Scoop Election 08: edited by Gordon Campbell

On Treasury’s ideological hostility to film tax breaks

December 3rd, 2010

Treasury’s religious objection to tax breaks and the left wing’s objection to paying subsidies to US multinationals like Warners have converged in their joint hostility to the Large Budget Screen Production Grants Scheme. The tax breaks for the film industry have resulted, so the NZ Herald dutifully claims this morning, in a taxpayer ‘gift’ of $500 million spending in subsidies to Hollywood film and television studios in the past ten years.

Not quite so much prominence was given in the Herald report to the fine print that Avatar and King Kong alone pumped $200 million more money into the local economy than the entire cost of the LOTR tax breaks and LBSPGS payments combined. Not to mention that by 2012, the two Hobbit movies will have generated an additional half billion in local economic activity and jobs in the film industry and the wider economy.

To tot up that $500 million ‘gift’ figure, the Herald cites a $300 million figure for the LOTR tax breaks, which is over $80 million more than the highest estimate (my own: of $217 million, based on IRD and MED sources) published before, and even that earlier level had been hotly disputed by Peter Jackson.

This is before the Herald (or anyone else) has begun to try and calculate the benefits from skills development, the creation of a world class FX shop by Jackson in Miramar and the spinoff gains in video-gaming and graphics industries that have accrued over the past ten years. Ever since the state successfully – albeit accidentally and reluctantly – picked a winner, and offered tax subsidy support to the film sector.

In similar critical vein though, the Standard blog has (for once) invoked Treasury’s authority and analytical nous with a report headlined “Treasury Warned of Risks of Hobbit Hustle.” In recent months, Scoop and the Standard have been justified in slagging the government’s handling of The Hobbit negotiations. ( Eg, John Key claimed to have played ‘hardball’ with Warners but told them he would change our labour laws and pay more money, even before he started negotiating with them. It was a pitiful, embarrassing performance. See Tim Riley’s article in the current Onfilm magazine for a great overview.)

Yet that doesn’t mean anyone should be using Treasury’s atavistic hostility to tax breaks as a weapon to beat up on Key. Yes, Treasury did advise government earlier this year about its skepticism regarding the benefits of the LBSPGS. But that’s merely par for the course. Treasury has always opposed the scheme, since 2005 at least – and, as has been pointed out several times, those 2005 objections by Treasury were roundly condemned by Peter Jackson in his Film Commission review this year.

The reality is that Treasury has a Khmer Rouge attitude to tax breaks for the film industry, or for any other industry. It would rather scorch the earth than allow such noxious ‘trade distorting’ schemes to take root. The LBSPGS is particularly galling to Treasury because it has succeeded in practice when it shouldn’t have done so in theory. In its Year Zero zeal to roll back all successful examples to the contrary, Treasury is willing to insist that no ultimate proof of the benefits exists – its hard to see what would satisfy them – and therefore no such incentives be provided. It has thus been willing to grasp at any sceptical straw about the benefits of the LBSPGS, including shonky findings that the benefits were somewhere between negative and positive, in tens of millions either way.

Neither figure remotely equates with the actual structure and workings of the LBSPGS scheme. It was adopted in 2003 not, as the Herald falsely claims ‘in the hope it would stem the flow of hundreds of millions of dollars being claimed in tax losses for Hollywood productions’. It isn’t a scheme for writing off tax losses. That was the scheme it replaced. It is actually a scheme for creating a win/win situation where Hollywood gets a rebate for the actual production spending it has done here, to their and our mutual benefit.

That’s why successive Economic Development Ministers – and its not common for Jim Anderton and Gerry Brownlee to be united on any policy – have argued that the scheme’s benefits are self evident, because of the way it is structured. ‘We pay 15%, they pay 85%’ is how Brownlee defended the LBSPGS last year. Treasury’s February paper could hardly be more misleading:

In the February paper, officials argued it was not clear if the assistance provided significant economic benefits.

In terms of cost it sometimes exceeded support for tourism, one of the largest export earners, and support for private sector research and development of $47.4m “where the evidence of benefits to the wider economy is strong”.

Right. And for Treasury to reach that conclusion, you would have to add up the costs of the LBSPGS rebates, and ignore all of the related economic benefits as unproven, or negligible, or both. Invoking the alleged virtues of taxpayer funding of private sector R&D is particularly brazen, given that the taxpayer has been bankrolling the private sector’s R&D wrk for decades. As a result, we have one of the lowest private sector R&D spends in the entire OECD. If it was at all consistent, Treasury should be campaigning long and loud for the private sector to start paying its own way on R&D. Not a peep from Treasury on that point, though.

But to cut to the chase. Essentially, Treasury is willing to gamble – against all evidence from around the world to the contrary – that Hollywood studios do not need and will not seek such rebates and that major foreign projects will either come here for our scenery and low labour costs that exist here, or they will not come here at all. And if they do not come at all – which as Jackson said in the Film Commission review, will be the inevitable outcome – then at least Treasury will have restored our religious purity on tax breaks. It can then blame a sinful world for not living up to its high standards.

I don’t think the liberal left should be endorsing such thinking, in order to score a few immediate points against John Key, or Warners. All Treasury’s agenda has ever done is to lay this country open to foreign ownership and peon status within a low wage economy. Almost every other small country that has managed to escape from our chosen path of self destruction has done so not through free trade, but by promoting its own industries from behind protectionist walls, well before exposing them to the full glare of global competition. No one has developed export industries via the cold turkey measures advocated by the Treasury evangelicals.

In that sense, the tax breaks for LOTR were our version of South Korean protectionism, and they succeeded in getting our film industry – in the shape of Peter Jackson’s empire at least – off the ground. Because of their potential to ravage the revenue base, the LOTR style tax breaks were phased out and replaced by the far more benign LBSPGS. Those within .Treasury and on the left who oppose paying any money at all to Warners need to address the counter factual – and if they don’t care that the studios don’t come here at all to make their movies, then let them say so.

Paying Warners and its ilk is, or should be, only a means to an end. The advantages that accrue from having them here need to be leveraged, in order to foster a healthy local film industry. It is not an alternative to doing so, but the means of doing so. So far we haven’t done much in that direction, partly because the Khmer Rouge cadres in Treasury regard picking winners as sinful. They favour exposing our industry on an ice floe and seeing which ones survive. No matter that their prescriptions – cutting taxes, cutting tariffs, subsidies and wages, thus opening us up to foreign control – have failed dismally for the past three decades.

Why so? Because other countries don’t play by such simple-minded rules. Take China, for instance. Yes, it joined the WTO. Yet while we still bang on about tariffs and subsidies, China has deftly switched the basis of the game:

Once China became a member of the WTO in 2001, it could no longer rely on explicit tariffs and subsidies. So it began to promote its industries through an undervalued currency instead. China’s current-account surplus rose by leaps and bounds, stoking global macroeconomic imbalances and, with them, tensions in the US-China economic relationship.

Similarly, South Korea – the host of the G20 last month, did not follow the free trade path to development, as Cambridge University professor and trade expert Ha-Joon Chang pointed out only a few weeks ago:

Korea’s economy also benefited from relatively closed markets during the cold war. Professor Chang calls Seoul’s [current] call for freer markets “fundamentally at odds with how Korea itself developed.”

“In the early stages of economic development,” he says, “Korea used a mixture of protectionism, regulation of foreign investment, lax international property rights, and occasional use of state-owned enterprises in order to nurture and develop high productive industries like steel, automobiles, electronics and ship building which are now the main pillars of the Korean economy.”

The LBSPGS, I would argue, is our equivalent to that South Korean state support – a positive measure to attract foreigners to inject money into our economy on our terms for once, to stimulate economic activity and thereby build a local industry. As things stand though, the LBSPGS has been the one successful counter-example to Treasury’s litany of failures, which is why Treasury opposes it to relentlessly.

Thankfully, the government have now postponed a full review of the LBSPGS until after the next election. For years, successive governments have refused to be transparent about the net benefits of its film sector support programme. This secrecy has not been because it has been unsuccessful – it has arisen from Treasury fears that overt success would create calls for similar rebates for other industries, which would up-end the whole neo-liberal enterprise. Hopefully, the relevant figures will be open to public scrutiny when the LBSPGS is reviewed in 2012, but don’t bet on it – the old excuse of commercial sensitivity may be wheeled out. Unfortunately, Jackson’s credibility on this point has been destroyed by the rank self interest he was seen to pursue during the Hobbit dispute.

Still, someone credible is going to have to step up and press the case for the retention of the LBSPGS. Whatever their different motives, the conservative and left wing hostility to it would have the same outcome – the scheme would be scrapped, no major films would come here and the opportunity to build a local cutting edge, value added knowledge industry will have been lost. Yes, it costs money. But if you try and get something for nothing the chances are that nothing is what you’ll get.

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Murdering Iran’s Scientists

As the Wikileaks cables have shown, a military attack on Iran’s nuclear facilities by Israel is still very much on the cards. In the meantime, the Israelis seem to be following other options, such as the systematic murder of Iran’s nuclear scientists. The Stratfor intelligence site (usually friendly to Israel) suggests as much this week, while suggesting that Israel and/or the US may have had local help as well in carrying out the killings.

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    1. 2 Responses to “On Treasury’s ideological hostility to film tax breaks”

    2. By Andrew R on Dec 4, 2010 | Reply

      One underlying issue is whether Treasury are capable of giving non-ideological advice..I think it would need major changes for that to happen (again).

    3. By Karyn Scherer on Dec 4, 2010 | Reply

      Gordon, just a couple of points: the news article did not cite “a $300 million figure for the LOTR tax breaks”. It quite clearly says: “films such as LOTR”. I did, of course, talk to IRD and I am well aware that figure includes a couple of other films as well. As for the “stem the flow” comment, that refers to the Government’s intention, outlined in several Cabinet papers which I’m sure you’ve read as well, that the aim of the LBSPG was “limiting Government expenditure on film activity”. In the very next line I make it clear that what replaced the tax breaks was “rebates on expenditure” — a point, I agree, that few journalists seem to have grasped.
      I’m not one of those thin-skinned journos who dishes it out, but can’t take it, so I won’t quibble with some of your other points, but I’m guessing that you didn’t actually read the 5000-word feature that accompanied this article. I’ve always admired your work, but it’s okay – I don’t expect the feeling to be mutual.

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