Teachers are demanding a 15 per cent to 16 per cent pay rise over the next one to two years.
The government is staunchly resisting. If it relents on the teachers' pay claims, it is likely to unleash a tsunami of public sector claims. So it can little afford to do so.
Teachers and other public servants have had almost a decade of meagre pay increases under a National-led government. The current government is the unfortunate recipient of this pent-up frustration.
The much-vaunted government budget surpluses were largely won at the expense of public servants and the quality of public services.
While inflation has appeared benign over the past decade (up 16 per cent), the reality is that the cost of essentials such as accommodation (up 80 per cent), rates, insurance and electricity have far exceeded wage increases over this period.
Inflation has been kept low by falls in the prices of non-essentials such as electronics and entertainment, but it has become much harder for the average Kiwi to pay the basic bills.
Teachers, nurses, police and many others have an uneasy feeling they have been going backwards, particularly if they prefer indoor living.
But there is a much larger theme underpinning public sector wage demands and this government's staunch response. It exposes a fundament faultline in our economy — a shared delusion about our economic reality.
We just aren't doing particularly well, despite what we have been told.
I have great sympathy for the pay demands of teachers and other public servants, yet their intransigence in their pay demands could expose the myth of the "rock star New Zealand economy".
This delusion stems from the myth of our apparent prosperity. This has been largely based on rising debt levels, mass immigration and housing inflation.
The statistics relating to household debt levels in New Zealand highlight the extent of this collective delusion. We have used borrowed money to bid up our own house prices thinking we are getting richer as a nation in the process — and this has been happily facilitated by politicians of all persuasions.
If the current government relents to the demands of teachers and other public servants, our economic success story could easily be exposed as a well-crafted fable; a very astute exercise in political marketing.
The question we should be asking is: "If we are doing so well, where are the new industries with heaps of well-paying jobs?" The answer is they don't exist.
Our economic growth over the past decade has largely been the result of an illusionary trifecta of mass immigration, ultra low interest rates and housing inflation.
There are no major new high-paying growth industries. Success stories such as Xero and A2 milk are well hyped minor players in the scheme of our wider economy, while tourism is generally a low-income industry.
There have been no surges in worker productivity or average pay rates.
Headline gross domestic prodict did grow at around 2 per cent or 3 per cent per year for a number of years. But that was because mass immigration meant there were more people living here and spending and generating more output and incomes.
Mass immigration also pumped house prices creating a feelgood wealth effect for home owners.
But, on average, we were little better off in our real incomes. Mass immigration is a steroid to headline economic growth but steroids aren't a long-term success story.
If this government relents and provides teachers and other public servants with double-digit pay increases, the likely outcomes will be a budget deficit and increased inflation.
The scenario from there will be higher domestic interest rates as the Reserve Bank raises interest rates to quell inflationary pressures. Higher interest rates will serve to further decrease housing inflation and wider demand in the economy. The economy will stall.
The public sector was the whipping boy for the previous government.
The frustration this created is now being unleashed on a supposedly sympathetic administration, but the current government is likely aware that catering to public sector demands could quickly unravel the New Zealand economic fable of the past decade.
They are on a hiding to nothing ... we are definitely living in interesting times.
Peter Lyons teaches at Saint Peter's College in Epsom and has written several economics texts.