For many ratepayers, it could mean rates rises will not be below 4%.
For others, their rates increases could stay under the cap while separate bills from a water services company climb.
Invercargill Mayor Tom Campbell said the exception for water services helped make the equation viable.
"It is appropriate that they have carved out water from [rates capping], because if they had included water, I think the water infrastructure would have suffered badly."
The past year’s rates increase in Invercargill was 7.1%, but it would have been under 3.5% if water services were excluded.
Mr Campbell expected the situation for Invercargill in the years ahead to be "challenging, but it’s not impossible".
The council’s next proposed rates rise was about 7.5% — it would have to defer or decline projects to meet a cap.
"We are doing everything we can to rein in the rates rises, but it’ll just mean that councils have to prioritise really clearly.
"We will be delivering the basics like we always do, but it means that there’s not going to be a lot left over for anything else."
The government announced yesterday a target range of possibly 2% to 4% for rates rises.
"From 2027, councils will be required to consider the impact of rates caps on their long-term plans and report on areas of financial performance, like the cost of wages and salaries, council rates as a percentage of local house prices and estimates of local infrastructure deficits," Local Government Minister Simon Watts said.
The cap would apply to all sources of rates — general rates, targeted rates and uniform annual charges — but would exclude water charges and other non-rates revenue, such as fees and charges.
Councils would not be able to increase rates beyond the upper end of the range, unless they had permission from a regulator appointed by central government.
"The full regulatory model will take effect by 2029, however, officials will be monitoring rates rises nationwide as soon as the legislation is enacted," Mr Watts said.
Councils had to submit water plans to the government this year outlining how drinking water, wastewater and stormwater services would be provided cost-effectively and showing planned investment would be sufficient.
The Dunedin City Council has in recent years increased its expenditure on Three Waters infrastructure.
It forecast water services capital spending of almost $1.1 billion over a 10-year period.
A household’s charges for water supply and drainage added up to $1556 in 2025-26 and were projected to be $2782 in 2033-34.
Dunedin Mayor Sophie Barker said water services were a big part of the council’s operation, but others included roads and waste management.
A cap could severely affect the council’s ability to deliver what the community wanted.
"The challenge about the centrally imposed rates cap will be our ability to respond to specific community needs."
Queenstown Lakes District Mayor John Glover said there could be some hard choices for the community.
Some worthwhile initiatives could be at risk of being cut, but "it will bring a real focus on what we do".
Otago Regional Council chairwoman Hilary Calvert said the proposal was a sign from the government councils should return to their knitting.
It would be the end of an era of broad decision-making by local government, which "encouraged councils to just go absolutely ape in the spending department".
