A small war with local government

Capping rates simply makes the problem of paying for services worse

It’s the 1980s in the UK. A right-wing government, elected to office on the promise of making things better and tackling rising inflation, is unpopular at home. It’s casting around for enemies to claim that it's fighting on behalf of the people. Enter – the “loony left council”. A term that eventually became hugely popular, especially with the tabloid British press.

Councils in the UK were being stretched to the limit via the Local Government, Planning and Land Act 1980. That provided them with money from the central government in the form of a block grant, provided they kept their expenditure within certain limits. Any council spending above that limit would see its central government grant decline. Any council spending money on things the government didn’t agree with was also pilloried in the press.

It's the 2010s in the UK. A right-wing government, elected to office on the promise of making things better and tackling rising inflation, is unpopular at home. It’s casting around for enemies to claim that it's fighting on behalf of the people. Enter local government. Again. Having just cut the funding to local government in England, the Minister for Local Government suggests that councils could save money by “stopping translating documents, putting adverts on council tax bills, and renting out their works of art”.

Councils in the UK were being stretched to the limit as a consequence of the GFC, changing funding regimes, and huge demands. Grants from the central government were cut by 40% in real terms between 2009/10 and 2019/20. This time around, the solution to the problem of rising rates bills was the Localism Act 2011. It included a clause that prevented local authorities from raising council tax rates by more than 2% annually without holding a referendum. In essence, a rate cap.

It's 2025 in New Zealand. A right-wing government, elected to office on the promise of making things better and tackling rising inflation, is unpopular at home. You can now see where this is going. Councils are stretched to the limit, paying for infrastructure like local roading networks and water. The Prime Minister takes the opportunity to tell local authorities that they need to “rein in the fantasies”. He goes on to declare, “It's a war on council waste”.

Just like the previous UK Conservative Governments, the solution from the NZ government is to cap the ability of local government to increase rates. The Minister for Local Government, Hon. Simon Watts, said that he was “proceeding with policy work in regards to rate capping”. We have no details yet as to how this would be delivered. But it would be safe to assume that it would make the already impossible job of making the council’s budgets work even harder.

If rate capping worked, we should be able to see the fruits of that success in the UK. Only we can’t because there is no evidence that it has had any success at all. In the 183 years between the Municipal Corporations Act 1835 and 2018, just 6 Local Authorities went bankrupt. But since 2018, 12 Section 114 Notices (a notice of bankruptcy) were issued. Birmingham City Council - Europe’s largest local authority – went bust in 2024. The council was forced to cut up to 600 council jobs, scrap almost all arts funding, and sell 11 community centres. It even agreed to dim streetlights to help save money.

Instead, local authorities in England were cut to the bone and beyond. In 2011, English local authority spending on youth services was £1.48bn. By 2021, it was just £379m. Cuts to support residents with addiction needs fell by up to 62%. The poorest places in the country faced the highest cuts, which were often the locations with the highest needs.

The same is true in South Australia, where research has consistently found that rate capping doesn’t work. Work conducted for the Local Government Association of South Australia stated, “In particular, it is argued that by imposing financial discipline on local authorities by limiting their ability to increase rates, municipal efficiency will be enhanced. This claim has no empirical foundations”.

Hopefully, we can avoid the problems that have consistently plagued local government elsewhere. Rates are rising in New Zealand because of two things. One is inflation – the cost of building things, in particular water infrastructure, has spiralled. Local Government NZ recently estimated that an extra $11 billion is needed over the next seven years to meet unexpected cost increases. Second is historical underinvestment. The infrastructure gap for local government (i.e. the things that should have been built but have not been) was estimated by Infometrics at $52bn in 2024.

Local government faces financial problems – that is undoubtedly true. The problem it faces is that it only really has two levers to solve them. If it needs money, it can raise rates. There is no other significant source of funding. Or it can choose to kick the can down the road. Which it did for too long in areas like water and roading, creating the chaos we have now. Convention centre spending might not help, but it’s at the edges of what is needed.

What is desperately needed is an adult conversation about funding, not one centred around creating an enemy for political expediency purposes. 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. Any NZ politician promising zero-rate increases without stating how that will be delivered should not be taken seriously.

If this policy does come to pass, expect two things. Firstly, it will be open season on any charge that the local authority can levy. User pays will become the norm as councils look to generate revenue in any way they can. Secondly, the services that councils run that are not prescribed in legislation will largely end. As costs rise in areas where there are legal requirements, this will require cuts elsewhere. Local government will be increasingly about the exchange of contracts for mandated services, rather than creating successful and sustainable communities.

Both of those consequences will harm the poorest and most vulnerable in New Zealand. We will all be poorer as a consequence of that.