Fitch Ratings has warned that the government's planned legislation capping council rate increases at 4 per cent per year could erode revenue flexibility and increase the risk of credit downgrades for New Zealand councils and the Local Government Funding Agency.

Senior director Paul Norris said the agency has generally held a positive view of the sector given the flexibility councils have had to raise revenue. He added that it is early days and some councils may secure exemptions, but overall the caps are expected to weigh on credit profiles.

The policy, announced by Local Government Minister Simon Watts in December 2025, sets a target band of 2 to 4 per cent per capita per year. Legislation is due this year, with transition from 2027 and full enforcement by July 2029. The cap covers general rates, targeted rates and uniform annual charges but excludes water charges.

Councils have faced sharp rate rises in recent years. Residential rates averaged $3,386 in 2026, up 15.4 per cent from the prior year. Three-year cumulative increases reached 34 per cent, more than double the 4 per cent average inflation over the period.

Hastings District Council — one of 18 Fitch-rated New Zealand councils whose credit profiles could be affected by the proposed 4% rate cap legislation. TheLoyalOrder · CC BY-SA 4.0 · Wikimedia Commons
NZ Council Rates Growth vs Inflation (3-year cumulative, 2023–2025)
Cumulative three-year rates growth ran at more than double average inflation over the same period.
Source: Taxpayers’ Union Ratepayers’ Report 2026; Centrist analysis of Stats NZ CPI data

These hikes reflect years of elevated council spending on infrastructure and services. The cap aims to deliver relief for ratepayers and curb unsustainable increases that have outpaced economic growth.

Rating Agencies Sound the Alarm

Fitch revised the outlook to Negative on four councils and the LGFA in March 2026, citing the sovereign action. S&P Global Ratings has similarly warned that caps will diminish councils' ability to raise revenue and could exacerbate leverage in an already indebted sector.

"We have generally held a positive view of the sector, given the flexibility councils have had to raise revenue." — Paul Norris, senior director, Fitch Ratings

Treasury has cautioned that artificial limits on rates could pressure credit ratings unless paired with spending restraint. Without corresponding cuts to waste and inefficiency, the policy risks shifting costs or creating service gaps.

The Scale of the Problem

Of the 24 New Zealand councils rated by S&P Global Ratings, 18 project rate increases exceeding 4 per cent each year from fiscal 2025 to 2029 to fund infrastructure, climate resilience, and service demands.