Local Government Minister Simon Watts stands in front of Wellington’s Inglewood Place toilets—price tag $2.3 million—and declares war on wasteful council spending. Prime Minister Christopher Luxon points to endless speed bumps and rainbow crossings. The crowd roars approval. Capping rates at 2-4% annually sounds like common sense. Problem solved, right?
Not quite. If politics were a game of poker, the government just went all-in on a bluff, and ratepayers are about to discover they’re holding the losing hand.
New Zealanders have been here before. In 1982, Prime Minister Robert Muldoon imposed a wage and price freeze to control inflation. Economists warned it would suppress problems rather than solve them. Workers and businesses hated it. It lasted two years before the incoming government scrapped it. Years later, Muldoon himself admitted the freeze was a political mistake. Rate caps are the same blunt instrument, just aimed at a different target.
Here’s what should worry you: the government wants to cap annual rate increases at 4%. Sounds reasonable until you discover that only four of New Zealand’s 78 councils have rate increases below 4% this year. That’s not because 74 mayors suddenly developed a shared addiction to expensive public amenities. It’s because the fundamental drivers of rate increases—the ones ministers conveniently ignore when cameras are rolling—have nothing to do with coloured toilets.
Construction costs soared 35-40% between 2020 and 2023. That’s not council profligacy; that’s market reality. When you need to fix a collapsing water main or resurface a deteriorating road, you can’t negotiate with the steel market or ask concrete suppliers for a discount because Simon Watts thinks you’re spending too much.
The government’s proposed rates cap, overseen by the Department of Internal Affairs, will require councils to justify any rate increases beyond 4% to a government-appointed regulator. Exceptions will only be granted in “extreme circumstances,” such as natural disasters. Need to catch up on decades of deferred infrastructure maintenance? Sorry, that apparently doesn’t qualify as extreme.
Let me share something from three decades in business: when you defer essential maintenance to save money today, you don’t actually save money. You transfer the bill to tomorrow, with compounding interest. Every council in New Zealand knows this. Every ratepayer should know this, too.
Birmingham City Council learned this lesson the hard way. Europe’s most significant local authority declared bankruptcy in 2023 after years of rate-capping policies starved it of revenue. Across in New South Wales, researchers found that rate capping led to worse financial equity, higher debt, lower infrastructure renewal, and reduced operational efficiency. The exemption process became bogged down in bureaucracy, creating annual shortfalls of over $200 million in maintenance funding.
That’s our future if we’re not careful. S&P Global Ratings has already flagged New Zealand’s proposed caps as potentially “credit negative” for councils unless matched with spending cuts. Translation: either services get slashed, or councils’ credit ratings tank, making borrowing more expensive and pushing costs even higher.
The political appeal is obvious. Polling shows 64% support for rate caps. Who doesn’t want lower bills? But here’s the catch hidden in that polling: people wish to lower rates until they discover it means paying per visit to the library, or finding their local pool closed, or watching their street deteriorate into a potholed nightmare because there’s no money for repairs.
Wayne Brown, Auckland’s mayor, isn’t mincing words. The City Rail Link—jointly funded by central and local government—needs revenue from rates to be completed. At a 4% cap rate, you’re looking at a half-built rail line with no trains or drivers. That’s not hypothetical scaremongering; that’s arithmetic.
The government’s response? Councils need to “stop doing dumb stuff” and “focus on the basics.” Fair enough. But when your basics include water pipes, roads, public transport, waste management, and community facilities—all the things rates actually pay for—you can’t just wish away the cost increases that affect all of those categories simultaneously.
I’ve long argued for veto referendums on significant discretionary spending—museums, sports complexes, convention centres—the nice-to-haves that should face voter approval. But essential infrastructure is different. Water pipes don’t wait for public opinion polls. Roads don’t care about political cycles. Rate caps are a blunt instrument that can’t distinguish between a council’s vanity project and genuine infrastructure renewal. They’ll kill both equally, leaving ratepayers with neither the facilities they rejected nor the pipes they desperately need.
Rates make up a small fraction of New Zealand’s total tax take, yet councils are expected to build and maintain some of the most expensive infrastructure in our lives. Central government controls the vast majority of tax revenue and has far more financial flexibility. When unexpected costs arise, Wellington can adjust income tax, GST, or borrowing. Councils can’t—they’re stuck with rates and user fees.
Yes, councils occasionally make questionable spending decisions. The Taxpayers’ Union has built a profitable business model around documenting them. But here’s what gets lost in the outrage: Wellington’s colourful toilets cost $2.3 million against a decade-long capital programme of $4.9 billion. Do the maths. That’s less than one-twentieth of one per cent. Even if you scrapped every controversial project from every council nationwide, you’d barely make a dent in the genuine cost pressures driving rates up.
What actually drives rate increases? Construction inflation. Decades of deferred maintenance are coming due. Water infrastructure that’s reaching the end of its life simultaneously across multiple regions. These aren’t discretionary nice-to-haves; they’re the fundamentals that keep our communities functioning.
The real question isn’t whether councils can survive on 2-4% rate increases. They can’t, and deep down, everyone knows it. The question is what breaks first: services, infrastructure, or the cap itself.
My bet? We’ll see a rapid proliferation of user-pays charges for services that used to be free. Swimming pools, libraries, park maintenance—anything not explicitly mandated by legislation becomes a revenue opportunity. Councils will do the absolute minimum required by law and nothing more. Infrastructure renewal will slow to a crawl, setting up far more expensive crises in 5-10 years.
And when those crises hit—when a significant water primary fails, or a bridge needs emergency closure, or a library building is condemned—ministers will grant their “exceptional circumstance” exemptions. Rates will spike far higher than they would have if councils had been allowed to invest steadily all along.
Luxon and Watts have bought themselves easy headlines today by promising to stop “dumb spending.” What they’ve actually done is guarantee tomorrow’s ratepayers will face far bigger bills for emergency repairs and crisis management. That’s not fiscal responsibility. That’s political expediency masquerading as prudence.
Ratepayers deserve accountability from councils. But they also deserve honesty from central government about the actual costs of local infrastructure and services. Playing to the gallery with sound bites about expensive toilets might win votes, but it won’t fix a single pipe or pave a single road.
The government should know better. Cheap politics today means expensive reality tomorrow. And when that bill comes due, the coloured toilets will be the least of our worries.
Steve Baron is a New Zealand-based political commentator and author. He holds a BA with a double major in Economics and Political Science from the University of Waikato and an Honours Degree in Political Science from Victoria University of Wellington. A former businessman in the advertising industry, he founded the political lobby group Better Democracy NZ. https://stevebaron.co.nz
Don says:
Steve’s bang on the money here – you can’t milk a cow by putting a cap on the bucket. We’ve seen this exact same nonsense with Wellington bureaucrats trying to control farm input costs while having no clue what it actually takes to run the show. Out here in the Wairarapa, when the bridge over the creek needs fixing, you pay what the contractor charges or you don’t get across – simple as that. The city folk cheering for rate caps will be the first ones moaning when their rubbish doesn’t get collected or the potholes swallow their fancy utes.
Bob G says:
Steve makes some valid points about construction costs, but let’s not pretend councils are blameless victims here. As someone who’s spent decades poring over budgets, I can tell you there’s plenty of fat to trim before we start crying about essential infrastructure. Those $2.3 million toilets didn’t build themselves – that’s the result of councils gold-plating projects and consultants billing ratepayers into oblivion. Yes, construction costs have risen, but so has council spending on non-essential items that ratepayers are fed up with. A 4% cap might be blunt, but sometimes you need a hammer when councils won’t listen to reason.
Josh says:
This is such an eye-opener Steve – honestly as someone who’s still learning about how local government actually works, I had no idea that only 4 out of 78 councils are even below that 4% cap already! That seems like a pretty massive red flag that maybe the problem isn’t just councils being wasteful? I’m genuinely curious though – if construction costs have gone up 35-40%, how are councils supposed to maintain basic infrastructure like water pipes and roads without their budgets reflecting that reality? My generation is going to inherit these infrastructure problems if they don’t get fixed now, so I’m wondering if there’s actually a middle ground between the expensive toilet situations and just capping everything artificially low?