The introduction of a rates cap on local councils ‘will erode the sector’s flexibility to raise revenues’, credit rating agency S&P Global Ratings says

As the Government plans to enact legislation to cap local government rates by 2027, credit rating agency S&P Global Ratings says New Zealand councils will have less capacity to raise revenue after rises in general property rates are capped, which could “exacerbate leverage in the already highly indebted sector.”

In a report released on Monday, S&P: “New Zealand councils face a credit overhang. Their revenue options are set to narrow due to incoming rate caps, but their spending needs will stay high.”

And options to resolve this problem aren’t clear cut, it says.

Before the rates cap kicks in, S&P says councils may have to start reining in property rates soon. “

These rates make up some 45% of total revenues and have been rising in recent years to meet growing infrastructure-related spending needs.”

Water reforms may potentially help but infrastructure-spending needs remain high in NZ, and councils may postpone “essential investments or be driven to borrow more, delaying promised fiscal consolidation”, S&P says.

Credit rating agencies like S&P assess an organisation’s financial strength, giving them ratings based on their capability and willingness to repay debts. In 2025, S&P lowered the credit ratings of 18 NZ councils and three council-controlled organisations by one notch, citing councils’ high and rising debt burden and policy uncertainty.

Councils ‘not yet prepared’ for proposed rate caps

In December, Local Government Minister Simon Watts announced the Government would be progressing a rates cap for local councils with analysis suggesting a target range of 2% to 4% increases per capita, per year. This means rates increases would be limited to a maximum of 4%.

The cap will apply to all sources of rates - general rates, targeted rates and uniform annual changes - but will exclude water charges and other non-rates revenue like fees and charges.

At the time, Watts told reporters: “Our message to councils is clear: focus on the basics, live within your means and be more transparent and accountable to the communities in which you serve.”

In its report, S&P says budget plans indicate councils “are not yet prepared to adjust to the proposed rate caps”.

When it comes to the 24 councils it rates, 18 of those councils project that rate increases will exceed 4% each year from 2025 to 2029, it says.

“Across all 78 local councils, none delivered a rate increase below 4% for 2024/2025, while only five were able to meet this standard in 2025/2026.”

Rate caps will ‘erode sector’s flexibility to raise revenues’

S&P says the ability of NZ councils to raise rates as a way to support fiscal outcomes is a “key credit strength” compared with similar systems across the world.

“The introduction of a rate cap will erode the sector’s flexibility to raise revenues.”

The credit rating agency currently assesses 10 councils out of 24 as having “above-average fiscal flexibility relative to domestic and international peers, reflected through a positive adjustment to their budgetary performance assessments," it says.

“Of these 10 councils, four have large financial asset holdings or investment funds that could be drawn down to make up for lower revenue from rates.”

The remaining councils, S&P says, have a track record of implementing “above-average increases in rates revenue, strong ability and willingness to defer expenses when needed, or a stronger demographic profile that supports potential further tax increases.”

And it sees limited scope for councils to cut costs without hitting core services.

“This is because, by our estimates, councils’ aggregate spending on what the Crown defines as ‘nice-to-haves” (e.g. non-essential services) could be as low as 10% of spending.”

When it comes to reining in spending, councils often look at postponing or cancelling capital projects. S&P says limiting revenue growth might only worsen “the sector’s ability to adequately invest in infrastructure maintenance”.

“To keep pace with these growing investment needs, the councils will most likely fund a greater proportion of capital works using debt. That in turn would drive interest expenses higher, meaning a larger proportion of rates will go directly toward servicing borrowings.”

The credit rating agency says if councils can’t cut spending or raise revenue, there’s a risk they’ll plug in the gaps with borrowing.

This would delay fiscal repair.

“While very few councils are currently near their borrowing limits, we expect this number to grow as the large infrastructure pipeline progresses.”

“Such a path would also limit councils' future debt headroom. Councils rely on debt headroom within their borrowing covenants as a source of liquidity in stress events, or as insurance to respond to natural disasters or emergencies.”

Creditworthiness

The cap on rates increases could draw out fiscal recovery for longer, the credit rating agency says, and the sector’s large infrastructure deficit will continue to weigh on credit quality.

“Weakening financial flexibility could imminently pressure at least six ratings and weaken financial metrics for many others,” S&P says.

The impact on creditworthiness has variables, it says, and this includes “how comprehensive and strict” the final caps are and how councils respond.

“If they can cut spending or make up revenue elsewhere, credit profiles should stand. If councils kick the can down the road, ratings will likely get dented.”