It said thousands of families would pay more for their childcare, and in other cases centres would absorb costs but reduce the quality of education.
Council chief executive Peter Reynolds said targeting money towards vulnerable groups should not be at the expense of existing services.
"The people who actually support the early childhood sector - middle income New Zealand - are being hit again. And there is a tolerance level before they start to pull their kids out of early childhood education."
But Ms Parata said costs and benefits had to be weighed up in the current fiscal climate.
The Government announced a new target of increasing the rate of participation in early childhood education to 98 per cent by 2016 - up from 94.7 per cent now. Ms Parata said achieving the 98 per cent participation rate would be challenging and made it critical to target areas where there were problems.
"These children often do not attend ECE for a variety of reasons. By targeting resources to these learners, we will raise participation to give them a strong platform for their compulsory school years."
Government subsidies for ECE had already doubled from $617 million in 2006/07 to $1.3 billion this year.
Excluding kohanga reo, there were 103,852 enrolments in the 20 hours subsidy at July 2011, or 89 per cent of all enrolments of three to five-year-olds in licensed services.
Per child the subsidy is worth $10.25 an hour - $205 a week - for centres with less than 80 per cent registered teachers.
Ms Parata said there was an extra $110.9 million of funding for the sector over the next four years - about $28 million a year.
That included $47.9 million to centres in areas where participation was lowest. A further $43.9 million was to provide ECE for the children of solo parents affected by welfare reforms.
The Government estimates that 40 per cent of services are expected to benefit from the increase in equity funding - around 50,000 children.
Those parents will be required to return to work when their youngest child turns five and will be given a higher level of support for early childcare as part of that.
There was also $19.1 million to improve access to Maori immersion services such as kohanga reo.
Dr Sarah Farquhar, chief executive of the ChildForum ECE Network, said the budget was a further tightening of the screws.
"[Centres] are going to lose funding that they would be counting on in their annual budgets.
"The surprise factor is quite significant. Because often ... services are running close to the line financially."
But Clare Wells, chief executive of NZ Kindergartens, said the additional funding targeting Maori, Pasifika and low socio-economic communities was welcome news.
"While there is no increase to the overall universal rates paid to early childhood services to meet increased costs, the status quo represents a degree of stability for services."
The NZ Childcare Association labelled the freeze "short sighted".
"The decision not to budget a cost of living increase will inevitably mean services will go backwards financially," said chief executive Nancy Bell.
Labour's early childhood spokeswoman Sue Moroney said the freeze was effectively a cut for childcare centres.
She said many families faced a "double whammy" of ECE fee increases as well as the loss of a tax credit which could be used to offset childcare costs for working parents.
The Government is scrapping the childcare tax credit worth up to $310 a year.
MORE PAIN FOR MOTHER OF TWO
Mother-of-two Rochelle Gribble says the childcare funding freeze and any subsequent hike in fees would hurt when taken in the context of the rising cost of living.
Mrs Gribble, who runs parenting information website kiwifamilies.co.nz, said the Budget announcement was a topic of concern on the website's Facebook page yesterday.
"Every time early childhood funding comes up for grabs people feel nervous, because they rely on it, and make life decisions around it."
Mrs Gribble, 35, said she and her husband, Martin, were still making student loan repayments while meeting the cost of looking after daughters Caitlin, 3, and Thalia, 1.
"I think there will be lots of people in this situation - they're still paying back student loans, and those [repayments] are increasing.
"And suddenly their child care rates are increasing, and it's just nibbling away, nibbling away at income that families have."
She said she paid $55 a week on top of the 20-hour subsidy for Caitlin to attend preschool, but had friends who paid almost $500.
"You have to be on a pretty good wage to make that money, then be able to eat and pay your rent or mortgage on top of that.
"I think middle-income families are really stretched, and it's just another piece that stretches it."
