Proposed rates cap: Technical questions and answers for Local Authorities

Note: The explanation of rates capping policy in this document is dependent on the passing of the Local Government (Rates Capping) Amendment Bill and subject to the final text of the Act.

Setting the scene: Why are rates important to New Zealand’s future? Rates are the backbone to local government funding in New Zealand. According to Stats NZ - in the year ended June 2025, local authorities recorded $9.989 billion in income from all rates. Sixty percent of local government income was from rates for the year ended June 2025. That scale matters for New Zealand. It is why rates are central to how councils fund local infrastructure and services, and why the Governments changes to how rates increases are managed will have implications for long-term planning, investment decisions, and community affordability.

Local authority financial statistics: Year ended June 2025 (Stats NZ website)

What is rates capping and how is it set?

What is a rates cap?

The rates cap is the Government’s approach to limiting how much councils can increase the rates they collect from ratepayers. The rates cap is designed to improve the affordability, predictability and transparency of council rates increases over time, while retaining flexibility for councils to manage their finances and plan for local services and infrastructure.

Who and what does the rates cap apply to?

The rates cap applies to all local authorities and their ratepayers.

It applies to the sum of rates divided by the number of rating units projected in the preceding year. Rates include general rates, uniform annual general charges, targeted rates, and penalties on unpaid rates. This is defined in the Local Government (Rates Capping) Amendment Bill as the “rates price”.

Rates and charges relating to water services (drinking water, wastewater, and stormwater) are excluded and regulated under separate legislation.

When will the rates cap start?

The rates cap will apply to long-term plans and rates decisions from 1 July 2027. For the 2027/28 and 2028/29 financial years councils need to have regard to the target range when planning and setting rates. From 1 July 2029, councils must comply with the target range unless an exemption applies.

What do I need to do between now and 1 July 2027

Councils should use this period to get familiar with the system, consider its impact on future rates and investment decisions, and incorporate the target range into development of their 2027–2037 Long-Term Plan.

What will the rates cap target range initially be set at and when will it apply from?

The first target range (from enactment until 30 June 2030) will be 2 to 4 percent (as set out in Schedule 1 of the Local Government (Rates Capping) Amendment Bill). The Minister of Local Government will set a new range by 1 July 2029, to apply from 1 July 2030. The Minister will then be obligated to reset a new target range every six years.

Is there flexibility within the three years when a long-term plan is in force?

The rates cap target range sets a minimum and maximum range for annual rates increases. The target range applies as an average over the three years when a long-term plan is in force. So for:

2029/30 – rates decisions need to comply with the target range
2030/31, 2031/32 and 2032/33 – rates decisions need to comply with the target range on average over those three years
2033/34, 2034/35 and 2035/36 – rates decision need to comply with the target range on average over those three years

For example

A council's rates price in 2028/29 is $3,000 per rating unit. The initial target range is 2 to 4 percent. For this example, assume the target range for the 2030 long-term plan remains at 2 to 4%. The council adopts the following rates price increases in its 2027 and 2030 Long-Term Plans:

Year	Rates price	Annual change
2028/29	$3,000
2029/30	$3,120	4.0%
2030/31	$3,307	6.0%
2031/32	$3,373	2.0%
2032/33	$3,437	1.9%

The council chooses to set the rates increase for 2029/30 at the top of the target range 4%.

For 2030/31, 2031/32 and 2032/33, the average annual increase is approximately 3.3%, which is within the 2 to 4 percent target range. This means the council could still comply with the rates cap, even though the increase in 2030/31 exceeded 4 percent, because compliance is assessed against the average increase over the first three years of the Long-Term Plan. Importantly, if the council's number of rating units increases over this period because of growth, its total rates revenue can also increase, because the rates cap is applied to the rates price per rating unit.

How was the first rates cap target range set?

The first target range (2-4 percent) is based on a midpoint of approximately 3 percent that was calculated from the average of the last 15 years of BERL’s local government cost index. In future, the rates capping regulator is likely to develop its own cost index, that the Minister must have regard to when setting the target range. The process for setting future target ranges is set out below.

How will future target ranges for rates capping be set (to apply from 1 July 2030)?

When setting the target range the Minister must consider:

the costs to local government of carrying out their functions (and any cost index developed by the rates capping regulator)
any costs already incurred by local authorities from Government decisions or legislative changes
any future costs stemming from Government decisions the Minister expects to fall on local authorities
any costs already incurred by local authorities as a result of unanticipated adverse economic trends (for example, higher than expected inflation or interest rates).

The Minister must receive and consider advice from the regulator and consult councils before setting the target range.

What factors go into setting the rates cap target range?

What is a rating unit?

A rating unit is the property, or part of a property, that a council can assess and charge rates on under the Local Government (Rating) Act 2002. In practice, a rating unit is usually a separately owned property with its own rates assessment, such as a residential home, farm, commercial building or industrial site.

Why does the rates cap use rating units?

The rates cap is applied to a council's rates price, which is measured on a per rating unit basis. Using rating units means the model takes account of growth. As new homes, businesses and developments are created, the number of rating units increases. This allows a council's total rates revenue to grow as it serves more ratepayers, while still limiting increases in the average rates price per rating unit.

Is calculating the rates cap target range based on a per capita or per rating unit measure?

The model uses the most recent rating units figure projected by the local authority in the previous financial year. This information is available in long-term plans or updated in annual plans.

How does the rates cap impact how a council sets rates for an individual rating unit?

Councils retain the ability to set individual rates for each rating unit, including the ability to set differential rates for different categories of ratable land.

How does the rates cap respond to a scenario where actual costs are higher than forecasted?

Aligning the rates cap target range with councils’ actual costs will happen in two ways. The Minister will consider any costs already incurred by local authorities as a result of unanticipated adverse economic trends when calculating the target range, every six years.

The Minister will also carry out a review, to be completed by 31 December 2033, to consider councils’ actual cost pressures and any changes to their statutory responsibilities.

What has happened to the formula that you consulted on?

We took on board feedback from the consultation between December 2025 and February 2026 that the formula was unclear and would be difficult to implement. Instead, the model has a simpler approach, whereby the Minister sets the target range, considering the costs to local government of carrying out their functions.

Is the rates cap target range based on regional or national data?

The target range is based on national data that includes long-term economic indicators. The Ministerial consideration of councils’ short-term actual costs will focus on national level costs. Council data will inform exemption decisions.

Does the rates cap allow for depreciation?

We expect councils to continue funding depreciation and maintaining balanced budgets.

Does the rates cap target range mean councils can still respond to the priorities of their communities and any unexpected challenges?

Can local authorities apply for an exemption from the rates cap?

Yes - Councils may operate outside the target range only if an exemption is approved. Exemptions are intended to be limited and time‑bound. There are four categories of exemption available to local authorities:

Type-1 exemption for exceptional circumstances
Type-2 exemption for future financial planning
FY 2029/30 transition exemptions:
Exemption for significant capital works projects
Exemption for financial difficulty (these may extend beyond 2029/30 if necessary)

More information on the exemptions is in 'Table 1 Rates capping exemptions' below.

How does the rates cap allow for emerging funding challenges like climate adaptation?

We would expect councils to be able to meet their statutory requirements from within the rates cap target range. Councils should be planning for and budgeting for climate adaptation. The Climate Change Response Amendment Bill was introduced on 15 July 2026, which makes climate adaptation planning mandatory for local councils, looking out at least 30 years into the future.

Where councils have exhausted rates funding available through the target range and alternative funding and financing tools they could consider applying for an exemption. Councils that plan to increase rates above the target range to invest in adaptation to climate change could apply for a Type-2 exemption.

Councils that have experienced damage from a severe weather event could apply for a Type-1 exemption. More information on this exemption is in Table 1: Rates capping exemptions below.

How does the rates cap allow for an unexpected weather event – or natural disaster?

Councils can apply for a Type-1 exemption if they need to increase rates above the target range because of exceptional circumstances, such as an unexpected severe weather event or natural disaster. This exemption is intended for events that are unpredictable, unforeseen and extreme. The amount and duration of any exemption would depend on what is needed for the council to respond to, or recover from, the event. The Minister of Local Government decides Type-1 exemption applications on advice from the regulator.

Does the rates cap recognise that there are differences across districts, cities and their councils?

The rates cap accommodates differences in population growth rates between cities/districts over time, because it focuses on the rates price per rating unit. However, this does not address the immediate need to fund and finance infrastructure for housing growth before the growth eventuates. The Government’s Going for Housing Growth programme is improving infrastructure funding and financing to support urban growth and providing incentives for communities and councils to support growth.

Further information on the programme is available on the Ministry for Cities, Environment, Regions and Transport website.

If an individual council identifies a need to set rates outside the target range, for prudent financial planning purposes, they can apply for a Type-2 exemption from the 2030 long-term plan onwards. The council would need to consult with their communities on this as part of the long-term plan development process.

What is excluded from the rates cap?

Are any council activities excluded from the rates cap?

The rates cap will apply to all sources of rates and council spending, except water services (including stormwater), which are separately regulated.

So, water services are not included in rates caps?

Yes. Rates and charges relating to water services are excluded from the rates cap.

This includes drinking water, wastewater and stormwater. These services are subject to separate regulatory arrangements, including separate economic regulation.

For the purposes of the rates cap, water services revenue is not included in the rates price calculation. The cap applies to a council’s average rates revenue per rating unit for non-water rates, including general rates, uniform annual general charges, targeted rates and penalties on unpaid rates.

This means that, where councils collect revenue for water services — including stormwater revenue collected through general rates — that revenue is excluded from the rates cap framework.

Is the collection of rates revenue to fund stormwater expenditure within the scope of the rates cap?

Stormwater revenue, including that collected through general rates, is excluded from the rates cap. Stormwater is a water services and has the potential to be economically regulated separately.

Will projects co-funded by Government and councils be exempt from the rates cap?

No. If councils require additional rates revenue for co-funded projects, they will need to apply for a Type-2 exemption.

What are the implications of a rates cap?

How will rates caps affect ratepayers directly – what will they see in their future rates bill?

Ratepayers will still receive rates bills from their council, and councils will continue to decide how rates are allocated across different properties and rating categories.

The rates cap does not cap each individual property’s rates bill. It applies to the council’s rates price - the average rates revenue per rating unit. This means individual bills may still rise by more or less than the target range, depending on property valuations, differential rates, targeted rates, growth, service decisions or other local rating factors.

The main effect for ratepayers is that, over time, rates will increase at a slower pace and should become more predictable and transparent. Councils will need to plan within the target range unless an exemption applies.

How does the rates cap target range allow for growth in New Zealand’s cities and districts?

The rates cap allows councils to increase rates to reflect a growing population and growing demand for services. The model regulates the rates price, which is the sum of general rates, uniform annual general charges, targeted rates, and penalties on unpaid rates divided by the most recent rating units projected in the preceding year. As councils’ ratepayer base grows, the council’s rates revenue will grow.

Councils grow in size over time as they support growth and serve more households and businesses with rates funded services. The target range does not affect the total rates revenue that a council can collect as a result of this growth.

Does the rates cap enable councils to invest in infrastructure for housing growth?

Councils have not been able to effectively recover growth infrastructure costs from developers with the existing financial tools. This means that growth is subsidised by ratepayers.The rates cap does not include an explicit allowance for housing growth.Government’s Going for Housing Growth programme (Pillar two) includes a move to development levies and other improvements to support the principle of ‘growth pays for growth’. Shifting to development levies will provide councils and other infrastructure providers, with increased flexibility to charge developers for the overall cost of growth infrastructure across an urban centre. Rates capping is designed to work in conjunction with development levies and the wider Going for Housing Growth initiatives. Effective use of these tools will mean there is reduced need for rates to subsidise this cost.Water services infrastructure to underpin housing growth is not within the scope of rates capping

Pillar three of the Going for Housing Growth programme provides funding for infrastructure-related costs, enabling councils to alleviate concerns among communities about the impacts of housing growth.

Councils can apply for a Type-2 exemption (for future financial planning) to fund a project that need to be delivered to enable growth, where the costs need to be paid for before new housing and other units are developed.

Does the rates cap allow a council to close an infrastructure deficit?

Yes, how it does that is a decision for the local authority in consultation with ratepayers.

How will the rates cap impact multi-year capital works projects?

Councils are expected to plan their levels of spending and investment consistent with the increases in the rates target range. This is intended to allow councils to meet their costs, maintain assets, and provide a reasonable level of improvements in capital works over time. In some cases this might be insufficient for major capital works, and councils can apply for an exemption. The processes for exemptions are outlined in Table 1 below.

How does the rates cap treat an existing or new voluntary targeted rate?

Existing and any new voluntary targeted rates are subject to the rates cap.

How does the rates cap apply to a reorganisation under the Local Government Act processes?

If councils are involved in a significant local government reorganisation, such as an amalgamation, they will need to reset their rates before the target range fully applies to the new entity. The reset process will be based mainly on the rates of the predecessor entities, with some allowance for the cost of reorganisation and changes in funding structures.

During the reset period, the new council or councils will have flexibility to set rates while having regard to the target range. The requirement to stay within the target range will then apply from the council’s first long-term plan prepared after the reorganisation.

How does the rates cap link to the Simplifying Local Government policy?

How the rates cap will apply to councils undergoing Head Start or backstop reorganisations (as part of Simplifying Local Government) will be managed through the legislation for those processes. The intention is that the rates cap target range should apply as soon as possible to the reorganised entity.

What happens in the event of a council entering some financial distress?

Some councils have notable operating deficits and there is risk that their financial position could be entrenched by the rates cap, if no further adjustment is made.

The rates cap regulator will provide advice to financially at-risk councils that in the regulator’s opinion may be unable to comply with the rates cap from 1 July 2029 or are at risk of becoming financially unsustainable. One possible outcome could be that some councils may need to increase rates by more than the target range during the transition years.

The regulator may invite any financially at-risk councils to apply for an exemption from the 2029/30 rates cap (or potentially longer). The invitations would most likely be issued in 2028/29 to any councils in financial difficulty.

How many councils are expected to be in some financial difficulty?

The Audit Office’s report Insights into Local Government 2024, shows many councils have not had a balanced budget. A fulsome assessment of the number of councils experiencing some financial difficulty, and the increases they may need to get onto a financially sustainable pathway will be possible after water services are removed from council finances and updated financial information is presented in 2027-2037 long term plans.

Part 2: Councils' financial performance in 2023/24 (The Audit Office website)

What support will councils in this position need?

We expect councils will need assistance in clarifying how they can use their funding and financing tools through both legislative reform and additional guidance. Those councils who have been running substantial operating deficits have a transition period to adjust their budgets. As a result, we expect few councils, if any, will need this exemption in the 2029/30 year, or beyond.

What is the impact of the rates cap on Council Controlled Organisations?

Councils will need to make prioritisation decisions on the level of rates funding to allocate to Council Controlled Organisations.

Can councils reduce service levels to stay within the rates cap?

Councils, in consultation with their communities will determine the most important things to spend rates revenue on. This includes funding core services like roading and libraries, and changing what is provided over time in response to community need. The rates cap allows for services to improve over time, though councils can choose to reduce some services where they are no longer the most important things for the councils to provide, based on consultation with the community.

Compliance

How does compliance work?

From 2030, compliance with the target range will be assessed on average over three years, aligned with the first three years of the council’s long‑term plan. This allows councils to exceed the range in a single year, provided the three‑year average remains within the minimum and maximum bounds.

Councils must plan for changes to rates revenue to be within the target range for years four to ten of their long-term plans. The target range applies to planning (long-term plans and annual plans) and rates resolutions.

For FY 2029/30 councils will need to comply with the target range unless they have an exemption. Averaging does not apply to this financial year.

Who is the regulator?

The regulator will be an independent statutory officer located within the Ministry for Cities, Environment, Regions and Transport and appointed by the Ministry’s Chief Executive.

What is the role of the regulator?

The regulator advises the Minister on setting the target range and on Type-1 exemptions for exceptional circumstances.

The regulator makes decisions on applications for Type-2 exemptions for future financial planning. It also monitors council compliance, issues guidance, requires information from councils and publishes a rates capping system report every three years.

The regulator will have the power to direct councils to make a replacement rates decision if the council has decided to:

set rates, a uniform annual general charge, or penalties that would not comply with the target range; or
to include in a long-term plan a forecast rate of increase to the rates price that would not comply with the target range.

During the transition period the regulator will also be able to issue invitations to councils to apply for exemptions for 2029/30 for major capital works projects or financial difficulty. The regulator will be the decision maker for these temporary exemptions.

Implementation planning

When should councils start aiming to align with the rates cap?

Councils will be required to consider the rates cap when setting their 2027 – 2037 long-term plans. MCERT will provide guidance to councils on adjusting to the rates cap in early 2027. Councils must have regard to the rates cap target range in the 2027/28 and 2028/29 financial years, and comply with the target range from 1 July 2029.

How will the rates cap interact with the logistics of preparing and adopting 2027-2037 long-term plans?

The deadline for adopting a 2027-2037 and making a 2027/28 rates resolution is 30 June 2027.

The expectation is the Local Government (Rates Capping) Amendment Bill will be passed in early 2027. Promptly after the legislation comes into effect, the regulator may invite selected councils to apply for an exemption from the target range for large capital works projects.

We acknowledge that the timing of legislative change in early 2027 complicates the long-term plan process for councils.

MCERT will support councils in early 2027 to prepare for the changes, and provide timing updates where possible, so that councils can plan their processes and engage early with their auditors to address any timing implications.

What approach will auditors take to 2027-2037 long-term plans?

The Local Government Act 2002 requires long-term plans to include an audit report from the Auditor-General before the long-term plan is adopted. The target range model does not alter the functions that the Audit Office carries out when auditing long-term plans.

Because the legislation is due to come into effect from 1 March 2027, this will put some timing pressure on preparing 2027 consultation documents, particularly if a council wishes to apply for an exemption.

Download the rates capping technical questions and answers

Rates Capping - Technical Questions and Answers (DOC, 162KB)