Treasury Enters, Stage Right

Treasury, not trade unions, poses the biggest threat to film industry jobs

by Gordon Campbell

Thanks to a combination of accident, design and Sir Peter Jackson, the film and television sector has become New Zealand’s cutting-edge knowledge industry. That importance has been reflected in the government subsidies available to major Hollywood film projects, and in the extra millions handed out to The Hobbit project last year – even though that project never seemed in genuine danger of leaving these shores in the first place.

Given the support role played by the public – Michael Cullen once said that every taxpayer in the country deserved to get a free seat to the Lord of the Rings movies – the health of the global film industry is now of concern to every New Zealand taxpayer, and has been for a decade or more. While the industry has had bipartisan support from both the Clark and Key governments – and from politicians as ideologically diverse as Jim Anderton and Gerry Brownlee – the process is now at something of a crossroads. Long opposed by Treasury on ideological grounds , the main inducement that New Zealand offers to Hollywood studios – the Large Budget Screen Production Grants Scheme – is now slated for review. In the US ( see below) such schemes are coming in for strong criticism, and for equally strong expressions of support.

Almost un-noticed, the film industry is going through something of an identity crisis. DVD sales have plummeted worldwide, taking down with them the value of the back catalogue of major film studios. As mentioned, many American states are now querying whether their film subsidies are truly delivering value for money. At the same time, cinema attendance in the US appears to be in something of a death spiral. Evidence of the decline can be found in this January report by Box Office Mojo.

While 2010 may have been the second highest-grossing year of all time – largely due to higher ticket prices, especially for 3-D movies – profits were down on 2009. More to the point, estimated attendance figures for 2010 marked an eight percent drop from the previous year, making 2010 the first year since 1995 that audiences have fallen below the 1.3 billion mark. As the BOM report says : ‘Since the modern attendance peak in 2002 (1.58 billion), attendance has been trending downward, but 2010 marked the second severe drop-off, following 2005.” December is usually a monster month at the movies. Yet last December recorded the poorest cinema attendance figures since 1993.

Clearly, only some of this decline can be blamed on the recession. A poor slate of movies last December didn’t help either. The more worrying reality is that soaring prices for tickets, popcorn and parking are transforming the movies into an occasional luxury, rather than the cheap and regular night out it used to be. Should a film industry haven like New Zealand care about such trends? Yes. But aren’t the real bucks these days to be had in the ancillaries, like DVD sales and rentals [both of which are also on the slide] and in TV screening rights, toys and other merchandise ? Pixar is doing OK, isn’t it?

The disconcerting reality – for any country basing its industry support policy on the health of the movie business – is that fewer customers are paying more and more to go to the movies. To make reliable local comparisons on cinema attendance with the US is no simple matter. Yes, thanks to the same inflated prices for cinema tickets – and for 3-D tickets in particular, the bottom line for cinema exhibitors seems healthy enough. That’s partly due to the phenomenal success in late 2009 into 2010 of Avatar, which boosted overall revenues and almost single-handedly created a paying audience for 3.D films.

Overall the last two years have seen a small decline in cinema ticket sales in this country. The following figures are from the Motion Picture Distributors Association of NZ:

Year Attendance
2006 15,330,000
2007 15,358,000
2008 15,426,000
2009 15,317,000
2010 15,297,000

The other relevant concern is the global re-think about film subsidy schemes, as the recession bites into government revenues. Last month, the New York Times reported that several American states are now re-evaluating the worth of their film tax credits which – in Michigan’s case – have been ramped up all the way to 43 % of qualifying production expenditure. (New Zealand offers 15%, though with The Hobbit, the reality for that film is now probably more like 20%.]

Problem being, as the NYT says, it is very difficult to gauge the true net worth of tax support schemes for the film industry :

Studies about the efficacy of film credits, which became widespread in the last eight years, have been maddeningly divergent in their conclusions, depending on methodology, the structure of the credit and, sometimes, who sponsors the report.

There is a political reason why film subsidy schemes are now being looked at in a new and critical light.In New Zealand – the main subsidy scheme for major film projects was launched by a Labour-led government and inherited by a National-led government. Similarly, many film tax credit schemes in the 43 US states that now offer them were created in flush times by Democrats, and are now being re-evaluated by Republican governors facing a series of fiscal crises. When times are hard and belts are being tightened – so the argument goes – should Hollywood studios be at the forefront of the priority queue ?

Framed in those terms, the answer is an obvious “No.” That’s certainly the Treasury line here. Like those embattled Republican governors, our Treasury also brings to the table an ideological distaste for government subsidy programmes. For that reason, Treasury’s critics would argue that its bureaucrats are probably the last people who should be entrusted with evaluating the net value of the schemes. Moreover, New Zealand happens to be slap in the middle of a gigantic entertainment industry event heavily reliant on government subsidies – ie, the Rugby World Cup – and few officials or politicians would be game to pull the plug on that venture for not paying its own way upfront. Arguably, the same rules should apply to film subsidies.

To illustrate just how hard it is to evaluate the net worth of film and television subsidies, one can point to two wildly contradictory reports on such schemes in the past two months alone. One, from the East Coast of the US says they’re definitely not offering value for money. Another, from the West Coast, says they’ve been a lifesaver for jobs, incomes and communities in California.

A. The Treasury view.

First. the bad news. One major US report issued in December will be music to the ears of Treasury officials in New Zealand. The New York Times article cited above sets the scene :

Looking at the credits nationwide, a report released in December by the nonprofit Center on Budget and Policy Priorities pointed to a study done for the Massachusetts Legislature in 2009 that concluded film subsidies were costing the state $88,000 a job. A similar study for New York’s film office said government coffers were gaining $2,000 with each job created. Over all, the center’s report concluded that film subsidies offered “liitle bang for the buck.”

The Center on Budget and Policy Priorities report is available here,; and there’s an explanatory podcast speech by its main author Robert Tannenwald (pictured left) available here..

As might be expected in this hotly disputed field, Tannenwald’s study and analysis has come under heavy attack – as the NYT reports – for alleged failings in its methodology. Still, I wouldn’t mind betting that in the course of time, Treasury officials will be bringing Tannenwald and his colleagues to New Zealand, to lend them heavy ammunition for the department’s uphill battle against government ministers like Bill English and Gerry Brownlee. Not to mention against local experts such as Peter Jackson, who flatly rejected Treasury’s argument for scrapping film subsidies in the text of his Film Commission review last year.

At least one element in Tannenwald’s calculations – that studios can on-sell the tax credits, even if they don’t use them – is not the case with the New Zealand grants scheme. The other main strand in his argument, that film jobs are extremely mobile and that the highest paying film jobs are commonly captured by a highly mobile and international force of experts is also not highly relevant to the New Zealand situation. Our subsidies in fact, have helped Jackson build such a relatively stable production and post-production centre in Miramar that he has indeed captured many of the high-end benefits. Without that stable platform of subsidised skills, New Zealand certainly would be at the mercy of Hollywood studio whims, just as Tannenwald has found in other, less fortunate American locales.

Without the continuity of projects and employment created and maintained by Jackson, Tannenwald – and Treasury – would have a point. New Zealand would indeed be like those US states that offer tax sweeteners one month, and then bid goodbye to their dearly-purchased jobs a few months later. New Zealand’s success has been built on a merger between enterpreneurial skill and state support. Rather than oppose it, Treasury should perhaps be treating the film industry as a model and figuring out subsidy schemes that will replicate it in other New Zealand added-value industries.

B. The Anderton/Brownlee Line

As mentioned, the rationale for subsidizing the Rugby World Cup is the same as the one for subsidizing films like Avatar – ie, that the downstream benefits in terms of job creation, upskilling, tourism spinoffs and increased economic activity from the production far outweigh the refunds involved. Crucially, when it comes to the NZ film and television incentive scheme, the benefits precede the costs. That’s why Bob Pisano, the president of the US Motion Picture Association lobby group for film studios was able to argue in the same New York Times article that film incentives might well remain attractive even for states that are currently having budget problems, because they push the costs further down the road :

The credits create jobs and business and tax revenue quickly, but generally require “no cash payment on the credit until productions are completed and audited up to two years later,” Mr. Pisano wrote.

That seems the case in California which – famously – is going through formidable budget balancing problems at present. Even so, a recent report by Film LA ( a non-profit community organisation that helps to coordinate location shooting) indicates that film and television subsidies still offer value for money, especially when times are hard.

According to the Film LA report, California has seen a 15% increase in on location film production that has lead to an injection of an extra $US2 billion into Californian communities Related film crew wages paid out on incentivised film projects have been worth $US697 million – all of it since a film tax credit scheme came on stream in fiscal year 2009. The increase is directly attributed by Film LA to the beneficial effect of the film tax credits.

The sceptical – and those opposed to film tax credits – will always be able to deny a causal link exists between the tax credit and the subsequent economic activity. Obviously, the counterfactual is very, very hard to establish definitively. Would Avatar have come here anyway? Would The Hobbit have come here without any subsidies at all – and without the extra sweeteners gifted to the production by the Prime Minister? There’s only one way to find out, if you’re up for the risk.

True, we have lovely scenery here, and are now blessed with skilled crews and world class post production facilities. Even so, the onus of proof about film subsidies has shifted from the advocates to the deniers. If the subsidies were necessary before – and most observers accept that Lord of the Rings would not have been shot here without the tax breaks then on offer – surely the onus now falls on Treasury to prove convincingly why they are no longer necessary.

Would major film projects come to New Zealand without subsidies? That’s what the upcoming review of the LBSPGS will be asking. Around the world, there is a point reached where small nations who have successfully built up their essential industries behind protectionist walls and on the back of state subsidies – South Korea is the classic example – then decide that those industries are strong enough to go it alone.

Has our film industry reached that point yet? Hardly. In our case, the only counterfactual would be for the film industry to go cold turkey – as Treasury seems to want, judging by its 2005 report – and see what happens to the jobs, skills and economic activity involved. Thankfully, the LBSPGS review will be concluded after the experience that New Zealand will have had with the Rugby World Cup. The RWC should give us valuable insights into the role of state subsidies and their net benefits, after they have been married to entrepreneurial ffort.

Until then, the people who marched last year to defend The Hobbit should be keeping a keen eye on this debate. Because the main threat to major film projects coming here – with all that means for jobs, skills, wages and living standards – is not being posed by a trade union based in Australia. It is being posed by the NZ Treasury, based in Wellington. Get those placards ready.