The Labour Party has accused the Treasury of being "nuts" for suggesting the country's rail network should be closed because it costs too much.
In Budget documents released today the Treasury estimated the net social cost of supporting KiwiRail at between $55 million and $170 million a year.
In the paper the Treasury recommended the Government just fund KiwiRail for one more year while undertaking a comprehensive study to look at closing the rail company.
It said the study should be done publicly so that people were informed of the costs of running the rail network compared with any benefits it provided.
The Government rejected the idea.
Labour's transport spokesperson Phil Twyford criticised the Treasury for even raising the suggestion.
"This proposal by Treasury for the Government to consider actually shutting down the rail network is just nuts and it shows that Treasury doesn't really understand transport economics and they certainly don't get rail.
"You know rail should be for decades and decades to come, it should be alongside the road system, the backbone of New Zealand's transport system ... To shut down, even to contemplate shutting down this valuable part of our nation's infrastructure is barmy," Mr Twyford said.
While government ministers rejected the idea initially they only intended providing money for KiwiRail for this financial year.
But a later paper reveals it agreed to a two-year funding commitment after the company expressed worries about its long-term planning if it had only one year of funding confirmed.
In its analysis the Treasury said rail had high fixed costs and it faced a challenge trying to reduce them.
It said the options for the business were to make relatively small changes to the existing network or significantly downsize it, including closing it altogether.
Another option was to shut down most of its operations but keep freight business for Auckland to Hamilton to Tauranga only as that part of the network carried most freight and covered most of its costs.
It warned KiwiRail posed considerable risk to the Government and was unlikely to ever be profitable.
"Treasury believes there is a net economic cost of continuing to fund rail at the levels required. The net social cost is estimated at between $55 million and $170 million per annum based on a national cost benefit analysis.
"Whilst some of the assumptions underlying analysis of this nature are subjective and some require further work to validate, Treasury believes that it will not change the conclusion that there is a net social cost of continuing to fund rail."
It recommended a public study of the implications of shutting KiwiRail down so the Government could make the most informed choice possible.
Phil Twyford said he agreed there should be an in-depth study on the value of rail to the economy.
Mr Twyford said the fallacy in the Treasury thinking was that the rail system, including the rail tracks, should be run as a profit making business. Nowhere in the world did that happen.
He said the rail tracks were simply like the country's roads and nobody expected the roads to make a profit.
A spokesman for Finance Minister Bill English said the Government had set aside $400 million for KiwiRail over the next two years.
"But before undertaking an investment of this size, it is appropriate that officials look at all options - including options for line closures.
"As we said in May, the Government is committed to a national rail network, but ongoing subsidies of around $200 million per year are unsustainable. The funding provided at the Budget gives the KiwiRail board a two-year window to identify savings and reduce the level of ongoing Crown funding required," he said.