The public would demand more spending but pay less tax under binding referenda, Prime Minister John Key says.
Saturday's "March for Democracy" of up to 4000 people in Auckland called for the Government to implement the outcomes of referenda.
Protesters said the government had failed to respond to citizen initiated referenda on reducing the number of MPs, a more victim-centred justice system and amending the anti-smacking legislation.
Protesters also demanded the smacking law be changed so that a light smack would not be a criminal offence.
Mr Key said his position on the anti-smacking legislation had not changed; the law was working but he would react if that changed.
He said the wider idea of requiring the Government to implement referenda was unworkable, and had failed in California.
"California has that and that's why they're broke. People only vote for spending increases and they don't vote for tax cuts," he said on TVNZ's Breakfast programme.
"If you apply ACC to that everyone would sign up and say no levy increases a few years down the track we'd have a system that was completely broken."
Auckland businessman Colin Craig, who funded the march, said more marches may be held if the Government refused to engage.
"We are willing to take this campaign through to the General Election in 2011, if that is what is required," Mr Craig said.
NZPA