The ‘significant fiscal risk’ of Lord of the Rings subsidy

Treasury officials considered bending Government budget rules to accommodate the enormous cost of subsidising the new Lord of the Rings TV show.

This year, despite the mounting cost of Covid-19, $1 of every $20 of new Government spending in the Budget was set aside for film subsidies, which are uncapped.

Film subsidies are linked to the cost of the production – for every $5 a producer spends in New Zealand they get $1 back. So if a production is expensive, its subsidy will be bigger.

A paper from 2019, released under the Official Information Act, looked at the cost of subsidising the TV series through the NZ Screen Production Grant, an effective subsidy of the cost of producing films in New Zealand.

Treasury warned that some options for dealing with the high cost of the show could trash the Government’s strong pre-covid public finances, plunging its books into deficit and making a material difference to our treasured debt-to-gdp ratio.

Instead of picking either of these options, Treasury recommended an option that wouldn’t alter the deficit, or add to the debt pile. But this would only be achieved by making savings elsewhere. In other words, every dollar paid out to film producers would have to be taken from somewhere else.

And those cuts have been severe. The grant scheme has run massively over the budget envisaged in just a few years. In the 2017 budget the scheme was given $55m a year for the years 2017-2021.

But by 2019, the scheme already required topping up. An extra $155m was approved for the rest of that year. This year, the Government approved a further $206m.

To put that in perspective, the

money paid out to a handful of Hollywood films this year is only marginally more expensive than increasing benefits.

Upping benefits by $25 a week for people on jobseeker and emergency benefits is estimated to cost $283.6m this year. Upping benefits for sole parent support cost just $104m this year – half the amount set aside for film grants.

The reason for this out of control cost is that New Zealand’s film subsidy scheme is completely uncapped. That means if all of

Hollywood decided to move to New Zealand, taxpayers would have to fork out billions.

Understandably, this has Treasury spooked. It’s always classified the scheme as a ‘‘significant fiscal risk’’, warning that the uncapped nature of the subsidy was a danger to public finances.

With both Avatar and The Lord of the Rings drawing on the subsidy at once, that ‘‘significant fiscal risk’’ could be on the horizon.

So in September 2019,

Treasury took the extraordinary step of writing out a briefing on the different ways the Government could book the ‘‘sizeable grant payment’’ it would owe the producers of Lord of the Rings.

Treasury warned that the 2017 funding was ‘‘likely to be exhausted’’ and warned that additional funding would be needed each year until 2024 – the end of the forecast period.

Treasury pondered another way of booking the cost of the scheme. Treating the TV show less like ordinary government spending and more like NZ Superannuation, was one example.

Each budget, the Finance Minister works out how much new money they want to spend that year, called the operating allowance. The different ministers then put in bids for that pot of money with the Finance Minister having to make tough decisions about which bids are the most worthy.

Superannuation is different. It’s charged outside the operating allowance system. That means that the Minister of Social Development doesn’t have to go cap in hand to the Financeminister each year for more super funding from the allowance – it will come out automatically.

Treasury looked at this approach for The Lord of the Rings, but cautioned that coming in above the operating allowance ‘‘would directly impact OBEGAL and net core Crown debt’’. OBEGAL records whether the government is in surplus or deficit.