This year we are seeing a number of instances of governments attempting to raise their revenues by "instructing" the organisations that they own to increase their dividend payments. This is just a tax by another name.

In some cases it's quite explicit, such as the Auckland Council requiring Ports of Auckland to "double its dividend from a 6 per cent rate of return to 12 per cent over five years" (Auckland port expansion plan put on hold, 7 March), and central government "expecting" Housing New Zealand to double its 2010/11 dividend in two years ("Put on hold then cut off: brave new world of Housing NZ's call centre", NZ Herald, 7 March). In other cases such in the pressures being placed on the Ministries of Police and Foreign Affairs, the cost savings required are equivalent to the imposition of a dividend requirement.

Legally, an enterprise's profit is a surplus, what's left over from revenues once costs have been paid. Thus dividends, the distributed part of that profit, can be expected to vary considerably from year to year, given the variability of such surpluses.

In reality however, the requirement from shareholders for dividends is not unlike the requirement of labourers for wages. Economists understand that dividends really represent part of firms' costs. This is most true where firms are large and have a single controlling owner. That is, this is generally true of firms which are "public" in either sense of that word; listed on the stock exchange, or owned by a central or local government authority.


Governments are under pressure to treat the enterprises they own as cash cows, especially when they need to raise taxes (or rates) but are under strong political pressure not to do so. In the case of the Auckland Council, the much-needed improvements to inner-city rail have to be funded somehow. In the absence of central government support, the Council's obvious targets are the businesses that it owns.

What it means is that organisation like Housing New Zealand and Ports of Auckland are having a substantial additional cost imposed on them, while having to accept revenues set in the marketplace. Thus, if one cost (the dividend) is ratcheted up, to compensate other costs must fall more than they otherwise would; hence the campaign to increase labour productivity.

Genuine labour productivity increases are a good thing, especially when they enable workers to receive higher incomes. Historically, productivity increases happen organically, rather than on command, as new knowledge is incorporated into business practice and as new techniques are adopted.

When authorities command productivity increases, something else tends to happen. Workers get paid less for doing more. Or they get paid a little bit more per week on average, but only by being available for many more hours. And inexperienced workers barely get a look in, or are hired for wages and conditions substantially inferior to those their elders first experienced.

Essentially the costs are transferred (economists say "externalised") rather than saved. Productivity might appear to increase within the individual organisation, but does not increase through society as a whole. We simply change the incidence of who bears the costs. Housing New Zealand tenants get a reduced service, and employees are expected to work longer and more uncertain hours.

It would be much more transparent, efficient and equitable for governments to simply raise taxes, than to go down this cash-cow dividend-raising route.

Further, the dividend-raising route is open to many privately-owned firms, and of course firms being prepared for privatisation. Pike River Coal clearly had significant shareholder expectations in the face of constrained revenues. Safety appears to have been compromised, as cost transference to workers, in the face of shareholder requirements.

Incidents in the last few years at Qantas also lead to the suspicion that safety may have been compromised by shareholder requirements.

Air New Zealand and Solid Energy are two companies that could easily be under pressure to compromise safety and other reduced conditions of work, as the government wishes to raise their dividends as these enterprises are prepared for sale. Indeed it may only be the Pike River tragedy that has prevented Solid Energy from already having to go down this route.

I'm guessing that the government will sell a minority share in Mighty River Power (with Tainui as a significant purchaser), and then abandon its plans to sell Genesis and Meridian. If it consistently follows its new strategy, in lieu of tax increases the government will place ongoing pressure on Genesis and Meridian to return ever higher dividends.

In such an event, and in the absence of the kind of competition facing Ports of Auckland, a cash cow strategy will lead to higher power prices and to windfall profits to the likes of Contact Energy, already privatised.

The government should come clean, admit that it's running an austerity programme, and raise the taxes of those who can afford to tighten their belts. Or, better still, encourage an open debate about whether austerity programmes actually achieve anything, other than making the fiscal problem worse. The Herbert Hoovers and George Forbes of this world, known for depression era retrenchment policies, grace the history books as by-words for failure.

* Keith Rankin teaches economics at Unitec.