UPDATED 12.26pm: A public health group says most poverty is caused by a lack of money, not by a dependency on drugs.
The Prime Minister says drug dependency is a major contributor to New Zealand poverty.
But the Public Health Association is disputing John Key's claims.
This year's Child Poverty Monitor has revealed child poverty is up since the 1980s, with nearly a third of children experiencing relative poverty in New Zealand.
LISTEN John Key speaks with Leighton Smith about the report
The report, co-authored by the Children's Commissioner, JR McKenzie Trust and Otago University, shows that while 29 percent of kids are in poverty this year, in 1985 it was at just 15 percent.
John Key said a range of factors contribute to poverty, but he said every employer who tests people for drugs will have had prospective employees who failed the test.
"Some people are locked out of the labour markets because they're taking drugs and they're holding themselves back."
Key said very few New Zealand children grow up in absolute poverty, but he said poverty is real, and welfare dependency is part of the problem.
"We accept that you need more money which is why we were the first Government in 43 years to raise benefits, but you've actually got to break that cycle."
But Public Health Association chief executive Warren Lindberg said it isn't a major cause of poverty.
"Poverty's a very complex phenomena and you can't simply just dismiss it by saying 'if they gave up their booze it would be alright'," Lindberg said.
"Drug dependency may be a factor in poverty, but I would be very surprised if there was evidence to show it was a major contributor."
Labour's spokesperson for children Jacinda Ardern is furious the Prime Minister has come out with such a statement at Christmas time, and is challenging him to produce the proof.
"That is patently untrue, totally irresponsible and totally demeaning to the hundreds of thousands of families who are struggling but doing the very best by their children."
She said the comments are morally wrong.
"I think one of the reasons that we continue to really struggle to make progress on this issue that I know New Zealanders care about is because we have from time to time people like John Key coming in and making false statements to try and detract people's empathy away from these kids."