Windbag: The government's misleading case for rates caps

The Spinoff

21-07-2025

Blaming colourful toilets for council rates rises is like saying millennials can't afford a house because of avocado toast.
In Men At Arms by Terry Pratchett, the 15th book in the Discworld series, Captain Samuel Vines waxed lyrical about the cost of boots: 'A man who could afford 50 dollars had a pair of boots that'd still be keeping his feet dry in 10 years' time, while the poor man who could only afford cheap boots would have spent 100 dollars on boots in the same time and would still have wet feet.'
That quote became the inspiration for the boots theory, an economic theory that explains why it's so expensive to be poor. Buying lower-quality products that wear out sooner is an obvious example, but the cost of poverty hits in many more ways. If you can't afford to go to the dentist, the doctor or the mechanic, that short-term saving comes back to bite you with a big, scary bill later on. The cost of poverty traps people in its downward spiral.
Sanctimonious rich people love to lecture the poor about how they simply need to stick to a budget. But it's not the wealthy person's superior budgeting skills that keeps them out of the death spiral – it's the ability to go over the budget when needed. If an unexpected bill arises, they have the flexibility to pay it, even if it means dipping into their savings. To the poor person, their budget isn't merely a target; it's a hard cap, with devastating consequences if they breach it.
In the ongoing war between councils and the Beehive, government ministers are the wealthy elite telling poor councils they just need to budget better. Central government has way more money and flexibility than local government. Rates account for only 7% of the total tax take in New Zealand, and yet, with that small slice, councils are expected to build and maintain some of the most essential aspects of our lives: roads, pipes, public transport and community facilities.
Local government minister Simon Watts says he is considering a law change to cap how much councils can increase rates by each year. (Act and NZ First have raised doubts about the plan, so it's unclear how far it will go.) The political appeal of this idea is obvious. There is a lot of anger nationwide about rates increases. At a time when the household cost of living is high, it can feel unfair for local councils to continue jacking rates up.
The government knows this, which is why it has been so happy to abandon its talk of localism and instead use councils as its punching bag. But Watts is making the critical error of mistaking good politics for good policy.
Council budgets need some flexibility for unforeseen circumstances, like when a major pipe collapses, or a library turns out to be a deathtrap, or you face a period of expected cost increases. Putting a hard cap on rates will inevitably mean that important maintenance is deferred, delayed or ignored. According to the boots theory, maintenance will end up costing more in the future.
We are already seeing the consequences of this in the water network, where councils of the 80s, 90s and 2000s cheaped out on pipe renewals to keep rates artificially low. The bill has come due for the ratepayers of today.
Economist Craig Renney of the NZCTU has written a good analysis of how rate-capping policies have affected councils in the UK and Australia. In the UK, 12 local councils have declared bankruptcy since 2018, including Birmingham City Council, Europe's largest local authority. In New South Wales, researchers found rates capping policies led to 'worse revenue effort equity, greater debt per capita, lower levels of infrastructure renewal and exhibited much less operational efficiency'.
'Fundamentally, local government doesn't have the financial tools it needs to do the job that it has been given. Capping rates doesn't help that – it makes it worse. The UK and Australia both show the negative consequences of that policy,' Renney writes.
Proponents of rates caps argue that councils are essentially irresponsible teenagers who will keep blowing money on stupid shit unless big daddy Watts limits their pocket money. This is the narrative being pushed by the Taxpayers' Union, which is running a public campaign for the policy.
The Taxpayers' Union's team of researchers are excellent at digging up and highlighting examples of outrage-generating spending. The government obviously pays close attention, because you'll often hear senior ministers repeating the same talking points to the media.
Some of this work is incredibly valuable. Local government should be held to account for how it spends ratepayers' money. The problem is that the Taxpayers' Union has been so successful that it has distorted people's views of what councils actually do – voters think rates rises are primarily because of rainbow crossings and karakia rather than pipes and potholes.
This misconception seems to have gone all the way to the top of the Beehive. Prime minister Chris Luxon has repeatedly taken aim at Wellington City Council for spending that isn't focused on the 'basics'. Last week, he highlighted the new $2.3m Inglewood Place public toilets, the $2.3m Molesworth St cycleway (only 10% of which was paid for by the council), and Tākina convention centre, which fell $1.2m short of targeted revenue last year.
For a prime minister who sees himself as a big-picture thinker, it's kind of embarrassing that Luxon gets distracted by, as he would put it, the ' small rocks '. Wellington City Council has planned a budget of $4.9 billion in capital spending and $11.6 billion in operating spending for the next decade. Every little bit counts, but a marginally cheaper public toilet isn't going to move the needle. Pretending colourful toilets are the problem with council finances is like telling millennials they could afford a house if they gave up avocado toast.
If Wellington City Council were uniquely bad at wasting money, it would have uniquely bad rates increases. But it doesn't. Wellington doesn't even make the top 10 for councils with the highest rates increases this year (though it is seventh over the last three years cumulatively).
The Taxpayers' Union's Sam Warren, writing in The Post, said wasteful spending caused rates to rise higher than inflation: 'Between 2022 and 2025, average council rates have surged by more than 34%, compared to inflation at 13.7% over the same period.'
That analysis misses an important point. The usual inflation measure comes from the CPI basket of goods, a list of 598 consumer products: spinach, pillows, hair products, streaming TV services and so on. But councils don't spend money on the same things households do.
The vast majority of any council's capital spending is on construction to build and maintain infrastructure. And construction is really expensive. According to BNZ chief economist Mike Jones, 'Construction cost inflation soared 35-40% from 2020 to 2023. It's since flattened off, but the overall level of costs is still elevated.'
To its credit, the government has taken several steps to address this: reforms in the construction sector, new financial arrangements for water entities, and a proposal to give councils a share of GST on new residential builds.
It would just be nice if ministers were more honest about the problems at hand. Councils are trying to make up for decades of underspending on core infrastructure at the same time that construction costs are at their most expensive. That's the real reason rates are so high.