The government has announced it will cap the amount councils can increase rates by to a maximum of 4 percent, unless there are exceptional circumstances.

Local Government Minister Simon Watts said the legislation would put "a brake on excessive increases and [give] ratepayers greater certainty".

"For too long, ratepayers have been hit with steep and unexpected rates increases, adding pressure to household budgets at a time many New Zealanders are already feeling the squeeze."

The changes would also "sharpen the focus on delivering the services communities expect councils to get right, like fixing the potholes, collecting rubbish and running our pools and parks".

The only exceptions will be for councils responding to "events such as natural disasters that go beyond what a council can reasonably be expected to plan for", and "where a council can demonstrate prudent financial management and a justified need to operate above or below the target range".

To qualify for the latter, councils would need to carry out community consultation before applying.

"We recognise there will be limited circumstances where councils need greater flexibility, such as recovering from a natural disaster or responding to events outside their control," Watts said.

"Exemptions will not be granted lightly and will only be available in exceptional circumstances where there is strong justification."

The caps will take full effect from 1 July 2029, but long-term plans prepared before then will need to consider the target range of 2-4 percent.

The target range will be reviewed every six years.

Water services, such as those provided by Watercare in Auckland and Tiaki Wai in Wellington, will be exempt.

An independent regulator will be established to monitor compliance, assess exemption applications, and support councils through the transition and provide guidance.