., construction materials, bitumin and cement versus canned peaches from China.

• Finally, while the Government has signalled some possible escape hatches – dealing with natural disasters or “catching up on past underinvestment in infrastructure” – the devil will be in details yet to be seen and the attitude regulators in Wellington bring to making those judgments.

Heaps to absorb and think about here. And although each of our councils will be pursuing budget pathways suited to their parochial predicaments, as a region we simultaneously face the need to fund regionalimperatives like flood and coastal protection, water services, cross-boundary economic development, and civil defence/emergency management.

Additionally, our region’s leaders need to push back at the Government with a collective voice of reason as its rates cap policy is further fleshed out. How prepared will we be prepared to do that with a new team of elected leaders and three regional planning entities – HB Regional Council, HB Regional Recovery Agency and HB Regional Economic Development Agency all twisting in the wind with uncertain fates?

The Government has thrown two granades and they’ve landed with a bang. But they’ve yet to actually explode.