The figure was released in the Child Poverty Action Group report Left Behind: How Social and Income Inequalities Damage New Zealand Children.
The report said there were about 150,000 families in 2004 in significant or severe hardship, and little had changed since.
Forbury School principal Janice Tofia believed the one in five ratio was too low.
She believed the number of children living in poverty might be as high as three in five at her decile two school.
"A person who lives in poverty is someone who is on a benefit. They can't afford to run a car or maintain insurances. They can't even afford to go to the movies.
"They forgo these things so that they can afford to feed and clothe their children."
Mrs Tofia said poverty was "a very real" issue for children in several areas of Dunedin.
The situation was expected to get worse with rising costs of food, petrol and rent, and it was putting families under increasing pressure, she said.
Ultimately, it was affecting pupil performance and achievement.
"The lack of food has certainly been an issue here over the years. Children can't learn if they are hungry.
"When children are hungry, they become irritable and they can't concentrate in class."
Mrs Tofia said the school began providing breakfast and lunch for pupils five years ago.
The breakfasts were paid for by grants from community organisations and the lunches were donated by a local bakery.
"In the past, we had desperate children who were crying out for something to eat. Since we started providing food it has made a noticeable difference to the kids' education. They are well focused in class."
One of the recommendations of the CPAG report was the provision of breakfast to all children in decile 1, 2 and 3 primary schools.
The report calls for higher welfare benefits and tax cuts for the lowest income earners and is critical of the disparity between assistance available to those working and those not working.
While work was important for reducing poverty and increasing wellbeing, a work-first policy was not sufficient to eliminate child poverty, the report states.
It is not a new message from the group, which drew criticism back in 2004 from Prime Minister Helen Clark when it expressed concern about the Working for Families programme discriminating against beneficiaries.
The latest report says moving more parents into low-wage jobs is expensive and largely ineffective in the long term.
It estimated that the cost of additional administration required for the Working New Zealand programme over five years was $100 million.
While there is no official poverty line in New Zealand, the CPAG report recommends it be set at 60% of the median household disposable income, after housing costs - with benefits adjusted accordingly.
The Government's own research in 2006 showed that, after paying for housing costs, even with the accommodation supplement, beneficiary families with no earned income were falling below 40% of the median household income. Those who were earning some income were a little better off at between 45% and 48%.
Without taking housing costs into account - and these may vary - 60% of median household income is estimated to be $33,000 a year ($634 a week) for a two-parent, two-child family and $21,000 a year ($403 weekly) for a single parent with one child (based on 2007 statistics).
While it is hard to make a straight comparison with existing benefits, because a variety of allowances may be available, the basic domestic purposes benefit for a single parent is $263 weekly (net), with a maximum accommodation allowance of $225, depending on the number of children in the family and the location.
