Budget Preview

The developments on two files provide a useful lens through which to consider the 2016 budget.

First up is the film industry. Screen Nova Scotia announced that a report from PricewaterhouseCoopers (PwC) provides new support for an unrestricted film tax credit system.

The report does nothing of the sort. It is a repackaging of the same weak arguments that the industry has been making all along. PwC acknowledges in its introduction:

“…that our report… has not attempted to analyse whether there are other viable alternatives for the provincial government funding…the benefits of such alternatives and how they compare. …Our Assessment should therefore not be seen as policy advice as to how the government of Nova Scotia should deal with the Screen Industry in the future.”

Here is that comparison, which explains why it was not included.

The screen industry argues that in 2014, it represented 1,600 jobs earning $69.5 million, or an average of $43,000 per person. But only $47 million of that income—about 1,100 workers—is affected by the incentive programs. The rest is for things like local broadcasting and advertising production.

A worker making $43,000 will pay $3,860 in provincial income taxes if he or she has no other deductions for dependents, union dues, charitable donations, employment related expenses, etc. Since most people have those deductions, let’s say the average personal income tax is $3,500. The 1,100 workers will thus pay $3.85 million in income taxes.

For this, the government provided an incentive of $23.5 million, more than six times the amount of personal income tax to be received. That is not much of a bargain, especially since the incentive has to be paid every year.

On the same day that the PwC report was being leaked, Nova Scotia Business Inc., the province’s economic development agency, announced payroll rebate agreements with three companies in manufacturing, technology, and insurance.

Over five years, they would pay up to $5.8 million for the creation (not just continuation) of up to 420 new jobs, with a total payroll over that period of $73 million. The income tax paid by those employees would be $7.8 million and the incentives amount to $5.8 million—less than one times the income tax. Most importantly, there is a reasonable prospect of those jobs continuing after the incentive is no longer payable.

The film industry tries to make much of the spinoff jobs that it creates. The payroll rebate jobs have the same potential to produce indirect and induced jobs as the film industry. The payroll rebate makes sense, and is vastly superior to the film incentive which makes no economic sense at all.

Meanwhile, there was a welcome new development in tourism. WestJet is going to provide a daily service to and from Boston. This means an extra 70 seats a day in each direction, and has put significant downward pressure on the fares that Air Canada charges. Together with the Delta service, this means over 200 seats a day in peak season.

Return air fares per person in June are currently well under $400, rising to almost $500 in July. Together with a week’s car rental, a couple visiting Nova Scotia can make the trip for $1,200-$1,500. This compares with a cost of $850 for a couple travelling by ferry—to which should be added wear and tear on their own car—and the cost of an overnight in Yarmouth on the way back. For those who do not love long drives, the airfare alternative is very attractive.

The airlines have received no incentives to provide their service. Air Canada and WestJet employees are all Canadians paying Canadian taxes, unlike the American crews on the ferry.

The government subsidy to ferry passengers will average $280 per person in each direction, greater than the cost of airfare between Boston and Halifax.

Opposition Leader Jamie Baillie has accused the Premier of putting politics ahead of economics in refusing to reinstate the old film tax regime. That is exactly wrong. The premier is right to keep a cap on this entirely uneconomic program in the face of skilled and relentless advocacy by the film industry.

On the other hand, he is succumbing to political pressure which has caused government to spend $14 million per year subsidizing the Yarmouth ferry—about $280 per traveler, and about $1,400 for each of the extra room nights in motels and hotels which can be attributed to the service.

Tuesday’s budget will involve a number of choices where good economic sense contends with political pressures. It will tell us a lot about the resolve of this government to complete the journey to fiscal balance.


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