My comments in Saturday’s Courier-Mail on payroll tax concessions—e.g. for BrewDog & Disney

With the possible exception of President Trump, the most interesting American politician at the moment is the millennial, freshman member of the House from New York, Alexandria Ocasio-Cortez (AOC). She is one of the main players is what The Economist earlier this year described as “The rise of millennial socialism”. AOC has been criticised heavily by conservatives for her proposed Green New Deal and her apparent belief in so-called Modern Monetary Theory. But at least one of her policy positions has been sensible from an economic perspective: her rejection of tax breaks and other financial incentives to lure big companies to invest in particular regions.

Rightly, AOC opposed NYC and NY State offering Amazon $3 billion in financial incentives to build its second headquarters in Queens. Now that HQ is going to be built in Arlington, Va., but AOC was right to oppose the deal. Regional governments around the world need to stand up to the game-playing corporations who are trying to play different governments off against each other to secure the best financial incentives they can.

Unfortunately, the Queensland government has, from time-to-time, given in to the demands of companies for financial sweeteners to induce them to invest here. As I recently mentioned to Steven Wardill from the Courier-Mail, who quoted me in his article Manufacturing sector sheds 18,000 jobs under Palaszczuk Government (also see figure below), it has been a failed strategy:

Mr Tunny said the Palaszczuk Government was going the wrong way about creating the private sector jobs needed to pay for an ageing population.

“They are doing things through payroll [tax] like discounts for movie studios and breweries,” he said.

“Yet the way to do it is through the education system.

“We need to encourage young people to be innovative because they are the ones that are going to create the new industries.”

For a good example of the failure of industry attraction efforts, consider that, in 2001, the Beattie government provided financial incentives to lure Berri Fruit Juice to move some of its manufacturing operations to the state, but 12 years later Berri shut down its juice manufacturing operation in Queensland (see p.28 of the QCA’s excellent 2015 Industry Assistance Review Final Report). Instead of wasting time and money chasing footloose businesses, we should instead focus on getting the basic policy settings right, particularly in taxation and in the education system.

One prominent recent example of a dubious Queensland government financial incentive to business was the one provided to BrewDog, the Scottish craft brewer, which Nick Behrens and I were critical of early last year:

Comments on BrewDog being lured to Brisbane in the Broadsheet

As Nick pointed out in his QEAS blog post, the state government was effectively subsidising a foreign-owned brewer to set up and compete with 20+ local brewers. To minimise the political damage, the state government had to scramble to develop a craft brewing strategy for the whole industry. Now it turns out BrewDog’s level of investment in the state is being scaled back, raising a big question about the bang-for-buck of whatever exact incentives were provided by the state government:

BrewDog scales backs Brisbane plans

Regular readers will know I’ve also been critical of film industry assistance provided by both the state and federal governments:

Fact check on PM’s comparison of GC film industry to tourism in economic contribution terms

manuf

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4 Responses to My comments in Saturday’s Courier-Mail on payroll tax concessions—e.g. for BrewDog & Disney

  1. Michael Willis says:

    Excellent advice, Gene, for governments of all hues – to avoid picking winners with tax policy. And as you point out, one of the few rational economic arguments from Congresswoman Alexandria Ocasio-Cortez in her brief career.
    It actually creates sovereign risk, as companies play games with provincial governments, at the expense of their credit ratings and business confidence, and of course, of their taxpayers’ pockets.
    You rightly focus on education policy, but the other lever for regional governments wanting to attract industries is through sustainable low rates of taxation for ALL industries and consumers.
    Your recent book “Queensland – Beautiful One Day, Broke the Next” outlines some evidence for that view, and the lessons from failing to follow it.
    It is an important lesson for national politics too, with damage done to taxpayer confidence by BOTH sides of politics with their policy changes to retirement savings – either actual or proposed. It is far better, but difficult in this partisan political environment, to build some cross-party consensus on such policies that have a long and dramatic impact on our burgeoning retiree sector. There was some sound cross-party support for sustainable retirement policies across the Hawke-Keating-Howard eras, despite the hyperbole of parliamentary debate. We need some of that now!

  2. Well thought through such incentives can make sense from the perspective of the regional government offering them. I think the strong case against them is really one in political economy rather than economics proper. But the taboo against them works both as economics and as political economy when imposed from the higher level of government – by a state on its local governments and by a federal government on its states or provincial governments.

    In that regard I think I’m correct in saying that the EU has stronger disciplines against this kind of dodgy beggar my neighbour (negative sum) competition between its member countries than Australia does against its states!

    • Gene Tunny says:

      Hi Nicholas, thanks for the comment. Yes, I accept such incentives could make sense for a regional government/council if the region has persistently high unemployment and isn’t attracting any investment. That certainly doesn’t apply to NYC and it doesn’t apply in Brisbane or the Gold Coast.

      Re. the EU, I think you’re right. I recall Gary Banks years ago was advocating states sign an agreement ruling out bidding wars, but the attractions of the grand prix, Virgin, Boeing and manufacturers were too great for some state governments to resist. Queensland has been one of the worst offenders.

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