Manufacturing the poor: How neoliberalism built the welfare state it loves to hate

Grant McLachlan
22 hours ago
18 min read

Updated: 22 minutes ago

How neoliberal governments manufactured the social crises they campaign against — and why beneficiary bashing is the oldest con in New Zealand politics.

1. Unemployment: The designed surplus

2. The 'Housing Crisis': A contrived Ponzi scheme

3. Homelessness: A health crisis masquerading as a housing statistic

4. The cost of living: Land, not supermarkets

5. Welfare capture: The state subsidising insufficient wages

6. Business Welfare: The unspeakable subsidy

A brief history of New Zealand's welfare system

The disingenuousness of beneficiary bashing

1. Unemployment: The designed surplus

Before 1984, New Zealand operated a full employment policy. The state was the employer of last resort. Rail workshops, post offices, hydro schemes, Forest Service gangs, and hundreds of other public enterprises absorbed labour that private markets could not or would not. In 1966, the unemployment rate sat at just 0.1% — and remained below 1% until 1978. The inefficiencies of that model were real. So was the social stability it created.

When Roger Douglas unleashed his reforms — deregulation, privatisation, the removal of import licensing, the floating of the dollar — the stated aim was to make New Zealand's economy more competitive and efficient. What followed was a mass redundancy event. Approximately 76,000 manufacturing jobs were lost between 1987 and 1992. Whole government departments were abolished or contracted out. The newly created state-owned enterprises immediately began shedding thousands of workers. Between 1986 and 1992, the unemployment rate rose from 3.6% to 11% — the longest recession in the post-war era. Māori, who were disproportionately employed in government-managed industries, saw their unemployment soar to 25% by 1992.

The effect on inflation was powerful, and deliberately so. A large reserve pool of unemployed workers suppresses wages. The Reserve Bank Act of 1989 formalised inflation targeting, but the heavy lifting had already been done by mass joblessness. Per capita GDP fell or stagnated every year between 1986/87 and 1993/94 — the longest such stretch in the post-war era — while inflation was credited to Reserve Bank independence rather than the mass unemployment that preceded and enabled it.

I previously documented this in detail: Dopey Economic Theory Causing Social Decline. The poverty that resulted from unemployment was staggering. The number of New Zealanders living in poverty grew by at least 35% between 1989 and 1992. Child poverty doubled from 14% in 1982 to 29% in 1994. Food banks, virtually unknown before the reforms, numbered an estimated 365 by 1994.

The deregulation of manufactured goods compounded the structural damage. Without tariff protection, New Zealand's light manufacturing sector collapsed. Towns purpose-built around freezing works, wool mills, or clothing factories became places of entrenched, multi-generational unemployment. Kawerau, which had near-full employment in the 1970s, saw hundreds of men and women laid off within two decades. These communities did not choose joblessness. Joblessness was chosen for them.

The removal of farming subsidies — often celebrated as a free-market triumph — delivered an equally severe regional shock. The national sheep flock peaked at 70.3 million in 1982. When the government abruptly removed all subsidies in 1985–86, returns for lambs fell by 50% and sheep numbers dropped precipitously to around 26 million today. Freezing works closed across the country. The rural towns that depended on them hollowed out.

Today's long-term unemployed are frequently framed as a workforce suitability problem — as if the issue is that they simply aren't good enough for available jobs. This misses the structural reality. New growth industries are geographically concentrated. They require digital literacy, professional credentials, or physical mobility. People whose families have lived in a provincial town for three generations because that's where the work was cannot simply relocate to Auckland's tech sector. The long-term unemployed reflect the immobility created by the deliberate destruction of regional economies — not a personal failure of will.

“We don’t have a real economy, we have a housing market with bits tacked on.” -Bernard Hickey

2. The 'Housing Crisis': A contrived Ponzi scheme

The phrase "housing crisis" is repeated so often it has become accepted as a natural phenomenon — a neutral descriptor of supply and demand imbalances. It is neither neutral nor natural. It is a manufactured narrative that serves the interests of a property-industrial complex.

Houses in New Zealand are being built at reasonable volumes. The problem is not that homes aren't being built — it is that they are being built as investment assets rather than as shelter for workers and families. Developers build where yields are highest. Investors buy to hold or renovate for capital gain. Owners leave properties vacant to preserve values in premium suburbs. The "crisis" is not a shortage of structures; it is a maldistribution of occupancy driven by tax and investment incentives that successive governments have chosen not to dismantle.

The infrastructure deficits cited in support of intensification tell a different story. In established suburbs with functioning water, sewer, and roading networks, intensification is demanded at the same time as infrastructure funding is deficient. The real pressure comes from the sale of state housing stock — which pushed low-income families into the outer suburbs — and from greenfield developments on the urban fringe that require entirely new infrastructure to be built from scratch.

The role of immigration policy in inflating the housing market has been explored in depth: The Immigration Tap: How National Turned a Housing Crisis into a Growth Strategy. The use of population growth as a substitute for genuine productivity gains meant demand was deliberately turbocharged without the infrastructure investment, wages policy, or land reform to support it.

The political economy behind the property development complex, and its capture of democratic processes, is examined in: New Zealand's Property-Industrial Complex: A Democratic Warning.

Queenstown provides a case study in miniature. A resort economy dependent on migrant and low-wage hospitality workers, where housing costs are driven by short-term rental platforms and absentee ownership by the wealthy. Workers are housed in garages, sheds, and cars. Essential services struggle to retain staff.

The consequences of unconstrained tourism-driven growth are examined in: Has Queenstown Exceeded Capacity? The housing problem there is not about supply; it is about who the housing stock is being built and priced for.

"Politics is the art of taking from those who will never vote for you and giving to those who might." -Grant McLachlan.

3. Homelessness: A health crisis masquerading as a housing statistic

Homelessness in New Zealand is routinely framed as a welfare and housing problem. This is a misdiagnosis that serves the interests of those who want to link it to benefit generosity or supply constraints. The primary driver of visible homelessness — the rough sleepers, people living in cars, the transient population cycling through emergency accommodation — is untreated severe mental illness.

Any frontline police officer will confirm that the single largest demand on their time is mental health response. The people they encounter repeatedly are not welfare recipients gaming the system. They are people whose conditions require institutional support that no longer exists.

New Zealand dismantled its asylum-based mental health care system in the 1980s and 1990s in favour of community-based care. The closure was more thorough than most comparable countries: by the late 1990s, all stand-alone psychiatric hospitals had been closed in favour of small inpatient facilities attached to general hospitals. The number of residents in psychiatric facilities fell from 350 per 100,000 population in the 1970s to about 50 per 100,000 by the late 1990s. The theory was sound: people with mental illness should be supported in their communities, not warehoused in institutions. The execution was catastrophic.

Community care required community resources — case managers, supported housing, crisis services, long-term medication management. These were chronically underfunded. As one director of mental health at the time recalled:

"We had been so busy concentrating on the concept of deinstitutionalisation that we had neglected the community care which must follow."

The institutions closed; the funding did not follow people into the community. The result is a population of severely unwell New Zealanders who cycle through emergency departments, police cells, and transitional housing.

Many in this cohort are also survivors of state abuse. The Royal Commission of Inquiry into Abuse in Care documented decades of systematic abuse in state institutions — psychiatric hospitals, youth justice facilities, care homes. Its final report Whanaketia, released in July 2024, concluded that between 113,000 and 253,000 children, young people and adults had been abused and neglected at state and faith-based institutions between 1950 and 1999. Survivors were left with profound trauma, addiction, and broken social connections. The current government's response to the Commission's 138 recommendations has been slow, and its financial exposure to the Crown considerable.

4. The cost of living: Land, not supermarkets

The cost of living debate in New Zealand has been captured by a single narrative: supermarket duopoly profiteering. The Commerce Commission's grocery market study and the subsequent policy responses have focused almost entirely on retail competition. This misses the structural driver.

Food is expensive in New Zealand primarily because land is expensive. The most productive agricultural soils in the country — the volcanic loams of Waikato, the plains of Canterbury, the river flats of Hawke's Bay — are being progressively carved up into lifestyle blocks, retirement villages, and suburban subdivisions. Every hectare rezoned from primary production to residential use increases the distance food must travel to market and raises the cost base of remaining producers.

Farmers are competing with developers for land. When land adjacent to a growing city can be sold for subdivision at several million dollars per hectare, the opportunity cost of keeping it in production becomes enormous. Land prices set by development activity flow into the cost of food production and, ultimately, into the price of groceries — regardless of how many supermarket chains are competing.

There is a further statistical distortion that compounds the problem. The Consumer Price Index purchase of housing measure tracks only the price of newly built homes, excluding the land. The prices of existing (second-hand) houses are explicitly excluded from the CPI entirely, on the grounds that resale transactions do not add to the housing stock. Stats NZ measures housing costs in the CPI through rental price movements and new construction costs — leaving the asset-price inflation that is the primary driver of housing unaffordability largely invisible to the measure that governs Reserve Bank monetary policy.

This is not an oversight. It is a structural choice that allows asset-price inflation to run unchecked while the Reserve Bank targets headline CPI. Those who own property benefit from rising valuations. Those who rent or aspire to purchase face costs that are not measured as inflation and therefore attract no monetary policy response. The CPI treatment of housing is one of the most consequential policy design decisions in New Zealand's recent economic history.

5. Welfare capture: The state subsidising insufficient wages

The most significant and least discussed welfare issue in contemporary New Zealand is not beneficiary fraud, long-term unemployment, or the cost of superannuation. It is "welfare capture" — the systematic supplementation of wages that are insufficient to meet basic living costs with government transfers paid to people who are in employment.

Working for Families, the Accommodation Supplement, childcare subsidies, and a range of other in-work benefits are now essential components of income for a substantial share of working New Zealand households. These people are in employment. They are doing the right thing by the dominant ideology. And they still cannot afford housing, food, and basic participation in society on their wages alone. As political analyst Bryce Edwards has argued, Working for Families "has become a subsidy scheme for employers who can't, or won't, pay adequate wages" — a form of corporate welfare that relieves businesses of pressure to raise pay by having the state top up their workers' incomes.

The Child Poverty Action Group has consistently argued that Working for Families is a flawed programme because it does not help the very poorest families — those on benefits — and that the income from work is "not in itself an incentive" if it needs to be topped up by the government to make it worthwhile. The accommodation supplement has a parallel perversity: it effectively allows landlords to raise rents knowing the state will cover the gap for low-income tenants, thereby entrenching high rentals rather than forcing market correction.

This is not a welfare problem. It is a wages problem — and a land prices problem. When the state supplements insufficient wages with public transfers, it effectively subsidises employers who pay below the real cost of living, while the real cost is inflated by property values that policy choices have encouraged to rise for the benefit of those who already own assets.

6. Business Welfare: The unspeakable subsidy

The welfare debate in New Zealand has a missing chapter. For every dollar spent scrutinising the benefit payments of the unemployed, the widowed, or the sole parent, billions flow through parallel channels to corporations, finance firms, struggling airlines, property investors, and the entertainment industry — with minimal public debate and almost no political hostility.

This is business welfare: the systematic transfer of public funds to private enterprise, dressed in the language of economic development, crisis management, and national interest. The ideology that insists the market knows best falls conspicuously silent whenever the market produces outcomes that are inconvenient for those with capital.

The New Zealand Screen Production Rebate is emblematic. The government provides a 40% cash rebate on qualifying domestic production expenditure, and up to 25% for international productions. Budget 2025 increased total baseline funding to $1.09 billion over the forecast period — with $250 million allocated in 2024/25 alone. Inbound productions have received $1.5 billion in rebates over ten years. The stated rationale is economic and cultural benefit. The operating reality is that the New Zealand taxpayer underwrites the production costs of international studios while the cultural product — and the intellectual property — flows offshore.

The rebate produces the peculiar spectacle of a government that insists benefit recipients must demonstrate hardship, work readiness, and continuous compliance, while simultaneously offering Amazon and Hollywood studios unconditional cash rebates worth tens of millions of dollars per production. The entertainment industry receives no lecture about dependency.

Public Private Partnerships represent a subtler but more pervasive form of business welfare. Under the New Zealand PPP model, the private sector designs, builds, finances, and maintains public assets over contract periods of 25 to 30 years, while the government pays availability-based fees throughout. The Treasury's own 2009 report concluded there was "little reliable empirical evidence about the costs and benefits of PPPs" and that "the advantages of PPPs must be weighed against the contractual complexities and rigidities they entail." The critical admission: PPPs attract a higher cost of capital than direct government borrowing, because private sector financing carries a risk premium that public borrowing does not. The difference is structural subsidy to the finance sector, compounded over three decades of availability payments.

KiwiSaver operates on a similar logic. The scheme is compulsory in practical terms, incentivised through employer contributions and government top-ups, and channelled into funds managed by private financial institutions. Fees compound across millions of accounts over decades. KiwiSaver is sound retirement policy — but it is also a legislated revenue stream for the finance sector, funded partly through compulsory worker contributions and partly through direct Crown subsidy.

Regional development grants and investment funds have directed billions into the provinces under successive governments. Kānoa — the Regional Economic Development and Investment Unit — has administered more than $4.2 billion across over 1,700 projects since 2018, including $3 billion through the Provincial Growth Fund and a further $1.2 billion through the Regional Infrastructure Fund from Budget 2024. These investments have genuine regional value. They also represent capital flows to private enterprises that the market had not found viable — a fact never acknowledged by those who simultaneously oppose wage subsidies or benefit increases.

The Covid-19 pandemic stripped away the remaining pretence. The wage subsidy scheme became the largest single transfer of public funds to private business in New Zealand's history.

Between March 2020 and December 2021, the government paid out approximately $18.8 billion to 1.76 million jobs across five subsidy waves. The scheme used a high-trust model — businesses self-declared eligibility and were paid within days, with verification deferred or absent. An Auditor-General's report noted that billions may have gone to ineligible recipients. Small Business Cashflow loans added a further $2.3 billion. No politician demanded that business owners demonstrate work-readiness, update their CVs, or prove they were actively seeking customers.

The government also stepped into the role of insurer and property buyer following natural disasters. After the 2010 and 2011 Canterbury earthquakes, the Crown initiated voluntary buyouts that ultimately acquired and demolished more than 8,000 residential properties across 630 hectares of red-zoned land, priced at 2007 rateable values. The total insured cost of the earthquake sequence exceeded $31 billion, with the Earthquake Commission — a Crown entity — bearing a substantial portion. The government became, in effect, the risk underwriter of last resort for an entire property market.

The most explicit case of business welfare is the nationalisation of Air New Zealand. Privatised in 1989, the airline was bought back by Helen Clark's Labour Government in 2001 for approximately NZ$885 million after the collapse of the Ansett Australia acquisition left the carrier insolvent. The government took an 82% stake. Private shareholders — including Singapore Airlines — lost almost everything. Taxpayers absorbed the risk. The airline was bailed out again during Covid-19 through government credit facilities. As one commentator observed, Air New Zealand "most certainly would be bust right now over Covid if the Government had not extended credit". The case is routinely made that New Zealand cannot function without its national carrier. That is probably true. But it is also an argument for permanent state ownership — not for the selective socialisation of losses while privatising profits in the good years.

Finally, the government is also the economy's largest single investor. The New Zealand Superannuation Fund — the Cullen Fund — holds more than $70 billion in assets and invests in infrastructure companies, energy projects, and commercial property. ACC, likewise, is a major institutional investor in the domestic market. Together, these Crown entities allocate vast pools of compulsory savings into the private economy, providing patient capital that no private investor would otherwise supply at those terms. This is not a criticism; it is an observation that the state is already deeply embedded in the so-called free market — as risk absorber, as insurer, as financier, and as investor of last resort.

The selective outrage about welfare dependency becomes harder to sustain when the full picture is visible. The beneficiary who receives $350 a week in Jobseeker Support is subject to constant scrutiny, work obligations, and public condemnation. The production company that receives $30 million in screen rebates is celebrated as proof that New Zealand is open for business. This is not a principled distinction. It is class politics dressed up as fiscal conservatism.

To understand how we arrived here, it is necessary to briefly trace the history of the welfare state and observe how each expansion of the system responded to a real social need — and how those needs were often created or exacerbated by policy choices.

A brief history of New Zealand's welfare system

The welfare state did not emerge from socialist ideology. It emerged from practical necessity — the recognition that a modern market economy, left entirely to itself, produces outcomes for some of its participants that are incompatible with a functioning society. For example, faced with a concerning number of single and elderly former miners in his Kumara electorate with no family support network, Premier Richard Seddon introduced the first old-age pension in 1898.

Each of the following programmes was introduced in response to a specific social condition:

Benefit / Programme	Year	Notes
Old-Age Pension	1898	Means-tested pension for those aged 65+, introduced by the Liberal Government. Non-contributory; aimed at the "deserving poor."
Widows' Pension	1911	Targeted support for women with children who had lost their husbands. Extended state welfare beyond the elderly.
Blind Pension	1924	Income support for those unable to work due to blindness.
Family Allowance	1926	Small payment for low-income families with three or more children.
Unemployment & Sickness Benefits	1938	Cornerstone of the First Labour Government's Social Security Act. Established the modern welfare state alongside the Health and Family Benefit.
Universal Family Benefit	1946	Extended family benefit to all families with children under 16, regardless of income. Replaced means-tested allowances.
Accident Compensation (ACC)	1974	Wage-related compensation for those incapacitated through accident, regardless of fault. Removed the need to sue for personal injury.
Domestic Purposes Benefit (DPB)	1973	Support for sole parents (mostly women), women alone, and full-time carers. Followed a Royal Commission of Inquiry.
National Superannuation	1977	Universal pension at 60 years (later raised to 65), replacing the means-tested Age Benefit with a pay-as-you-go scheme.
Accommodation Supplement	1993	Introduced post-1991 benefit cuts to assist with rent, board, or mortgage costs as state housing stock declined.
Working for Families (WFF)	2004	In-work tax credits and family support for working and low-income families. Acknowledged that wages alone were insufficient.
KiwiSaver	2007	Voluntary but incentivised retirement savings scheme; partially state-subsidised via employer contributions and government top-ups.
Jobseeker Support	2013	Reformed and consolidated Unemployment Benefit, Sickness Benefit, and parts of DPB into a single work-obligation-focused payment.
Best Start Payment	2018	Universal payment for parents of newborns for the first year, then income-tested. Part of the Families Package.
Sole Parent Support	2013	Replaced DPB for sole parents with children under 14, with increased work-readiness obligations.

The pattern is clear. The welfare state expanded to fill gaps created by economic change, demographic shifts, and — most significantly — policy decisions. The DPB was not introduced because women wanted to be single parents; it was introduced because marriage breakdown was rising and there was no other mechanism to prevent child poverty in female-headed households. Working for Families was not introduced because workers were lazy; it was introduced because wages had fallen relative to costs and working people could not support their families on earned income alone.

Sources: Welfare in New Zealand — Wikipedia; History of the Welfare State in New Zealand — NZ Treasury; Social Security Act Passed — NZ History; DPB Legislation Enacted — NZ History; Family Welfare — Te Ara Encyclopedia; Working for Families — Wikipedia; History of Welfare in NZ — Maxim Institute.

The disingenuousness of beneficiary bashing

The right-wing critique of welfare spending rests on several assumptions: that beneficiaries are largely there by choice, that the system is a disincentive to work, that spending on welfare crowds out productive investment, and that tougher conditionality would reduce rolls and costs. Each of these assumptions is empirically contestable, and each ignores the structural conditions that produced the welfare state's expansion.

Unemployment was not caused by generous benefits. It was caused by policy choices that deliberately destroyed industries and created a labour surplus as an anti-inflation tool. New Zealand's economy grew by just 4.7% between 1985 and 1992, a period when the average OECD nation grew by 28.2%. Long-term unemployment in former manufacturing towns is not a personal failure; it is the predictable legacy of deindustrialisation without transition support.

Housing unaffordability was not caused by building consents or Council bureaucracy. It was caused by tax and investment policy that converted housing from shelter to asset class, combined with immigration policy that turbocharged population growth without the infrastructure investment or wage reform to match.

Homelessness is not caused by benefit generosity. It is caused by the dismantling of mental health services and the failure to adequately fund community-based alternatives. New Zealand carried deinstitutionalisation further than most Western countries, closing all stand-alone psychiatric hospitals without building the community infrastructure to replace them.

The cost of living is not primarily caused by supermarket oligopolies. It is caused by land price inflation driven by property investment incentives and the progressive loss of productive agricultural land to development on urban fringes — combined with a CPI that is structurally blind to asset-price inflation.

And welfare capture — the most expensive and most ignored issue — is not caused by welfare dependency. It is caused by an economic model that has consistently produced wages insufficient to cover the real costs of living. New Zealand Superannuation, Working for Families, and the Accommodation Supplement between them reach the majority of New Zealand households — not because New Zealanders are dependent, but because the market economy has been structured to require state supplementation at almost every income level.

"The architects of those reforms, and their ideological descendants, now campaign loudest against the very conditions they engineered."

Beneficiary bashing is not a policy. It is a distraction. It focuses public anger on the most vulnerable recipients of a system designed to manage the social consequences of deliberate economic choices — choices that predominantly benefited the already-wealthy. As long as that distraction works, the structural causes remain unaddressed, the rolls remain stubbornly high regardless of conditionality, and the costs continue to rise.

The efficiency of the welfare system is not measured by how many people it removes from rolls through punitive work requirements. It is measured by how effectively it prevents the social disintegration that unmanaged market capitalism reliably produces. By that measure, an honest accounting would ask not why the welfare state is too large — but why the economy it supports continues to fail so many of the people within it.