This year’s election was full of ideas that were considered good politics, but poor policy. One of these was rates capping.  

Whichever parties form the next government, the Rates Capping Bill will sit near the top of its local government pile. It was introduced just before the old Parliament dissolved, and the new Parliament will need to decide what to do with it.

The Bill would hold increases in councils' average rates to between 2 and 4 percent a year, policed by a new regulator.

The New Zealand Initiative's submission, lodged last week, recommends that the Bill not proceed.

Ratepayers have every reason to be angry with councils. Rates rose by roughly a third in three years, and many councils have spent poorly. None should be spared scrutiny.

But any government tempted to bank the Bill as a cost-of-living win should read the fine print first and spot the traps.

Start with what it caps. Not your rates bill. The cap applies to a council's average rates per property. Revaluations, differentials and targeted rates could still push an individual bill well beyond 4 percent.

The Bill also sets a floor. A council holding average increases below 2 percent would need the regulator's permission. One that simply set low rates could be directed to redo the decision.

A policy sold as protecting ratepayers would let a central government official order an elected council to charge them more.

The numbers have a curious history too. At last year's consultation, the 2 to 4 percent range was derived from inflation and economic growth. The subsequent regulatory impact statement rested it on a 'steady state' in which infrastructure deficits had already been fixed. Latest official guidance explains it as the 15-year average of a council cost index. The workings keep changing, but the answer never moves from 2 to 4 percent. Numbers that behave like that were chosen first and justified afterwards.

Officials have been more candid than ministers.  They weighed the cap against simply doing nothing and could not say the cap was better. The panel reviewing its first impact statement found it did not give Ministers enough information to make a properly informed decision. A supplementary analysis published in August found council spending on non-core services growing at just 2 to 3 percent a year and rated the package's benefits ‘marginal’.

Australia has run this experiment for decades. New South Wales has pegged rates since 1977. Nearly every council there has sought exemptions, while maintenance backlogs ran into the billions. Councils defer the spending nobody notices until it fails.

One clause sets a particularly harmful trap. It makes councils' statutory duty to manage their finances prudently subject to the duty to comply with the cap. Where prudence and the formula conflict, the formula wins.

This is not just one badly designed bill. It is the latest turn of a habit New Zealand has indulged for most of our history. When something goes wrong locally, central government responds with fewer and bigger councils and tighter control. Each round leaves local institutions weaker, and the weakness becomes the evidence that communities cannot be trusted. The rates cap is a trap sitting inside that larger trap.

I wrote about the council merger side of that habit in these pages in June and August. The Infrastructure Commission could find no clear link between council size and efficiency. Fifteen years after amalgamation, Auckland's real per-capita spending is up 34 percent, the typical rates bill is about 85 percent higher and voter turnout is the lowest in the country.

My forthcoming essay, Closer to Home: Why New Zealand's decisions belong with its communities, will propose a very different direction.

First, decisions should sit as close as possible to the people they affect. Anyone wanting to shift a job to central government should have to show why, not the other way round.

Next, councils should share in the growth they enable, starting with a share of GST on new construction. Welcoming new houses should no longer punish existing ratepayers. Councils should get a share in minerals royalties and be free to use accommodation levies. Remove rating exemptions on Crown land.

Fiscal discipline should come from a Ratepayer Bill of Rights, with binding local votes on major projects and rates increases above set thresholds, in place of a central cap. Mayors and councillors should be better able to scrutinise their councils.

None of this is exotic. Versions operate today across developed countries, especially in Europe.

There is a hard fiscal reason to start now. The Treasury's long-term projections show a central government that cannot afford everything it has taken on. Some form of devolution will come regardless. The only question is whether it arrives by design, or by retreat - later, improvised and on worse terms.

Hiding costs is not reducing them, and a trap does not stop being a trap because a new government inherits it. It need not walk into it. The better answer is the one New Zealand has avoided for decades: trusting communities with the decisions, and the money, that shape their own places.

To read the article on the NZ Herald website, click here.