Courier-Mail’s Paul Syvret on my “coldly commercial prism”

Thanks to the Courier-Mail’s Paul Syvret for quoting my last post in his Saturday opinion piece on the proposed new 1,500 seat theatre for Brisbane (see Opinion: New inner-city theatre would be a boost for Brisbane, which may be behind the paywall):

Already the move has attracted some criticism. Economist Gene Tunny, for example, describes the project as “a complete waste of taxpayers’ money” and questions whether such a facility is needed in the first place, and if so, then surely there is a business case for the private sector to develop it, not the taxpayer.

Viewing such a project through a coldly commercial prism, Tunny is right, in that in a very narrow sense it is in effect a government subsidy of the arts sector.

This ignores however both the capacity constraints of our existing facilities, and the multiplier effects of investing in such infrastructure.

Responding to Paul’s piece, first, I do not think I have ignored the capacity constraints. I just cannot see any justification here for the Government increasing capacity, rather than the private sector doing it when there is sufficient demand to justify it.

Second, I would not deny the existence of multiplier effects. However, multiplier effects, which may be estimated using input-output or computable general equilibrium models, are typically irrelevant to the cost-benefit analysis of public projects. And it is the cost-benefit analysis that determines whether the project delivers net benefits to the community (i.e. whether it stacks up), and which should be the focus of any business case.

The Queensland Government’s Project Assessment Framework supplementary guidance material on cost-benefit analysis from July 2015 is instructive (p. 16):

Benefits identified in economic impact analysis using an input-output approach should not be included in cost-benefit analysis for several reasons including:

  • although any project will generate economic activity, directly and indirectly, these effects could also be generated by an alternative use of the resources…

I trust the $1.3 million business case that is being prepared for the new theatre will contain the correct treatment of any multiplier impacts.

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6 Responses to Courier-Mail’s Paul Syvret on my “coldly commercial prism”

  1. Many (almost all) business ventures have ‘multiplier effects’ …so Syvret’s comment is somewhat irrelevant as a justification for public monies to be spent on a particular project. Government investing in digging a 100km ditch through a town with high unemployment will also have a multiplier effect in the short term … the question being whether that is the best use of finite budget resources in the medium to longer term given the opportunity cost of investing in a project a little more worthwhile that returns bigger dividends to taxpayers.

  2. Jim says:

    I just went and got my morning coffee. That created some economic activity keeping someone employed and resulting in flow-on impacts in the economy.

    Perhaps the State Government could subsidise my morning coffee due to the important contribution it makes to the economy via the multiplier effect….

  3. Jim says:

    I would also imagine the capacity constraints of existing facilities would be considered as part of any business case (which Paul indicates would not be considered). Any CBA would attempt to estimate the additional demand for such a facility.

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