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Positive indicators for the UK economy I - May the Force be with us

Saturday, May 11, 2013
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Apparently this is how George Osborne ended his tweet last night, announcing that the next Star Wars film is to be made in the UK - how nice to have some good news for a change! It looks like a great example of supply-side fiscal policy being effective. As long as at least 25% of the total production expenditure takes place in the UK, the film will benefit from tax relief, up to a maximum of 80% of the total budget for production costs in the UK. This seems to be acting as a powerful incentive: hundreds of films have been made here in the last few years and benefited not only from the tax relief but also from the comparative advantage which the UK is establishing in the creative industries with major film studios such as Pinewood, Leavesden and Ealing. How much is this worth to the UK economy?

The British Film Institute (BFI) and Pinewood Shepperton commissioned a report from Oxford Economics called 'The Economic Impact of the UK Film Industry in 2011', which was completed last September. They concluded that UK film contributes over £4.6 billion to UK GDP and more than £1.3 billion to the Exchequer. Much of this comes as inward investment; in 2011 this reached record levels contributing £3.7 billion to UK GDP and £1 billion to tax revenues. The report states that the UK is a gateway to Europe for international filmmakers. The major studios clearly see this too and add their own investment. For example Pinewood has invested £63 million since 2007, and is proposing a major development scheme to extend studio capacity, while the Warner Bros. studios at Leavesden have received £100 million investment.

Further injections to AD come from exports, with UK film industry exports in 2010 standing at £2.1 billion. The report adds that "...Exporters of other goods and services also benefit from the part film plays in establishing and reinforcing Britain’s image and brand. This is helped by around a quarter of the top worldwide films being premiered or co-premiered in the UK, which generates substantial media exposure." And then there is also tourism. The report suggests that films depicting the UK are responsible for generating around a tenth of overseas tourism revenues, estimating that around £2.1 billion of visitor spend a year is attributable to UK film. This ranges from visitors to sites where scenes have been shot, to the fabulous Warner Bros. Making of Harry Potter Studio Tour.

As you would expect, these injections to AD from investment and exports result in a derived demand for labour, and more jobs. To quote directly from the BFI summary, "...The number of jobs has risen with the UK film industry, directly employing almost 44,000 people (up from 36,000 in 2009) and supporting 117,000 direct and indirect jobs overall (up from 100,000 in 2009). The UK film industry employs more people than both the fund management and pharmaceutical manufacturing sectors with 70% of the workforce graduates and, at £32,500, earning a significantly higher than average salary." So we must conclude that there is likely to be a positive multiplier effect from the investment, which also benefits in the short run from higher box office takings in cinemas and merchandising sales and also in the long run from the potential for significant dynamic efficiency from the development of new technologies in the film industry such as video-on-demand, and from the extraordinary innovations in special effects.

So while the tax relief offered by the Treasury clearly has a cost - around £114 million a year - it generates far more for the economy, estimated at about £12 in GDP for every £1 invested. Without it, the report claims that national GDP would be reduced by approximately £1.4 billion a year and Exchequer revenues by £430 million a year. Therefore evidence would suggest that supply-side fiscal policies which are designed to exploit comparative advantage can be effective in encouraging investment in both production and innovation, and that these can be seen to bring an increase in GDP which will drive up the demand for labour thus increasing employment, while also increasing the economy's potential output - which might be called the Holy Grail of economics.

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