Local Government New Zealand (LGNZ) is warning that a rate cap on councils will increase debt costs and place an additional burden on communities.

This comes after S&P Global Ratings released its downgrade of the New Zealand local government institutional framework score last week, lowering the credit ratings of 18 councils and three council-controlled organisations.

S&P has cited central government policy uncertainty - combined with an increase in unfunded mandates from central government being put on councils - as the driver behind the lowering of these credit ratings.

This policy uncertainty, which is partly driven by a potential rates cap, means debt will be more expensive for councils. And if new borrowing and refinancing is more expensive, that in turn drives up rates.

LGNZ President Sam Broughton says the S&P announcement paints a troubling picture.

“We’re concerned that a credit rating agency is sounding warning bells on a possible rates cap,” says Sam Broughton.

“We’ve previously signalled to Government that while a blunt instrument like a rates cap might sound good politically, there are better transparency tools and measures for ratepayers to understand how their council is investing in their community.

“One of the key drivers of rates increases is inflation in the costs of infrastructure as well as the cost of borrowing, and a rates cap would only put further pressure on this.

“From the international analysis it is clear that a rates cap will have unintended consequences on communities; it will restrict the ability of councils to invest in infrastructure and risks their financial instability, and we need to avoid this.”

Sam Broughton says that local and central government now have a chance to work collaboratively on a workable solution.

"Councils focus on balancing rates affordability with delivering on community need, and we know council costs will continue to be expensive due to the need for infrastructure investment - so it’s also about value for money. Australian examples show that a rates cap will have the opposite effect to what the Government wants to achieve.

“We’re asking the Government to put aside rate capping, and to send a strong signal to credit agencies that New Zealand is a safe place to invest, by working with us on a better way forward through greater transparency and benchmarking.

“This will enable communities to know what councils are investing in and why, while at the same time empowering those communities to better engage with councils around key decision-making and investment processes,” Sam Broughton said.

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