There is nothing better than a press conference of a minister announcing a new investor who has chosen Bulgaria for their new investment venture. This is also the dream of every mayor, although mayors do not have much to offer to potential investors. Ministers, unlike mayors, have the arsenal of the State budget at their disposal.
Thus, they can use taxpayer money to offer incentives for companies and offer resultant advantages to a selected sector or region.
Recently it was announced that Netflix and Disney are interested in shooting movies in Bulgaria, and the government is very conveniently and timely implementing changes that will encourage them to do just that. In short, “the provision of new state assistance is envisaged through two completely new schemes, through which the Bulgarian film industry will approach the standards of European practice and trends in the field, as well as the cultural needs of society”.
Reading the government’s transcript, we learn that two completely new subsidy schemes will be necessary for the survival of the national film production and film industry and the preservation of cultural diversity within the European Union.
This is the exact reasoning in favor of spending around 20 million BGN annually. Although at a governmental meeting, Deputy Prime Minister Atanas Pekanov asked for a cost-benefit analysis of this venture, more information other than that there is indeed some benefit was not available.
General Comments
Politicians love universal approval and have the tendency to give away what does not belong to them. Subsidies for attracting investors have existed for more than a century, with the argument that they create jobs and revitalize regions.
At the beginning of their implementation, they usually are of a smaller size, but once they start, it is almost impossible to stop them, given the political obstacles in the way of doing so, the strength and intensity of lobbying efforts to preserve them, and the presence of bureaucrats who likely profit from the selection of one project over another in the subsidy race.
The race between countries for investors through tax and other incentives has recently reached unprecedented proportions. In 2014, Tesla received an incentive package worth about $ 1.3 billion USD from the state of Nevada, and Amazon organized a race between 200+ cities, in an effort to choose where to build its new headquarters. In the end, the company chose the state of Virginia, which offered more than $ 500 million USD in tax benefits and 23 million USD in cash, among other incentives.
Estimates of the impact of easing and incentives on employment and the economy as a whole show a very mixed picture. Here are some conclusions from several analyses:
- Subsidies give an advantage to those who use them and put all other enterprises at a disadvantage – not only in a particular industry and region;
- Subsidies are paid for by all taxpayers, but are only used by select companies;
- The ability of the administration to manage the entire process of evaluating, granting and controlling subsidies calls into question their effectiveness from the very beginning;
- The administration is able to choose and provide subsidies to specific companies, which in the face of nation-wide corruption scandals, discredits the process;
- New jobs created are very unstable and volatile. Even if they are created very quickly upon the receipt of a subsidy, they disappear just as fast when the economic situation changes and/or the subsidy is terminated;
- A substantial part of the wage costs incurred by subsidized enterprises are often for enterprises that are leased and are not from the region in which the investor’s activity develops, with this being especially true for the service sector.
Film Industry and Special Encouragement
The promotion of the film industry by governments is constituent to a broader strategy to diversify the economy by creating a creative industry that is believed to create stable jobs with high wages.
In practice, however, since the creative industries have a high degree of mobility and a high sensitivity to any and all incentives, it turns out that state subsidies for film production, for example, are a wasteful, inefficient, and unfair tool for economic development. Although they seem to be a “quick fix” that provides jobs and employment for local businesses and workers, in fact they are primarily useful for foreigners, especially for well-paid foreign and sector-related film professionals.
One of the most in-depth empirical regular studies assessing the impact of film subsidies on the local economy was prepared by the Massachusetts Department of Revenue – the last one in 2018 leads to the following conclusions:
- Tax incentives for films lead to new jobs and an increase in local GDP, but this is at much lower levels than expected, due to the partial “export” of the newly created income outside the state, i.e., the benefits for the local economy are less. During the period 2006-2016, 62% of the subsidies went to non-residents (companies and individuals), i.e., most of the subsidies were spent outside the state;
- Since the state of Massachusetts has a balanced budget requirement, every dollar spent on a film subsidy is one less dollar that can be spent on other policies (education, health, infrastructure, etc.). This compensates for some of the benefits of subsidies, which increases the total cost of staff for each new job created in the film industry;
- The average net expense per resident in Massachusetts for a subsidized new job in the film industry for the years 2006-2016 is 102 888 USD;
- The export of income outside the state also affects the taxes created by film production. Despite the fact that film production generates new tax revenues (mainly from income tax on wages), these revenues amount to only 14 cents for every dollar received by the tax deduction, i.e., the remaining 86 cents must be financed either by eliminating taxes or by reducing other government expenditures to maintain a balanced state budget;
- In the production of a feature film, the process usually involves actors and workers with special skills, most of whom will be “imported” from outside the state. Filming usually lasts only a few weeks, leaving little or no permanent presence in the local economy;
- For the period 2006-2016, more than 60% of salary expenses go towards paying people with a 1+ million USD salary already, i.e., it does not go towards related local enterprises serving the film industry.
Observing the experience of the state of Massachusetts over the past ten years, we can assume with great confidence that film subsidies in Bulgaria will only be money in the pocket of the few who are highly paid, in Bulgaria for a short time, hiring local enterprises at the bottom of the chain hourly or for a short period of time.
Obviously, there are still benefits, but they will be short-term, very volatile, and will be felt only in Sofia, with the rest of the taxpayers and residents paying for the film subsidies in the form of fewer available services, such as education, health care, police and fire protection. The benefits for the wealthy few are evident; most of the costs are hidden because they are distributed among everyone.
What Needs to Be Done?
The lobbyist’s idea of film subsidies in Bulgaria should be stopped immediately. The government should not spend scarce public funds on subsidies for films.
Instead, it’s time for those in power to finally focus on the main reasons for investors to pass by Bulgaria. The latest World Bank Investment Report indicates that the main reasons for choosing a place for investment by companies (by importance) are:
- Political stability
- Macroeconomic stability
- Regulations and the rule of law
- Abilities, talent, and knowledge
- Low taxes
- Market size
- Physical infrastructure
- Exports
- Intellectual property protection
- Investor protection
- Low cost of labor and resources
Evidently, subsidies for film production do not address the first obstacles in the way for investors, but they are a perfect example of lobbying, which, after many years of trying to realize itself, succeeded in the mandate of the state government.
