What are rates caps solving?

In this article we follow a standard policy assessment of the rates capping policy by stepping through the problem definition, the options, the criteria, and the trade-offs.

Our view is that the contention regarding rates capping is not simply a narrow debate about limiting rates increases. Instead, it should spark a broader discussion about the enduring role, structure, and operation of local government, particularly in relation to central government, in funding growth through infrastructure investment and other services. This is the root problem that needs addressing. 
 

A common policy pitfall is working backwards from a proposal to the societal problem it intends to solve. Without prematurely indicting rates capping for this, the soon-to-be-announced policy should clearly and transparently lay out the root problem(s) it seeks to address.

Is the policy tackling rates affordability or cost of living (inflation) pressures on households? Is it intended to direct local government spending towards core services? Or is it to address another issue entirely?

Each problem definition should be well-evidenced. Assuming the premise that a rates cap is needed, it should be set according to the problem the policy is ultimately addressing. For example, a clear and evidence-based definition of ‘rates affordability’ is essential to understand how to set the cap, as discussed in our previous local government article. 

Once the root problem is established, the next step is to identify policy alternatives to achieve the desired outcome. These should be compared to assess the effectiveness of rates capping.

If rates affordability is the concern, local elections arguably remain the primary process for influencing rates increases. Indeed, candidates campaigning for low rates increases have had some success in the 2025 local elections.

Central government could also introduce alternative funding and financing options for local government. For example, targeted rates, development and tourism levies, GST sharing, and/or congestion charging, could help to manage and compensate for the effects of rates caps on councils’ budgets.

However, this would challenge the notion of ‘rates affordability’ as the overarching problem to solve in the first place. In practice, what would change is ‘who pays’ and ‘on what’ rather than ‘how much’. In other words, the purpose of the policy would instead be reforming the funding approach and principles for local government services, rather than the level of funding per se.

If the aim of rates capping is to, in part, address related concerns about transparency and value-for-money spending, or to ensure incoming councils deliver on their campaign promises, including on lower rates increases or voter turnout and engagement more broadly, other policy options and packages targeted at those specific root problems could be considered.

Finally, if the primary policy problem is directing local government spending towards core services, are changes to the Local Government Act sufficient in influencing council spending decisions? How might City and Regional Deals compare as a policy process for negotiating priorities between relative spending on core and non-core services?
 

The third step is to assess the trade-offs of rates capping against other policy options and alternatives using clear criteria.

Suggested key criteria include ‘efficiency’ and ‘administrative and compliance cost’. For example, central government may want to provide flexibility to local government, such as considering variable rates caps depending on whether local councils are ‘growth’ or ‘stagnant’ in terms of population. 

From an efficiency perspective, the question arises as to whether central government would need to effectively review, assess and potentially duplicate (at least in part), the policy processes for designing long-term plans and, accordingly rates setting, in order to set appropriate rates caps for different councils.

Other key criteria may include, for example, the trade-offs between ‘rates affordability’, ‘financial sustainability’, and ‘levels of service’, with the litmus test being whether rating agencies may reassess local councils’ credit rating in light of their rates caps.

Stepping back from the detail, our view is that at the heart of the debate about rates capping is ultimately the role, structure, and operation (funding and financing in particular) of local government, especially in relation to central government, in funding growth through infrastructure investment and other services. 

That is the root problem that requires addressing.