Councils in rural areas might be forced to cut spending if the dairy downturn lasts for a long time, Local Government New Zealand head Lawrence Yule says.
A Westpac-McDermott Miller regional economic survey has shown big falls in confidence in major dairy areas including Waikato, Taranaki, and Southland.
Mr Yule said the businesses in many rural towns were already hunkering down as farmers tightened their spending, and that could spread.
"When things are really tight, local authorities like to reflect the fact that actually their own ratepayers are finding it really difficult, and they seek to contain costs," he said.
"But you can only do that for a short period of time otherwise you actually undermine the very basic infrastructure that's required for successful community and economy."
Another recent survey, from Rabobank, has shown that rural confidence is at the second lowest level recorded in the past 10 years.
The survey found 53 percent of farmers surveyed had a pessimistic outlook on the agricultural economy over the coming 12 months.
This was, however, up 30 percent from the previous survey at the end of last year.
Only 11 percent of farmer surveyed were expecting conditions to improve, and 34 percent were expecting the agricultural economy to remain the same as the previous year.
However, in the horticulture sector, growers have an increasingly optimistic outlook on their business performance in the year ahead.