UnitedFuture leader Peter Dunne's "willing buyer, winning seller" trade over spying laws failed, Labour says.
National has backed off a deal to review the treatment of private communications and metadata as part of an overhaul of privacy and spying laws.
The promise was made to Dunne in return for his crunch support for the controversial Government Communications Security Bureau (GCSB) bill.
At the time he said of the transaction: "When you have a willing buyer and a willing seller, you can always do a deal."
Labour's associate spokesman for the Security Intelligence Service, Grant Robertson, said the trade had "failed".
"New Zealanders are no better off in the protection of their data," Robertson said.
"If you are going to sell your political soul, you need to be more careful that he has been."
Dunne came under fire last year for backing a bill that beefed up the powers of the GCSB, in the wake of an illegal spying scandal.
Metadata from his emails and telephone calls had been supplied to the government-ordered Henry inquiry into the leak of a GCSB report into the scandal. His one vote ensured the legislation passed.
He justified his stance, saying he negotiated a "comprehensive work programme" to update the definition of private communications, including the treatment of metadata, across legislation including the GCSB and SIS Acts, the Crimes Act, and the Search and Surveillance Act. This was to take place as part of a review of 20-year-old privacy laws.
But a package of proposals was announced on Wednesday with no concession to Dunne's concerns.
Justice Minister Judith Collins said the issues listed by Dunne were on hold until work was complete and new privacy legislation was drafted.
Dunne, who was reinstated as a minister in October, said yesterday that he was "not happy" and would raise the matter with Prime Minister John Key.
Robertson said it was "farcical" to say the work was on hold.
"This is a complete failure of leadership in this policy area from the Government.
"It is a continuation of the behaviour that has led the public to no longer trust our security and intelligence agencies and that is why we have been suggesting a review, which is about in a large part rebuilding that trust.
"This is yet another example of why that trust is fading."
It emerged yesterday that spies had made another blunder, going "beyond powers" during a raid linked to an alleged assassination plot.
A former inspector-general of intelligence and security, Andrew McGechan, found an SIS officer overstepped boundaries when questioning former Fiji government minister Rajesh Singh in July 2012. Singh denied involvement in a plot to kill military leader Frank Bainimarama.
Officer A "warned" off Singh, saying such activities would not be tolerated by the Government.
Watchdog McGechan ruled that this kind of "planned disruption" was not within the scope of SIS functions, which were to gather intelligence, not enforce security.
It was "beyond powers", he said, and ordered the SIS to stop until it had sought advice from the Crown Law Office.
Key insisted the SIS "acted lawfully".
"I don't see it as a major."
Does David Cunliffe need to resign as Labour leader?Related story: David Cunliffe's leadership on the line