Subsidy-palooza

GDP-to-Debt ratio by government locale

I post a bit about government film subsidies. It’s a major reason VFX work goes to places like New Mexico, Canada, UK, and other locations. I’ve also written that US trade law experts question the legality of international subsidies for US studios.

Supporters often point out that these subsidies lead to greater tax revenue and jobs for the people but if that is so true then why are governors in Michigan and New Mexico trying to get rid of them? Even other states like Georgia and Pennsylvania are starting to face the music. Michael Kinsley of the LA Times thinks the idea behind them is totally absurd:

The appeal of the movie industry to beleaguered state treasurers, in addition to its glamour, is its mobility. There are no huge factories. Regardless of where the movie is supposedly set, it can be shot almost anywhere. And it will employ locals and spend money.

But mobility giveth and mobility taketh away. Pit the states against one another and the subsidies will inevitably become more generous and less effective at the same time.

I’ve said so often that the danger for vfx markets to rely on subsidies is that they are the first to get cut and that’s exactly what is happening. For New Mexico and Michigan, the choice is either to cut education and healthcare for the poor or cut the subsidy so compromises are being made.

On the international front, while UK VFX houses boast how well things are going, Tim Adler at Deadline reports that things may have peaked for the film industry in the UK:

the European Union wants to clamp down on the local 20% tax break designed to tempt Hollywood to UK shores. It’s all part of the EU’s drive to stamp out competition between European countries in favour of the single market.

Funny, I get labelled a racist for calling international subsidies unfair and illegal, yet neighboring European countries are also having issues with them. The last time a group of Brits were boasting how great the UK film industry was doing it was the UK Film Council and they got the axe the very next month.

Many point out that California is in too much deep shit to provide subsidies but lets look at some numbers.

California’s Problems Are As Bad As Everyone Else

In 2009, California had a budget deficit of a whopping $135 Billion! California might as well commit suicide right?

Well if you had $135,000 in credit card debt you would probably do the same. However, what if you had an income of $1.9 Million? Not so bad right?

The debt-to-GDP ratio is usually the best way to measure a country or state’s fiscal health. While California has a budget deficit of $135 billion, it’s GDP was $1.9 Trillion:

A debt-to-GDP percetage of 7.12%.

Now the deficit is nothing to sneeze at. It needs to be taken care of because it grows every year. So there has to be a tightening of the waste.

New Mexico Problems

This is the reason why New Mexico is discussing cuts to it’s film subsidy. In 2009, New Mexico had a deficit of $8 billion and a GDP of $76 billion.

That’s a debt-to-GDP ratio of 11%: That’s higher than California’s.

What about the UK?

It offers lucrative film subsidies to lure vfx work from US studios. They have a comparable GDP with California of £1.4 Trillion. Their deficit is £950 Billion!

A debt-to-GDP ratio of 68%!

What about British Columbia?

Of course no discussion about film subsidies is complete without the city of Vancouver and it’s province of British Columbia which boasts one of the largest film subsidies in the world. It’s 2009 GDP was $188 billion. It’s deficit? $42 billion.

That’s a debt-to-GDP ratio of 22%.

Just to give you a comparison of how hefty the debt burden is on a per person basis, California has the highest in the country with $1805 debt per person. British Columbia’s is $9401 per person!!

It’s no surprise that current projections of a $53 billion deficit are an  alarming cause of concern.

The Subsidies Will Not Last

I’ve said that in the VFX industry, if you live by the subsidy, you die by the subsidy. New Mexico’s film subsidy program was THE model for how it should work and it’s under attack. Now Louisiana seems to be the place to go. What will they do differently? With all the millions spent to lure production from California studios none of it has stayed without continued subsidization. Yet California still had gravitational pull. It still continues to do a lot of VFX work. At the end of the day it’s about quality and talent. Much of that talent resides here.

Soldier On.

[Add on:  A commenter pointer out that some of the number I’m using confuses annual deficit with total debt. I apologize and will edit it post and update the numbers to get this right.]

18 Responses to Subsidy-palooza

  1. the stranger says:

    N.M House approves $45M limit on film subsidies

    http://www.kob.com/article/stories/S1999493.shtml?cat=504

  2. Tom says:

    The key point here: “The Subsidies Will Not Last”, what do all those companies do when the “savings” for doing business overseas goes away? They come crawling back to the starting point.

    I remember back in 1998, I was in a conference room with about 20 executives. This was a different industry I was working for then. They all wanted to “outsource” programming. My reaction was, well, if you outsource what will the cost be to manage the outsourced code here in the states?

    The answer did not become clear till about 2002. The cost was actually more to outsource than it was to do business on our own. In 2003 I left that industry and went towards the VFX industry.

    I find the idea of outsourcing very similar to what the film industry is now trying to do. “Hey John, lets save some money by outsourcing to India because its cheap…” then Joe says, “Won’t the quality be less?”, John, “Ha, the general public don’t care, nothing to worry about”

    Well, now look at India, what was once cheap is now becomming expensive. Its only inevitable that the same will happen with “subsidies” that happens to the software industry when “outsourcing” was the trend.

    I do have to make one last point, “You can only success through failure” So when this fails the industry will be looking for something to replace it. Why not get a union in place in the meantime?🙂

  3. anon says:

    Yawn. It’s not outsourcing anymore it’s WORLDSOURCING. http://news.bbc.co.uk/2/hi/business/7133283.stm
    I can just imagine people like Lucas, Speilberg and Cameron, who have demonstrated the success of worldsourced production for years, laughing at this blog. Thanks to RSP’s Oscar winning outsourcing software, it doesn’t matter where you live, it’s what you can do that counts.
    “…in order to survive …service providers will need to own or manage the full stack of IT capabilities on a massive scale in order to provide deep expertise in delivery of services-on-demand. Yet many outsourcing analysts say that customers have been moving away from single-sourced IT outsourcing deals to a best of breed approach. How do you explain that disparity?
    The jury is still out on what will be the sustainable model. We believe that the [current] dynamics in the supplier landscape—for example, Xerox acquiring ACS, Dell acquiring Perot, HP acquiring EDS, Google partnering with CSC, Amazon partnering with Capgemini—are a precursor of what will be adopted by customers.”
    http://www.cio.com/article/603075/The_End_of_IT_Outsourcing_As_We_Know_It?page=3&taxonomyId=3195

  4. Winston Smith says:

    Good points about debt to income ratios. Clearly it’s not the amount of debt that is significant but the ratio of debt to income. The problem when the ratio is high is that you also pay increasing financing costs as you borrow to cover your debt. Large debt ratios cause you to pay higher interest rates to borrow, which in turn puts increasing pressure on your debt, wash, rinse, repeat.

    This is why it’s so important for individuals, companies, unions, cities, counties, states, nations, etc. to live within reasonable financial means. Excessive debt will eat you up.

    That $45 million cap in New Mexico does not seem like much. It will be interesting to see how this affects Sony Imageworks. Probably just move more stuff to Vancouver.

  5. George says:

    To be fair to BC (the fairness or not of subsidies aside) I think you have your numbers wrong. A little poking around reveals that while BC does have a total DEBT of $50 billion, the deficit for 2009 was $2.9 billion. The article you linked to was talking about the ballooning provincial debt, which is still a ridiculous amount, but websearches suggest that California has a state debt of $367 billion which puts the two much closer in comparison when you take into account the differences in population.

    Not weighing in either way on the fairness of subsidies, but the numbers you have chosen for BC are incorrect😉

    • VFX Soldier says:

      If you read the end of my article I actually note that I misuse the word deficit for debt. If you look at the sources Im talking about total debt.

      California and New Mexico are total state debt. This does not include local debt.

      Regardless the purpose was to show its not like California is the only one in trouble. As we have seen in New Mexico, these subsidies are doing nothing to prevent more debt and ultimately are the first to go down.

  6. john schlag says:

    Subsidies are a short-term special case of the Attractiveness Principle. Literature, even wikipedia entries, on the subject are wonky. Jay Forrester, who coined the term, put it very succinctly:

    “To illustrate the attractiveness principle, imagine for a moment the ideal city. Perhaps the ideal city would be one with readily available housing at low cost, a surplus of jobs at high wages, excellent schools, no smoke or pollution, housing located near one’s place of work, no crime, beautiful parks, cultural opportunities, and to this list the reader can add his own preferences. Suppose such a city existed. What would happen? It would be perceived as the ideal place to live. People from everywhere would move into the ideal city until the advantages had been so swamped by rising population that the city would offer no net attractiveness compared with other locations.”

    The end game? A global standard of living?

  7. Paolo says:

    @john schlag

    in europe the ideal city has been berlin since 5/6 years ago, now it’s getting worse month by month because everyone want to live there..

  8. interpretation des reves, signification des reves…

    […]Subsidy-palooza « VFX Soldier[…]…

  9. […] Two years ago I predicted problems for subsidized locations due to their government debts. So why is the BC government reluctant to further support the film and gaming industry in BC? Well here’s a list of what I believe to be the issue: […]

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