[A] Labour/Green coalition would have been ok 02-05 with the transfer of votes you discuss. If that had been the government, though, what would politics look like now? Would Labour, hijacked to the left, have been in contention for a third term?
The lesson Labour's current leadership has taken is that progress needs to be slow to endure, and that the failure to be patient destroyed the second and third Labour governments. Going in the wrong direction destroyed the fourth.
What would the politics look like if Labour had gone the other way? I'd have expected a greater commitment to civil and human rights and a restraint on Phil Goff, also less pissing about over Civil Unions. Economically, I think Cullen would have acted as a brake on the Greens just as he acts as a break on the tax-cutting impulses of United Future. Possibly a little more money and a slightly smaller surplus, possibly a quicker implementation of Working for Families, but not really a hell of a lot of change on that front. Labour is clearly delivering
I'm not sure about progress having to be slow to endure. How slow was the first Labour government to implement its programme? And how much of the fourth Labour government's blitzkreiged "reforms" have been rolled back? It's lasting more than one term so that things have a bit of time to settle down that seems to be important - but that's a matter of choosing which reforms to push through, and maintaining a public consensus behind the changes. The current government has one behind working for families, and seems to have one on the Cullen Fund as well; if it is re-elected, then both these policies will become the status quo, and the political cost of reversing them will be substantially higher. (I should also note that you can't maintain a public consensus if you make no attempt to build one. Labour's cravenness in justice policy is thus something of a self-fulfilling prophecy; they claim there's no public support for opposing the "hang 'em high" brigade, but part of the reason there is no public support is that sensible, mainstream voices like Labour haven't taken a stand. It's the same reason British (and NZ) food used to be so bad...)
Do New Zealanders want a more left-wing government? I think the consistent strength of Labour and the Greens in the polls show that they do. If we don't get one, it will be because Labour has abandoned its roots again, not because there is no public demand.