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About 80% of aged-care providers are expected to refuse to sign a 1% funding increase offered by the Government.
The New Zealand Aged Care Association has recommended providers not sign the contract, which is offered through district health boards.
Citing increases in KiwiSaver, insurance, the minimum wage and new technology, the association has called for a 7.6% increase - an extra $76 million. The offer on the table would mean $10 million extra for the sector.
Otago-Southland board member Malcolm Hendry estimated about 80% of providers would follow the association's recommendation. Mr Hendry is chief executive of Birchleigh Residential Care Centre, in Mosgiel, which would not be signing.
The aged-care sector - which is under pressure from the living-wage movement to increase wages - was unlikely to grant pay rises if it had to cope with a 1% increase, he said - ''it means we're going backwards''.
If providers did not sign the contract, the introduction of new requirements, such as the computer-based needs assessments known as InterRai, would stall.
Mr Hendry said Prime Minister John Key suggested in 2012 the sector would benefit when the Government's books got back in surplus, but that had not been followed through. Facilities would need to reduce recreational activities for residents because of the funding squeeze.
He had hoped the Government would recognise the ''tough times'' experienced by the sector, in which inflation ran higher than in other sectors.
Associate Health Minister Jo Goodhew said in a statement the Government was spending more on health and aged care than ever before, despite a ''very tight financial situation''.
''I understand that any aged-residential-care providers who do not to sign the ... contract variation will stay on their current contract and be paid at existing contract rates,'' she said.