Wednesday 18 December 2013

Picking winners

Treasury's comments in Cabinet Papers on the expansion of the film subsidy scheme are blunt, and rather likely right.
Treasury Comment 
96. Treasury does not support any further subsidies for the film industry. The two evaluations of the current subsidy regime show at best small economic benefits, with limited evidence of spill-over benefits within the film industry, tourism and New Zealand in general. Further subsidies will only increase costs and offer weak benefits. The 2011 evaluation indicated that the LBSPG delivered net economic benefits of $13.6m over the 7 years 2004-2011, at an annual rate of return of less than 1%. In addition, the 2011 evaluation is based on generous assumptions about premiums paid by large productions on goods and services. The current regime is also estimated to have had an overall negative fiscal impact of $168m once tax revenue that would have been earned anyway is taken into account.  
97. Other jurisdictions are offering large subsidies to attract films and further New Zealand subsidies will simply add to this cycle and future demand for larger subsidies. Permanently matching overseas subsidies to generate activity in New Zealand is not a sound basis for economic development policy and favours the film sector over other industries. 
It doesn't seem implausible that Lord of the Rings provided a tourism boost. The sales job provided by the films probably even made it easier for me to convince Susan that we should move here. But boy does that seem the kind of thing that would be hard to replicate.

Why can't the TPP include a line "None of us will provide any treatment for the film industry that differs from that which is provided to every other industry"?

We're helping to make things worse.

HT: @Economisive

Posting has been light as I am between offices. The open plan sheds we've occupied since July 2011 were packed up late last week for a move into our new offices in the refurbished law building. We were supposed to have moved in on Tuesday. But the building isn't ready. And so I'm between offices until, they now expect, 6 January. Happy holidays folks.


  1. Totally agree that it would be much better if nobody offered the film industry any kind of subsidy. New Zealand would then have a very good chance of winning a slice of this business on its real merits as a location and home of talent.
    However, that is not an argument for New Zealand disarming first; there's no first mover advantage here. Nor does it seem that an agreement in the TPP would help much, since a lot of the competition these days seems to be from eastern Europe. I think it was Slovenia that looked so fantastic in "Prince Caspian", for example.

  2. Yes, some tourism impacts from LoTR.

    'Come and see the greenscreen and computers Avatar 2, 3 and 4 was made with' isn't much of a tourism strategy.

  3. Elinor. Imagine that it was possible to grow bananas in New Zealand if we spent enough on expensive greenhouses to replicate tropical conditions (I suspect this is the case, but if not run it as a hypothetical). And with sufficiently high subsidies, it would be economically viable for a banana industry to exist. But I presume you would agree that it would be better to import cheap bananas from tropical countries. Now what if we discovered that the reason tropical countries were able to grow bananas cheaper than we can was not because of geography but because their industries were massively subsidised by their governments. Would that imply that we should subsidies our banana industry or would it not matter for us what the source of their cost advantage was?

  4. Exactly. And promo materials in DVD packages / special features is pointless where everybody's shifting to streaming.

  5. If it took a $1 subsidy to have the bananas grown here?
    If it took a $100trillion subsidy?

    The issue is price.

    Your banana example assumes it is high.

  6. Happy holiday to you also Eric.

    I would caution against thinking, as many people do, that Treasury are always right. They are not, and in many cases they talk about stuff they know little about. While I agree in general that we should not subsidise business activity, I wonder if this sort of activity (Avatar) is different (and whether Treasury factored in the spend of $500m in their thinking). As in - James Cameron is going to spend $500m somewhere - if we the taxpayer give him 20% of it back. So, presumably $400m stays in the country. If we do give him the 20% he takes the $500m elsewhere. This does not sound like a bad thing really.

  7. I think Treasury's right on this one.

    First off, spending isn't the right measure. You could get some measure of "profits earned on spending by Avatar etc net of what would have been earned anyway because surely some of this is just displacement" and use that as a measure of benefit - and it'll be much smaller than total expenditure. But even there, we have to worry about the dynamic effect and interaction with other regimes who are also running the same game.

  8. I agree that spending is not the right measure, what really matters is what is actually spent in NZ (say on wages for locals or on local goods) that does not go quickly out of the country again. And I dont know the figures on that one. And even if another regime ups the ante, does that matter - we will still have had the $500m from your countryman? One place where I think Treasury are wrong is regards the tax earned anyway - I observe that large numbers of filmy type people have now left the country - they are are paying tax to someone else!

  9. Not a good analogy. In fact its so bad I hardly know where to start. If someone else said, from Canada say, I want to come to NZ and spend $500m in your country to make fancy glasshouses. But I want you to give me $100m after the glasshouses are built and the money spent - would we agree to that? We might - and then who cares where we get our bananas from - the market can decide that

  10. If that Canadian hires a local away from some other employment, would you count all that employment spending as subsidisable benefit? What if they can only afford to hire away the worker from the existing company because of the subsidy?

  11. I really should go and read all of what Treasury said. Agree with the point you make - but would want to know if that local person was truly local, or someone who would go overseas otherwise (amd this has been happening - you can see it in Wgntn, and I am told the same in Auckland). In the 'globalised' economy we have to play by the rules that others play. James Cameron can take his films anywhere to be made, the people who work on those films ply their trade anywhere also.

    I dont buy the argument about we need a local film industry as a reason for giving the subsidy, but am open to the argument that any firm can/will negotiate on the price its big customers pay, if those customers can take their business elsewhere.

  12. I agree, VMC; that's a rubbish analogy. New Zealand's advantages as a film location aren't artificial constructs brought about by politics and subsidy, they are real - excellent scenery, talented and skilled locals. We're actually the equivalent of the tropical country that finds itself deprived of its natural competitive advantage in banana-growing by some other less geographically-favoured country subsidising itself into banana produceability. We can level that playing field at less expense than they've had to incur. Certainly it would be better if they hadn't incurred it at all, but since they have it's hard to see where the advantage is in letting them win on that basis.