The country's essential infrastructure is being run down with councils not spending enough on drinking water, sewers, and flood barriers, the government's auditor is warning.

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The Auditor-General said if that continued councils could struggle to maintain service levels, leaving future generations to foot the bill.

That comes at a time when many small towns face declining and ageing populations, and a dwindling rating base.

Assistant Auditor-General Andrea Reeves said though numbers she looked at did not specify the state of councils' pipes or roads, they showed the local bodies spent only 70 percent of what they had budgeted for those items in 2015-16.

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"It could be an indicator that you're not adequately re-investing in your assets, and that could mean the cost to re-invest in assets in the future could actually fall on future generations," she said.

According to Water New Zealand's latest information, nearly 70 percent of the inspected wastewater pipes in South Taranaki were in a poor or very poor condition.

In Christchurch, Dunedin, Nelson, Timaru, and Porirua more than half were in such a condition.

That meant pipes were leaky, so ground and stormwater got in, causing overflows into streets and backyards, and swamping wastewater plants.

Councils are responsible for owning and managing drinking water, wastewater, stormwater, flood protection, roading and footpaths.

Infrastructure New Zealand chief executive Stephen Selwood said it was clear councils were deferring work on ageing assets, putting them at risk of failure.

"There's no question that the infrastructure assets across New Zealand are struggling through councils not being able to renew their assets, not being able to afford to fund key investments when they're needed, and not keeping pace with growth," he said.

Minister for Local Government Anne Tolley said her officials were closely monitoring the underspend.

"We [are] concerned at the central government level about the long term maintenance and condition of our infrastructure and provision of services,

"So is local government - and we've been having many discussions with them about how we support them for that."

Mrs Tolley said she wanted councils to understand the state of their assets, and to talk with their communities about what they could afford.

Photo: RNZ / Claire Eastham-Farrelly

However, the problem is not new.

In 2011, the government-led National Infrastructure Plan gave the country's water assets, worth more than $31 billion, the lowest ranking of everything it assessed.

Water New Zealand chief executive John Pfahlert said the problem was systemic and many small councils, already struggling with costs, had hard decisions to make.

"In the long run, the councils are going to have to have a conversation with their communities about reducing the level of service that they currently provide," he said.

Local Government New Zealand chief executive Malcolm Alexander did not think assets were failing.

He said the underspend could be due to poor budgeting, assets being in a better state than expected or, more likely, meeting the costs would equal politically unpalatable rates increases.

"This may be showing a deeper problem we've been alluding to for some time, that the model of just relying on property tax is under strain.

"That doesn't mean we can't fix it, but we have to think about infrastructure financing in a different way," he said.

Mrs Tolley said the Better Local Services amendment bill currently going through parliament would make it easier for councils to work together to cut costs.

In the meantime, the Auditor-General would continue to focus on underinvestment, and said councils should be prepared to justify their decisions.