Socialism for the Rich, the cost of corporate welfare in Budget 2017

SOCIALISM FOR THE RICH The corporate welfare bill is growing

A briefing paper by Jim Rose on the cost of corporate welfare in Budget 2017

Your Money, Your Voice Promoting sensible restraint of government expenditure

ABOUT THE AUTHOR Jim Rose is a Research Fellow at the New Zealand Taxpayers’ Union and has worked at the Ministry of Business, Innovation and Employment, the Department of Labour, the Ministry of Social Development, and the New Zealand Treasury. In Australia he has worked in Canberra for the Productivity Commission, the Department of Prime Minister and Cabinet, and the Department of Finance.

Jim has Masters degrees in economics and in public policy from the Australian National University and from the National Graduate Institute for Policy Studies in Tokyo respectively. He blogs at www. utopiayouarestandinginit.com.

TABLE OF CONTENTS Introduction

2

1. The Latest Tab

3

2. KiwiRail Wants More

5

3. The Capture of Science and Innovation

6

Appendix

7

1

INTRODUCTION The purpose of this briefing paper is to quantify the amount of corporate welfare spent by the New Zealand Government in Budget 2017, and, specifically, where that corporate welfare is targeted. In Budget 2017, corporate welfare has increased by $200 million to $1.6 billion. The primary recipients of corporate welfare are KiwiRail, Science and Innovation, and the Film Industry.

This briefing paper is the fourth annual instalment by the New Zealand Taxpayers’ Union on the level of corporate welfare in New Zealand. Welfare Bums analysed Budget 2016, Any new kids at the trough? was released after Budget 2015, and Monopoly Money was published soon after the 2014 Budget.

Corporate welfare involves the Government selecting individual businesses to subsidise (i.e. “pick winners”) instead of setting an even playing field for all businesses to compete. Removing corporate welfare would allow for a six percentage point reduction in the company tax rate that would benefit all businesses equally.

“When the government makes loans or subsidies to business, what it does is to tax successful private business in order to support unsuccessful private business.”

Henry Hazlitt

2

1. THE LATEST TAB Handouts to business received a bump of $200 million in Budget 2017, now exceeding $1.6 billion. This $200 million increase is on the previous budget which itself was up almost $200 million on the budget before that (see figure 1). To give this context, the company tax rate could have been 6 percentage points lower but for the corporate welfare identified in this briefing paper.

Figure 1: Corporate welfare in budgets 2008 - 2017

1,848 1,606 $million

1,278 1,074

2008/09 Budget

2009/10 Budget

1,130

1,022

2010/11 Budget

1,403

1,382

2011/12 Budget

2012/13 Budget

2013/14 Budget

1,179

1,211

2014/15 Budget

2015/16 Budget

2016/17 Budget

2017/18 Budget

Source: New Zealand Government Budget Papers, various years.

Table 1 shows that KiwiRail (transport) and primary industry are the growth areas in corporate welfare.

The first few budgets of the current Government consisted of half billion dollar annual bailouts for KiwiRail and a continuation of handouts in economic development, film and tourism portfolios. These supplicants were inherited from the outgoing government. In this budget, handouts to KiwiRail are up by about 50 percent.

From Budget 2013, corporate welfare under the National Party has spread into more spending areas and portfolios. Science and innovation funding was previously tightly targeted at basic research. Now, $290 million is distributed to co-fund “commercialisations” and start-ups for an ever-growing number of industries.

Under Bill English and Stephen Joyce, modern versions of “Think Big” are back with about $137 million per year in irrigation construction subsidies, $50 million per year for a primary industry growth partnership and $145 million a year for ultrafast broadband. Taxpayers fund investments private investors gave the cold shoulder because their risks do not make the investment worth while.

3

Table 1: Corporate welfare in New Zealand government budgets since 2008, $million 08’

09’

10’

11’

12’

13’

14’

15’

16’

17’

Arts, Culture & Heritage

3

11

19

10

29

4

5

18

27

27

Commerce and Consumer Affairs

6

6

6

6

7

7

6

7

7

8

Communication

0

25

39

150

178

205

215

191

192

145

Economic Development

372

419

446

379

332

284

280

356

391

386

Finance

16

44

3

108

15

210

0

0

60

0

Primary Industries

700

0.3

14

0

43

65

77

72

109

212

Science and Innovation

0

4

0

0

0

112

219

211

253

294

Tourism

76

94

119

113

98

124

124

123

130

138

Transport

675

470

376

511

680

119

255

233

233

396

Total $million

1,848

1,074

1,022

1,278

1,382

1,130

1,179

1,211

1,403

1,606

Source: New Zealand Government Budget Papers, various years.

Table 2 shows that the taxpayer is spending almost twice as much as earlier years in order to attract the glitz and glamour of Hollywood, for few economic benefits. From 2004 to 2011, the Treasury estimated taxpayers spent $472 million for net economic benefits of just $13.6 million; an annual rate of return of less than one percent. Treasury can find only limited evidence of spill-overs to tourism.

Table 2: Film industry subsidies, Budgets 2008 to 2017, $million 08’

09’

10’

11’

12’

13’

14’

15’

16’

17’

NZ Screen Production Incentive Fund

3

11

19

10

29

4

0

2

2

0

NZ Screen Production Grant

0

0

0

0

0

0

5

16

25

27

Attracting International Screen Productions

0

0

0

0

0

0

0

0

1

1

NZ Screen Production Grant - International

48

52

127

92

51

41

67

112

132

120

Total $million

51

63

146

102

80

45

72

130

160

148

Source: New Zealand Government Budget Papers, various years.

The appendix to this report sets out the full calculations of corporate welfare by portfolio vote.

4

2.KIWIRAIL WANTS MORE The Government has given up on its 10-year KiwiRail “Turnaround Plan” published in 2010. That hope against hope no longer appears in the latest budget papers. The long-suffering taxpayer is now making capital injections into a business that is never expected to repay a cent.

As table 3 shows, the taxpayer has bailed-out KiwiRail (under various guises) to the tune of $4 billion since 2008. That is equivalent to $883 per New Zealander. This is in addition to write-downs in the Crown balance sheet of an incredible $9.8 billion (Bennett 2012). The most recent annual bailouts totaling $390 million exceed half of KiwiRails annual revenue (about $700 million a year). Taxpayers will never see a dividend from these investments. KiwiRail is now valued at minus $1.545 billion (i.e. a liability).

Almost 20% of KiwiRail freight is coal from the mines of Solid Energy. This co-dependence has made it possible for the dire finances of KiwiRail to become even more dire if Solid Energy fails.

Table 3: Taxpayer handouts to KiwiRail since 2008 budget, $ million 08’

09’

10’

11’

12’

13’

14’

15’

16’

17’

Total

NZ Railways Corporation Loans

0

405

55

250

108

0

11

0

0

0

828

NZ Railways Corporation Operating Support

90

90

0

0

0

0

0

0

0

0

180

ONTRACK Operating and Maintenance Costs

7

0

0

0

0

0

0

0

0

0

7

KiwiRail Turnaround Plan

0

20

250

250

250

94

198

210

190

0

1,462

KiwiRail Equity Injection

0

0

0

0

323

25

46

23

24

12

452

Rail Network and Rolling Stock Upgrade

0

45

71

11

0

0

0

0

0

0

127

KiwiRail Holdings Limited

0

0

0

0

0

0

0

0

0

220

220

KiwiRail Holdings Limited Loan

0

0

0

0

0

0

0

0

0

164

164

NZ Railways Corporation Loans

55

0

0

0

0

0

0

0

0

0

55

NZ Railways Corporation Increase in Capital

376

0

0

0

0

0

0

0

0

0

376

Crown Rail Operator Loans

140

0

0

0

0

0

0

0

0

0

140

Crown Rail Operator Equity Injection

7

0

0

0

0

0

0

0

0

0

7

Total

675

560

376

511

680

119

255

233

214

396

4,008

Source: New Zealand Government Budget Papers, various years

5

3.THE CAPTURE OF SCIENCE AND INNOVATION In 2008, science and innovation funding was targeted at basic research. This does not attract private backers because it has no immediate commercial application. The Government funded ‘public good’ science.

Starting in 2013, the National Government now spends $290 million to co-fund commercialisations and start-ups – see table 5. If research is worth commercialising, the way to find that out is to leave private entrepreneurs to back it with their own money.

Table 5: Corporate welfare, Vote Science and Innovation, Budgets 2008 to 2017 08’

09’

10’

11’

12’

13’

14’

15’

16’

17’

Realising the Benefits of Innovation

0

0

0

0

0

11

16

0

0

0

Research and Development Services and Facilities for Business and Industry

0

0

0

0

0

0

26

23

23

20

Building Business Innovation

0

0

0

0

0

0

0

32

33

0

Research and Development Facilitation and Promotion Service

0

4

0

0

0

0

0

0

0

0

Repayable Grants for Start-Ups

0

0

0

0

0

1

14

11

9.4

14

Research and Development Growth Grants

0

0

0

0

0

65

119

116

136

154

Partnered Research Fund

0

0

0

0

0

0

0

0

35

37

Targeted Business Research and Development Funding

0

0

0

0

0

36

44

30

26

38

Total

0

4

0

0

0

112

219

213

253

294

Source: New Zealand Government Budget Papers, various years.

The commercialisation of new technologies is the last place where taxpayers should be picking winners. If politicians and bureaucrats were any good at picking winners, they would join a hedge fund. A top hedge fund managers annual pay package is bigger than the entire payroll of the Ministry of Business, Innovation and Employment. Picking the next big thing is a serious business not done on public service salaries, literally.

6

Appendix 1

7

Appendix 1: Corporate welfare by budget and portfolio vote since 2008 2008

2009

2010

2011

2012

2013

2014

2015

2016

29

4

0

2

2

0

0

5

16

25

27

29

4

5

18

27

27

2017

Arts, Culture & Heritage New Zealand Screen Production Incentive Fund New Zealand Screen Production Grant - New Zealand Total

3

3

11

19

10

11

19

10

Commerce and Consumer Affairs Administration of Trade Remedies

0

1

1

0

1

0

1

Retirement Commissioner

6

6

6

6

6

6

6

6

7

8

6

6

6

6

7

7

6

7

7

8

5 0

1

Total Communications Fibre Drop Costs

0

5

13

5

International Connectivity

0

2

0

0

Crown Fibre Holdings Capital Costs Crown Fibre Holdings Capital Costs (UFB2) Broadband Investment (Crown Fibre Holdings Capital Costs) Total

150 42 0

25

39

143

165

200

210

190

0

25

39

150

178

205

215

191

192

145

0

0

0

1

1

1

1

1

1

13

13

13

20

145

Economic Development Enhancing Small Business Capability and Performance Policy Advice - Small Business Policy Advice - Economic Development Policy Advice - Sectoral Leadership, Firm Capability, and Regional Development Sectoral Leadership, Firm Capability, and Regional Development Operational Policy

2

2

1

1 0

16

20 0

27

26

13

18

6

10

8

Ministerial Servicing and Crown Entity Monitoring International Business Growth Services Investment Fund Management Services to Develop Business Capability Services to Support the Growth and Development of New Zealand Businesses Analysis and Development Services for Firms Identification and Coordination of International Market Opportunities International Investment Facilitation Services Investment Fund Management Establishment and operation of the Food Innovation Network New Zealand Regional and Sector Development Services Standardised Training and Advisory Services Film New Zealand Growth Services Fund

0

102

101

105

111

147

152

2

2

2

2

2

3

3

12

14

13

31

33

32

13

13

15

4

5

20

18

20

69

74

80

16

15

14

3

2

145

15

0

13

47

48

31

15

15

11

1

1

1

1

1

1

1

1

1

20

26

30

16

27

25

35

30

1

1

132

120

6 1 10

Attracting International Screen Productions New Zealand Screen Production Grant - International Major Events Development Fund

48

52

127

92

51

41

67

112

5

8

8

14

15

10

9

8

Management Development Fund

0

0

1

0

1

1

1

1

Regional and Industry Development Fund

2

1

1

4

1

1

0

Appendix 1

International Biotechnology Partnerships International Growth Fund

13 1

8

9

Regional Partnerships and Facilitation Sector Strategies and Facilitation

9

12

5

5

4

5

2

2

1

1

1

1

Enterprise Development Fund

3

1

45

41

Market Development Assistance Fund Enterprise, culture and skills fund New Zealand Trade and Enterprise

0

1

1

8

2

2 1

0

0

0

0

Seed Co-investment Fund

14

3

8

8

16

7

9

8

Venture Investment Fund

34

1

10

14

29

15

11

10

13

13

9

26

2

2

Promotion of New Zealand Associated with the America’s Cup Depreciation on the temporary Rugby World Cup showcase and festival building on Queens Wharf Temporary Rugby World Cup showcase and festival building on Auckland's Queens Wharf Rugby World Cup Leverage and Legacy Programmes Rugby World Cup Free-to-Air Broadcasting Right Rugby World Cup Louis Vuitton Pacific Series Louis Vuitton Trophy Series

1

10 15

15

11

2

20

2

2

5

5

8

2

6

8

2

1

5

2 1 4

Stadium Development Purchase of Queen's Wharf, Auckland

11

1

2

Services to Support the Growth and Development of New Zealand Businesses New Zealand's Participation at Expo 2010 Shanghai, China 3D Digital Graphics Cluster

11

Appendix 1

9

Regional Growth Initiatives

28 20

10

Negotiation and Completion of Stadium Projects Transformational Initiatives Fund Total

41 2 372

419

4

3

446

379

332

284

15

130

280

356

391

386

60

Finance Solid Energy New Zealand Limited Loan Facilities Solid Energy New Zealand Limited Redeemable Preference Shares Solid Energy New Zealand Limited Redeemable Preference Shares Impairment Write-Off of Historical Investment in Solid Energy New Zealand Export Credit Office

25 25

2

Payment in respect of Export Credit Office Guarantees and Indemnities Rugby New Zealand 2011 Limited

3

3 0

4

Rugby World Cup 2011 - Crown share New Zealand Aluminium Smelters Electricity Agreement Incentive Payment Public Trust Capital Injection

108 30 30

Hawke's Bay Airport Equity Injection

8

Industrial Research Limited Equity Injection Invercargill Airport Suspensory Loan Total

5

7

2 44

3

108

15

210

0

0

60

0

Primary Growth Partnership

0

0

14

37

56

Water Storage and Irrigation Investment Proposals Crown Irrigation Investments Limited

0

6

9

57 8

55 14

66 15

50 25

12

3

29

137

Primary Industries

10

0

11

Appendix 1

16

Total

700 700

0

14

0

43

65

77

72

109

212

11

16 26

23

23

20

32

23

32

Science and Innovation Realising the Benefits of Innovation

0

Research and Development Services and Facilities for Business and Industry Building Business Innovation Research and Development Facilitation and Promotion Service Repayable Grants for Start-Ups

0

4

0

1

Research and Development Growth Grants Partnered Research Fund

0

65

14 119

9 116

9 136

14 154

Targeted Business Research and Development Funding Total

0

36

44

30

35 26

37 38

0

4

0

0

0

112

219

211

253

294

76

84

94

84

84

113

113

116

117

117

2

6

8

8

3

6

6

6

2

4

Tourism Marketing of New Zealand as a Visitor Destination Tourism Growth Partnership Marketing New Zealand As a Visitor Destination through Joint Venture Partnerships Implementation of the Tourism Strategy Tourism Facilities Development Grants The National Cycleway Fund

5

18

2

1

0

0

1

5

27

Management Support of the National Cycleway New Zealand Cycle Trail Incorporated Seed Funding National Cycleway Fund - Extension

2

1

1

1

0 12

5

12

Appendix 1

11

New Zealand Fast Forward Fund

Maintaining the Quality of the Great Rides Total

124

2

2

4

124

123

130

138

11

76

94

119

113

98

55

405

55

250

108

20

250

250

250

94

323

25

198 46

210 23

190 43

12 220 164

680

119

255

233

233

396

Transport Rail - New Zealand Railways Corporation Loans New Zealand Railways Corporation Operating Support ONTRACK Operating and Maintenance Costs KiwiRail Turnaround Plan

90 7

KiwiRail Equity Injection KiwiRail Holdings Limited KiwiRail Holdings Limited Loans Rail Network and Rolling Stock Upgrade New Zealand Railways Corporation Increase in Capital for the Purchase of the Crown Rail Crown Rail Operator Loans Crown Rail Operator Equity Injection

45

71

11

470

376

511

376 140 7

Total

675

Source: New Zealand Government Budget Papers, various years.

Appendix 1

12

13

www.taxpayers.org.nz 13