Council rates are likely to increase over the next few years - but at a slowing pace, according to ANZ economists.
Council rates inflation hit a record high last year - averaging 12.2% across Aotearoa, according to ANZ’s latest Property Focus report, released on Thursday. This came after three years of annual increases between 7% and 10% - up from the 4.7% average per year between 1992 and 2019.
“Although rates are still increasing rapidly, there are signs that we are at least now getting past the largest increases,” the economists say, as councils have announced an average rates increase of 8.4% for the coming year.
“Some of the cyclical economic pressures on councils are abating, while political pressures are perhaps ramping up.”
Rates have been a contentious topic - there’s been public pushback against rate increases and Cabinet is set to look at ways to control rate rises later this year.
It’s even got the Taxpayers’ Union and the Green Party on the same side as they both support basing rates solely on the value of the underlying land instead of taxing properties on their total value (including buildings and improvements).
The ANZ economists say easing wage and construction costs, falling interest rates on council debt, lower population growth and gross domestic product (GDP) growth will help with catching up on strained infrastructure.
The councils in Auckland and Christchurch are hiking rates by 5.8% and 6.6% this year while Hamilton City Council is increasing it to 15.5% and Wellington City Council to 12%.
This report comes as annual inflation rose, as measured by the Consumers Price Index (CPI), to 2.7% in the June quarter - an increase that was lower than expected by economists.
This increase was driven in part by local authority rates which were up 12.2%.
Statistics New Zealand says rates contributed to 13% of the 2.7% increase. They are captured once a year in the September quarter and next quarter, Statistics New Zealand will capture changes in rates as of July 1 this year.
The economists say: “Rates are a fairly small component of the overall CPI, with a weight of 3.1% (or 3.4% when including water supply charges, billed separately by some councils).”
“Looking out over the next few years, the balance of probabilities points to smaller but still-sizable increases in council rates.”
Given the “sizable increases”, the economists expect rates to contribute a “meaningful” 0.3% to inflation in the September quarter.
Closing existing budget deficits, catching up on infrastructure maintenance and making sure they’re resilient against natural hazards, all continue to be costly and important issues for councils.
“More generally, the prices of key inputs for councils - wages and construction costs - tend to rise more quickly than overall inflation (as is the case for most non-tradeable goods and services).
“That all means that it would likely be hard to sustain council rates inflation much lower than the average pace of 4.7% per year seen over 1992-2019, unless councils find ways to significantly restrain some of their expenditure or boost their incomes in other ways.”
Underpinning recent inflation in council rates, the ANZ economists say, have been strained finances.
“Deficits widened in the years after the pandemic as council expenses grew faster than the economy as a whole.”
Total operating expenditure across councils was 4.3% of GDP in the year to March 2025 - this is up 3.6% of GDP on average in the five years before the Covid-19 pandemic, according to figures from the report.
“Revenue has struggled to keep up, despite rates hikes.”
Some of the reasons the economists say have driven up the rise in council spending since 2019 are things like:
- The costs councils face (primarily wages and construction costs) have gone up more than overall inflation
- Increasing costs in the purchases of goods and services and grants (think payments to suppliers across councils’ functions and public transport subsidies, rising insurance costs for various councils)
- Rising depreciation expenses - this is the estimated cost of existing infrastructure wearing out
- Rising interest costs which the economists say are driven by a combination of higher council debt and higher interest rates
With widespread deficits across councils, this suggests “a part of councils’ financial woes is down to common nationwide factors, rather than local decisions alone”, the economists say.
While “cyclical pressures on council finances look set to ease”, they say balancing the books will remain a “fraught task for the foreseeable future”.
“This will keep the pressure on council rates over the medium term.”
6 Comments
Turnout for the forthcoming elections will be of interest. Poor turnouts have allowed a disproportionate representation that has been exposed as pursuing ideological and fanciful agendas at the expense of core functions and services. There has usually been more than adequate representation on offer to restore better attention to basics but if the electorate(s) are not prepared to get off the backsides and vote accordingly, then they get what they deserve.
While you have some valid points, there‘s a bit of oversimplification happening there.
From my understanding, the data indicates that local elections are usually decided upon by older, home-owning conservative voters who prioritise lower rate-rises above all other election promises. And despite the majority portion of rates being spent on infrastructure upkeep people get upset about any money spent on what is perceived to be non-core council services. I’d certainly argue there is room for better infrastructure spend where long term investment is prioritised over expensive upkeep of sub-par infrastructure in the short term but that is a hard sell to the electorate. But whether it’s money spent on bike lanes or money spent on keeping a library/community centre open, the council can’t win and year after year ends up with more responsibilities and less funding options.
Just my two cents.
Depending on the council, infra spend rarely cracks 50% of expenditure, and around 1/3 gets spent on community projects and cultural development.
Fairly clearly, councils cannot afford to entertain non infrastructure programs as well as effective upkeep and deployment of new infrastructure. So they either need to generate more income, which is most efficient as a rate rise, or do some cutting.
Although this same issue runs to national politics, and in fact most nations trying to promote the idea of being "first world".
Usually it's best to tick off the basics before getting into frills, but we want our cake every which way thanks.
Capping rates at CPI is very problematic. The basket of goods and services Councils provide is very unlikely to correlate to the CPI. I'd be happy with 2 -2.5x CPI except when CPI exceeds a certain threshold, say 5%. There'll be few Councils that have come near to this in the last 10-15 years.
NPDC made a hash of the rates and I'm not talking about the GST issue. I'll give them a bye on that one as it has to be paid. The fiasco is the application of the rates rate and commensurate overcharging. This is a fairly straight forward calc which any competent financial person with a knowledge of SQL or even expertise with Xcel can carry out. Even an IT person with a smattering of knowledge about the rates system could do this. NPDC had a re-structure since the new (2-3 years ago) CEO took over. Got rid of a person or maybe persons who knew what was going on with the rating system. Making sure there was someone in the place of the departed lies predominantly with the CFO. It appears he didn't know how to arrive at the correct figures. Case of a previous specialist, probably a CA, not having worked in a Council organisation at the lower levels to find out how things tick or an outsider who is used to the grand management role without finding out who does what in their department and whether competent to do it.
Seems to be some plausibility to dispensing with the regional councils and amalgamating the functions with the local body councils as/where relative. And that is not only over cost savings. Have encountered too often the too hard basket being shuffled between the two concerns.
"
"Have encountered too often the too hard basket being shuffled between the two concerns." A case in point is the Yarrow stadium in NP. A huge kerfuffle between TRC, and two other district councils. TRC did something which the other District Councils excluding NPDC wasn't satisfied with and TRC went ahead without the other district councils approval. Essentially a much greater capex spend than the opponents wanted. NPDC ran away from the problem, that's NP councillors and the CEO. NPDC operate the stadium.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.