The festival did so in good faith, but has now been left without its anchor venue that won't be open in time due to construction delays.
Council officials signalled earlier this year the construction completion date was continuing to slip with issues relating to seismic gaps, water leaks, resource availability, and design detail.
New Zealand Festival of the Arts executive director Meg Williams told councillors at a meeting today the news came very late in the festival's planning cycle.
Some events have already had to be cut because there was no longer suitable space, she said.
Williams said they've come up with a new plan to build a temporary 1000-seat theatre space at TSB arena.
But the festival was unable to meet the further deficit of fitting out the arena and the loss of revenue from having to use smaller venues.
Williams said without the money the festival would likely have to reduce its programme from three weeks to two.
She said that would result in reputational damage, loss of work for artists, reduced audience numbers, and knock-on economic effects.
The current programme has an estimated audience of more than 250,000 people and typically the festival has a $50 million economic impact to the city.
Mayor Andy Foster said the festival was a flagship event for the capital and was important to its reputation for arts and culture.
"It is absolutely essential that good festivals are being put on and having seen the programme, I think it's a great programme."
Foster said the construction timetable for the St James Theatre project was tight to begin with and has been put under further pressure because of the Covid-19 lockdown and supply issues.
He said it was still possible the building might be open on time.
"It's possible that it could be delivered in January, but possible isn't good enough. The Festival needs certainty."
Social, cultural and economic committee deputy chairwoman councillor Nicola Young acknowledged it has been a trying time for the festival team having to deal with circumstances totally beyond their control
WellingtonNZ, the region's economic development agency, has also agreed to a reduction in venue hire rates.
Councillors unanimously voted to approve the $300,000 payout for the festival.
