Finance Minister Bill English says New Zealand's drought could cut $2 billion from the national economy, twice the figure estimated last week.
The extended dry spell has led to the entire North Island being officially declared as affected by drought, forced dairy farmers to dry off herds earlier than usual and cut milk production.
Mr English told Televison New Zealand's Q+A programme the drought could knock 30% off New Zealand's growth rate in a year.
He said the Government will be getting advice from the Treasury in the run up to the Budget on 16 May.
But Mr English said the latest advice is that somewhere between $1 billion and $2 billion will be cut from the national income, and as every week goes by, the prospect of it being the higher figure grows.
Rain falls but may not give much respite
Rain is spreading in parts of the country after months of drought but is not expected to last more than a couple of days.
MetService says Northland, Taranaki, Taupo and Bay of Plenty got between 15 and 30 millimetres of rain on Sunday.
Other parts of the North Island received less than 5mm, including eastern areas down to Wairarapa and Wellington.
In the south, Nelson, Buller and Westland had between 15mm and 25mm of rain.
The West Coast, normally one of the wettest parts of the country, last week became the first region in the South Island to request to be declared a drought zone.
MetService forecaster Brooke Lockhart said the rain would last until Monday and in some regions until early Tuesday, but dry weather is forecast to return after that.
Milk price rise predicted
A rural economist and Federated Farmers say New Zealanders could soon be paying more for milk and other dairy products as a result of drought.
ANZ rural economist Con Williams said milk prices may rise by up to 20% meaning a two-litre container of milk selling for $3 would cost $3.60.
Mr Williams said overseas buyers are speculating New Zealand will have a shortage of milk as a result of the drought and have been prepared to pay a premium for milk powder at the last three dairy auctions.
Lincoln University agribusiness specialist Professor Keith Woodford said Fonterra had forecast dairy production would be 1% higher than last season but now expects it will announce a drop in production.
Federated Farmers president Bruce Wills said the lack of milk supply will inevitably lead to a rise in prices for consumers.
Farmers' incomes dropping
North Island dairy farmers say they are losing tens of thousands of dollars as the drought forces them to dry off herds months earlier than usual.
In Wairarapa, sheep, beef and dairy farmers say they are having to significantly reduce livestock numbers.
Castlepoint farmer Anders Crofoot said he had to sell 400 head of cattle early for $200 less than expected per animal leaving him $80,000 out of pocket.
Some farmers say streams on their properties have dried up for the first time in 50 years.
Tararua sharemilker Neil Filer expects to dry off his cows 80 to 90 days earlier than normal unless there is significant rain by Wednesday, meaning he could lose $500,000 at the two farms he runs.
Federated Farmers Tararua branch chairman Gray Beagley said he is in the process of drying off his cows and expects to lose about $140,000 in income due to reduced milk production.