What happens when you scrap the welfare state?: New Zealand has, and its economy is stronger. But there is a dark side: - one in seven below poverty line - record numbers of people in jail - armed police on the streets - queues at charity 'food banks'

THE SCENE is Rotorua, on the North Island of New Zealand. It is summer, and this city of 60,000 people is bathed in brilliant sunshine. On the main streets, buskers play as shoppers come and go. In the distance, steam rises from the geysers at Whakarewarewa.

On the surface, it is what you would expect of New Zealand: peaceful, old-fashioned, respectable, perhaps dull, a country in which visiting Britons have often found both the virtues and the drawbacks of their own country 40 years ago. But look more closely at New Zealand today and you will find it is neither as peaceful nor as respectable as it seems.

Why does a squad of policemen, dressed in black as it moves among those shoppers in Rotorua, carry Glock automatic pistols? And why, in Wellington, are families scavenging at dawn through the rubbish bags outside supermarkets? Why is a breast-feeding mother taken into a public hospital in Auckland with her child for three days, but given no food during that time? Why, again in Wellington, do people queue for food for two hours outside a small, dark office? And why is the murder of the son of the country's richest industrialist regarded as something more significant than an isolated piece of misfortune?

'WHY GAZE into a crystal ball when you can read the book?' asked Aneurin Bevan in the Forties. His metaphorical 'book' was New Zealand. When Bevan and his Labour Cabinet colleagues were laying the foundations of the British welfare state - building Jerusalem, as they saw it - New Zealand had already completed its first decade of 'cradle to grave' social security. It has a proud history of being in the forefront of social change - it was the first country, for example, to introduce universal suffrage.

Now, New Zealand has achieved another first. Since 1990, the National (conservative) government has ended universal benefits, sharply cut the level of benefits and introduced means tests for health care. The aim, in the now familiar rhetoric, was to roll back the state and to remove the drug of dependency. New Zealand conservatives have already done what some right-wing British Conservatives, such as Peter Lilley and Michael Portillo, are threatening to do. The world's oldest welfare state has become the first post-welfare state.

What does the 'book' tell us? Everything that should be up is up: economic growth (now 3 per cent a year), consumption, investment, retail sales, farm income. What should be down is down: inflation (to 1.4 per cent) and unemployment (just above 9 per cent). Even the traces left by a long recession - the second-hand shops and the old Datsun Sunnys and Morris Minors - seem to give the place a jaunty retro air.

Everywhere, however, there are signs of a darker side to this change. You notice an old man whizzing along the footpath on an electric cart, braking at each litter bin to go through the contents. You read a furious media debate about a Methodist minister who says the theft of food can be condoned when a family is starving. (The fact that children are going hungry at all, in a country whose export wharves are groaning with butter, cheese, wine, apples and lamb, seems not to be an issue.)

And you see, around Christmas time, the armed police on the streets of Rotorua. It is explained that New Zealand provincial towns have suffered a wave of violent robberies. 'We are making sure,' said the acting district police commander, John Dewar, 'that bank tellers and shop assistants will enjoy Christmas with their families and not in hospital suffering shotgun wounds.' Other police authorities indicate they will follow suit.

Then you look at the figures. The numbers in poverty (as defined by a 1972 Royal Commission) rose from 360,000 in 1990 to 510,000 in 1993, about one- seventh of the population. Between 1990 and 1993 notifications of child abuse and neglect have increased by 60 per cent. The suicide rates for young males, at 38 per 100,000, are now the highest in the industrialised world. The daily prison muster has grown by 10 per cent a year, to 122 per 100,000. (Britain, the keenest jailer in Europe, locks away 98 per 100,000). And crime rates have soared, especially violence and burglary. A New Zealander is now more likely to be the victim of a crime than a citizen of any other country in the industrialised world, including the US.

The symbol of post-welfare state New Zealand is the food bank. It has become part of the social welfare structure; official social security clerks, accosted by the indigent, may direct them to the nearest food bank. At a typical food bank - in Cannons Creek, a state housing suburb of Wellington - the number of parcels given out per month rose from 89 in January 1992 to 1,200 in January 1993.

Yet food banks are run by volunteers and rely on donations - from the Salvation Army; from Anglicans, who parade into church carrying packets of rice and cornflakes; from supermarket shoppers, who can drop a spare can of peaches or baked beans into bins specially provided at check-outs. Charity being charity, there is never enough to go around, so a family may receive assistance only once every six weeks.

Typical of those who rely on the food banks is Averil Pairima, who lives in Wellington with her unemployed husband and five children. The local food bank is about 30 minutes' walk from their old weatherboard cottage. Before collecting their allocation, claimants have to be interviewed and their needs assessed, so there is a two-hour queue. 'We couldn't survive without it,' she says. 'The food's OK. There's baked beans - a lot of baked beans. Dried pasta. Flour. You might get a kilo of cheese. Bread the bakeries have given away. Marmite, honey, tea, sugar . . .'

Does she feel embarrassed, asking for free food? At first she did. 'But now it feels more comfortable to have a full tummy than my pride. But I know some people who won't go.' What happens to their families? 'They don't eat.'

THE NEW ZEALAND welfare system dates back to 1898, when pensions were introduced for needy old people - 11 years before Lloyd George introduced the first old-age pensions in Britain. In 1926, New Zealand brought in family allowances - 19 years before Attlee's Labour government did so. By 1938, New Zealand had the most comprehensive social security system in the world. Benefits helped ease old age, sickness, widowhood, orphanhood, unemployment and other exceptional circumstances. Medical and hospital care were free.

These benefits were available to everyone, from the richest to the poorest. The idea, in the words of a 1972 Royal Commission, was that all citizens should 'feel a sense a participation in and belonging to the community'. By 1984, however, New Zealand was troubled by rising unemployment and low growth. These were the Reagan-Thatcher years, when free market ideology was approaching its high-water mark in Britain and the US. In New Zealand, growing ideological pressure for change came from within the Treasury and from the Business Round Table, a group of 43 chief executives of leading companies, representing about 85 per cent of the country's stock market capitalisation.

In the next six years, a Labour Party government pursued a breakneck programme of the most comprehensive free-market reforms ever undertaken by a developed country. Prices, wages, the exchange rate and interest rates were set free, the financial system deregulated, tax rates slashed, government subsidies eliminated and state firms privatised.

The tenure of the head of the central bank was made dependent on his success in keeping down inflation. Government departments were handed over to 'chief executive officers' on private, fixed-term performance contracts who, in the marketspeak that now rules in New Zealand, no longer advise on policy but 'sell output', including advice, to ministers.

By 1990 only the welfare regime remained relatively untouched. This was the greatest prize of all, standing in the path of the 'true enterprise society' in which self-reliance and private initiative were rewarded.

In Britain, even the most right-wing ministers are nervous of attempting a full assault on the welfare state. When the New Zealand National Party was elected to power in 1990, it did not hesitate. Urged on by the Business Round Table, the Finance Minister, Ruth Richardson (her policies became known as 'ruthenasia') wielded the axe. The universal family benefit - the equivalent of British child benefit that has survived nearly 15 years of Tory government - was abolished. Unemployment, widows', sickness and single-parent benefits were cut by between 9 per cent and 25 per cent. The automatic right to an old-age pension was abolished and replaced by a means-tested pension.

Health care was also, to use a favourite new-right term, 'targeted'. For this purpose, the population is divided into three parts. On presentation of a community card (popularly known as the 'poor card'), those on the lowest incomes get free health care. A second group gets subsidised care. The third group - by far the majority - bears the full cost of doctors' visits (about pounds 15), prescriptions and out-patient charges. A daily fee for hospital beds had to be withdrawn in the face of public outrage, but long-term geriatric hospital patients are still charged dollars 1,000 a week.

The entire public housing stock was also thrown open to market forces. The rents on state houses - the equivalent of British council houses - had been pegged at 25 per cent of the tenant's income. They now rose to market levels. An accommodation supplement - like British housing benefit - was offered to those on low incomes, but this provided only partial compensation.

The Housing Corporation, which ran state houses, was reconstituted as Housing New Zealand, a commercially driven landlord required to make a profit but also to maintain a sense of social responsibility. When the businessmen hired to run it complained that these roles were mutually exclusive, the social service aspect was allowed to fall away.

People living in state housing - the poorest in the land - were thus hardest hit by the National Party's budgets. Because of the cuts in benefits, their incomes dived at the same time as their rents climbed. The proportion of their meagre incomes that went on rent rose from 25 per cent to between 35 and 50 per cent. The chairman of the MPs' committee that dealt with the housing bill said that those who could not afford the new rents should find cheaper houses in low-rent areas such as Twizel or Oamaru - the equivalent of telling council tenants in London to move to Consett or Dundee.

All sections of society in New Zealand have made sacrifices. A two-parent, two-child family in the richest fifth, it is calculated, has lost 3.3 per cent of its income. But a family of the same size in the poorest fifth has lost 20.9 per cent of its income - a far larger decline, in a far shorter period than anything suffered by similar sections of the population in Britain. In the pursuit of economic recovery and the enterprise culture, those with the least gave the most. And, as they did so, they disappeared below the poverty line.

If 'disappeared' seems too strong a word, it is true in that sense of 'belonging to and participating in the community'. Some disappear from the market-place, relying on the food banks. Some disappear from the streets and housing estates, departing to the caravan parks of south Auckland.

On a Thursday morning in East Tamaki, one south Auckland suburb, you notice a fat man and his three children at the bus stop, a little wooden structure covered in spidery graffiti. An hour later, they are still there, the bus having come and gone. With benefits pared to the bone and transport subsidies withdrawn, people do not lightly take the bus to town or to the beach. The bus stop becomes an outing in itself.

A Jamaican selling Rasta tapes in the shopping mall in Otara, another poor south Auckland suburb, summed it up. He had recently lived in Brixton, south London. 'Life is harder here,' he said. 'Less things to do. Less ways out.'

THE SON of the industrialist Sir James Fletcher, Jim, 49, was stabbed to death one night before Christmas when he disturbed intruders in the kitchen. Hours later, three suspects were arrested. They were Lewis Haeta Kapene, 24, an unemployed single parent from Te Puke; Tony Danny Walker, 19, unemployed from Otara; and a 15-year-old unidentified boy - all young people, Maori, living on state benefits in poor areas.

The murder had a harsh irony. Almost alone among the leading business figures in New Zealand, Sir James had argued against the government's severe monetarist policies with their social costs of unemployment and rising crime. But the government in New Zealand, like its counterpart in Britain, insists that these are not connected. 'The majority of unemployed people,' says a Justice Department briefing paper, 'do not commit criminal offences . . . the causes of crime are individual.' A district court judge vehemently disagrees: 'The two are unquestionably connected,' he said. 'If you could sit in my court and see them coming in, all unemployed, one after another, day after day . . .'

The department admits that the crime rate is soaring, though there are anomalies. It is actually falling among males aged 16 to 20, but among people aged 35 or over it has risen 33 per cent in the past five years. The overall prison population is climbing by 10 per cent a year, and sentences are getting longer. The seriousness of crimes is also increasing.

One obvious effect of this is the rising cost of policing, courts and the penal system, with new prisons being built, the police armoury updated and many more custodial staff hired. All the reforms of the past 10 years have been in the name of reducing the state, and yet it refuses to be reduced. Roll the state back there, and it rolls forward here - and in its most coercive form, as judge and jailer. It is as if the state is unable to change its size, but like a creature in a children's tale, can only change shape, now appearing with an apron and ladle, now with a muzzle and claws.

For the time being, the reform programme is over. The National Party took a hammering in last November's elections and now has a majority of just one seat. But there is the feeling that something irreplaceable has already been lost. For 40 years, New Zealand tried to build a civil society in which all its people were free from fear or want. That project has now lapsed. In its place is only a vague exhortation for individuals to go and get rich.

As you drive through the green and pleasant landscape of the lower North Island, the ramshackle towns - Woodville, Pahiatua, Eketahuna, with their glum faces and second- hand shops - seem to be, if not an open book, at least a placard, saying: 'Jerusalem now not to be builded here.'

(Photograph omitted)