Auckland's inner-city rail loop is at risk of being completely shunted off track by a lack of funding as the Government moves to curb council rates increases and borrowing, Local Government New Zealand says.

The prospect has been raised in a war of words between Local Government NZ and Local Government Minister Nick Smith, who says councils' rates and borrowing have increased too quickly over the past decade and are reaching unsustainable levels.

In recent weeks Dr Smith has publicly voiced concerns about sharply rising council rates and debt ahead of a major reform package for the sector he expects to launch in the next month.

Though Dr Smith indicated the package was likely to restrict the range of activities councils could undertake, he told the Herald he would not rule out legislated restrictions on rate increases and council debt, and was "exploring all options".


But Local Government NZ president Laurence Yule said most of Dr Smith's criticism, including his claim that a blowout in staff costs has been the biggest driver of rates and debt, was unfounded.

"My concern is actually most of the costs of local government rates and what we charge for is actually going on providing core infrastructure," he said.

Any constraints on councils' ability to raise rates and debt would affect the plan for Auckland's inner city rail loop and other big ticket transport projects in the city. "It could also constrain other projects in New Zealand."

Prime Minister John Key and his Government have already indicated that they are unlikely to support a number of measures, such as a regional fuel or income tax, suggested by Auckland Mayor Len Brown in a recent discussion document as the means to fund the rail project.

Yesterday, Mr Key said debt was a legitimate avenue for any council in New Zealand, "and obviously the size of Auckland's balance sheet and their ratepayer base dictates they can carry a lot more debt than anyone else around the country.

"But equally because they can only raise revenue theoretically through rates, we don't think it's sensible for them to get excessive amounts of debt on their balance sheet."

Mr Brown yesterday said it was crucial that Auckland Council had the ability to complement work by central government to get transport infrastructure in place.

"I would like the Government to reflect on the fact that it is critical for local government to support central government in particular in building infrastructure and one of the few tools that we have is the prudent use of our balance sheet through borrowing."

He pointed out that credit rating agency Standard & Poor's recently took Auckland Council off "credit watch negative" and affirmed its AA credit rating.

"I'm very comfortable with where our council is at the moment in terms of its prudent financial management.

" I would just be concerned that the minister not throw out the baby with the bath water and that we just reflect well on generally how well local governments manage their economic status."

He was looking forward to speaking to Dr Smith to find out exactly what he was proposing.