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Treasury officials considered bending the government’s budget rules to accommodate the huge cost of subsidizing the new Lord of the Rings TV show.
This year, despite the rising cost of Covid-19, $ 1 in every $ 20 of new government spending in the budget was set aside for film subsidies, which are not capped.
Film subsidies are tied to the cost of production: for every $ 5 a producer spends in New Zealand, they get $ 1 back. So if a production is expensive, their subsidy will be higher.
A substantial portion of this year’s money will go to companies owned by Jeff Bezos, the world’s richest man, who is behind the latest Lord of the Rings adaptation.
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Bezos has had a good 2020; This year alone, it saw its net wealth increase by roughly a third of New Zealand’s total GDP: $ 75 billion (NZ $ 106 billion).
A 2019 document, published under the Official Information Act, looked at the cost of subsidizing the television series through the NZ Screen Production Grant, an effective subsidy of the cost of producing films in New Zealand.
The Treasury warned that some options to deal with the high cost of the program could ruin strong pre-Covid public finances, sinking its books into a deficit and making a substantial difference to our precious debt-to-GDP ratio.
Supplied
The new Lord of the Rings TV show will be expensive
Instead of choosing any of these options, the Treasury recommended an option that would not alter the deficit or increase the debt. But this would only be achieved by saving elsewhere.
In other words, every dollar paid to film producers would have to be taken from elsewhere.
And those cuts have been severe. The grant scheme has vastly exceeded the planned budget in just a few years. In the 2017 budget, the plan received $ 55 million a year for the years 2017-2021.
But by 2019, the scheme already required a recharge. An additional $ 155 million was approved for the remainder of that year. This year, the government approved another $ 206 million.
To put that in perspective, the money paid to a handful of Hollywood movies this year is only slightly more expensive than the increased profits.
Increasing benefits by $ 25 per week for job seekers and emergency benefits is estimated to cost $ 283.6 million this year. Increasing single parent support benefits cost just $ 104 million this year, half the amount set aside for film grants.
The reason for this runaway cost is that New Zealand’s film subsidy scheme has no limits. That means if all of Hollywood decided to move to New Zealand, taxpayers would have to shell out billions.
The very simple scheme. For every $ 5 a producer in New Zealand spends, they get back $ 1. Some lucky movies outperform even more. “5% increase” which means that for every $ 4 they spend, producers get back $ 1.
Understandably, this scared the Treasury. The scheme has always been classified as a “significant fiscal risk”, warning that the unlimited nature of the subsidy was a danger to public finances.
With both Avatar Y the Lord of the Rings taking advantage of the subsidy right away, that “significant fiscal risk” could be on the horizon.
So, in September 2019, the Treasury took the extraordinary step of writing a report on the different ways the government could reserve the “sizeable subsidy payment” that it would owe to producers of Lord of the Rings.
The Treasury has warned that the 2017 funds are likely to “run out” and warned that additional funds would be needed each year until 2024, the end of the forecast period.
A tax hobbit
The Treasury considered another way to account for the cost of the plan. Treating the television show less like ordinary public spending and more like New Zealand retirement was one example.
In each budget, the Finance Minister calculates how much new money they want to spend that year, which is called the operating allowance. Then the different ministers submitted offers for that pot of money and the Minister of Finance had to make difficult decisions about which offers are the most valuable.
Retirement is different. It is loaded outside the operational allocation system. That means the Minister of Social Development does not have to go hand in hand with the Minister of Finance every year to get more superfunding from the allocation – it will come out automatically.
The Treasury considered this approach for The Lord of the Rings, but warned that exceeding the operational allocation “would directly affect OBEGAL and the net debt of the Crown.” OBEGAL records whether the government has a surplus or deficit.
That means that the additional spending would have a direct impact on the government’s ability to run a surplus and its ability to keep its debt under control. The Treasury estimated that this option “would increase the central debt of the Crown”, but its estimate was written.
Another option that was considered was simply to increase the operating allowance however much it would take to pay the subsidy. This would also put pressure on the government’s ability to run a surplus and would have an effect on the Crown’s debt. However, it would come with the benefit of not having to block new government spending to pay for the cost of the film subsidy.
In the end, the government decided on the recommendation of the Treasury: to keep the operating allocations fixed and to make concessions with other government expenses to pay the film subsidy.
The Treasury warned that this “would reduce the room for additional spending in other areas” and “would require offsets.” This “would limit the government’s ability to fund other initiatives during the budget process.”
And concessions were made. Of the $ 3 billion operating allocation for 2020/21, $ 185 million was set aside for film subsidies, which equates to just over $ 1 for every $ 20 in operating allocation.
