An inquiry released in July found that 362 children who did not have any form of mental illness were subject to unmodified electroconvulsive therapy or paraldehyde injections at the Lake Alice Psychiatric Hospital Child and Adolescent Unit between 1972 and 1978.
It found that instead the children and teens were abused for punishment and emotional control.
"It is never possible to right or compensate for the torture of children," Erica Stanford, the minister leading the government's response to the inquiry's findings, said at a press conference on Wednesday.
Erica Stanford acknowledged it's impossible to compensate for the torture of children. (Mark Coote/AAP PHOTOS)
"Cabinet has agreed to recognition to those remaining survivors for the torture that they suffered in the care of the State."
Compensation for those still alive would come in three parts - a one-off payment, a new written apology that acknowledges torture, and facilitating access to support and rehabilitative services, Stanford added.
Survivors will be able to choose an expedited payment of $NZ150,000 ($A136,336) or to have their individual claim assessed by an independent arbiter who will decide on the amount.
The government said it has set aside $NZ22.68 million ($A20,611,584) for the redress and the operating costs associated with the process.
Stanford said there would be people who would be disappointed with the amount and added there were some survivors who were expecting millions.
"We knew it was never going to make up for what happened," she said.
She added that this decision was "completely independent of any decisions about the future redress system for abuse in care".
The inquiry also found that some 200,000 children, young people and vulnerable adults were abused in state and religious care between 1950 and 2019.
Those from the Indigenous Maori community were especially vulnerable to abuse, the report found, as well as those with mental or physical disabilities.
The government publicly apologised in November and it is expected that some efforts to financially redress the impact of this would also be made.
