The Prime Minister says she has bitten the bullet and stopped agreeing to Australia's recurring demands that New Zealand pay bigger and bigger shares of the welfare bills of Kiwis living in Australia.

But former Immigration Minister Aussie Malcolm, a former Australian, described the planned changes to the status of New Zealanders in Australia as a classic example of xenophobia and racism.

"Either we have a common labour market or we don't," he said. "You can't separate out the people working and paying tax from the ones looking for a benefit."

The Australian Government had been whittling away at the transtasman travel agreements since the 1970s and the changes were clearly linked to last week's comments from Australian Immigration Minister Philip Ruddock about "backdoor immigration."

This related to people from third countries who used New Zealand citizenship as a stepping-stone to Australia.

Mr Malcolm said Australia did not mind white New Zealanders settling there, but did not want Pacific Islanders or Maori, who were less likely to qualify for the new residency requirements.

Mr Malcolm said the New Zealand Government was now in the difficult position of deciding whether to retaliate and introduce tough rules for Australians coming here.

This would start a downward spiral of retaliation, from which neither country would benefit.

New Zealand Herald - NZ 'caved in' on changes by Australia (Tuesday June 05, 2001)

New Zealand buckled in to accepting big changes for Kiwis crossing the Tasman for fear of consequences from Australia, official papers suggest.

Officials believed Australia had not justified its case to change the social security arrangement, but feared that unless New Zealand gave in, damage to the relationship would spill into other areas.

And the Treasury argued that the moves would create "two classes of New Zealanders”.

"If New Zealand fails to satisfy Australia's concerns, we run the risk of souring the relationship," warned Don Greenfield, the manager of international policy and agreements in the Ministry of Social Policy.

"This 'immigration filter' will effectively create two classes of New Zealanders, those who hold Australian permanent residency and those who do not," a Treasury paper warned last July.

"The former will continue to have access to health, education and social security in Australia, while the latter will no longer be able to access social security and may have reduced access to health and education."

The ministry feared an underclass of New Zealanders could be created.