In December last year, Local Government Minister Simon Watts announced plans to cap local council rate increases at 2%-4% per year. The legislation is yet to be introduced to Parliament, and it is understood the planned cap would not take effect until 2029. But there are growing concerns within the local government sector that a rates cap could trigger a credit downgrade.
Those fears were reinforced this month when both Fitch Ratings and S&P Global warned that limiting councils’ ability to increase rates could weaken their financial flexibility and place pressure on their credit ratings.
But the warnings reveal something much bigger than concerns about a single policy reform. They expose how heavily New Zealand’s local government system has come to rely on endless rates increases — and how deeply lenders depend on ratepayers being legally compelled to keep paying more.
Unlike ordinary borrowers, councils enjoy an extraordinary advantage in financial markets: they can effectively force revenue growth through rates hikes. That legal power is precisely why councils are able to borrow so cheaply despite ballooning debt levels across the country.
Legal analysis of the Local Government Funding Agency framework shows that council borrowing is secured directly against councils’ rates revenue streams. If a council defaults, lenders are not simply left to absorb losses.
Under Section 115 of the Local Government Act 2002, where a receiver is appointed over council debt obligations, they may “assess and collect” rates sufficient to meet debt repayments and associated costs. In practical terms, the system is ultimately designed to ensure ratepayers carry the risk.
The exposure extends beyond individual councils. Any council borrowing more than $20 million through the LGFA participates in a joint and several guarantee structure alongside dozens of other councils. If one council defaults, the burden may ultimately fall on ratepayers in other districts as well.
That is the uncomfortable truth sitting beneath the ratings agencies’ warnings.
For years, many councils have pursued aggressive spending programmes and accumulated large debt burdens while relying on annual rates increases far above inflation. In some districts, homeowners have faced double-digit increases year after year, even as household budgets come under pressure from rising mortgages, insurance, and living costs.
Now, for the first time, central government is signalling there may be limits to how much councils can simply pass on to ratepayers.
The fierce reaction from the local government sector suggests many councils have become structurally dependent on rates growth to sustain their financial position. If modest limits on future increases are enough to trigger fears of credit downgrades, that raises serious questions about the sustainability of the current model.
Private businesses facing tighter revenue constraints are expected to cut costs, reprioritise spending, and improve efficiency. Councils should not be exempt from the same discipline simply because they possess the power to compel payment by law.
The ratings agencies may see rates caps as a risk to council creditworthiness. But for ratepayers, the greater risk may be a local government system built on the assumption that rates can rise indefinitely.
