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America's Cup Challenge 2007 - Economic ImpactKey Findings3.1 ScopeThe findings are presented for each key component of the impact assessment – the implications for the economy, and the tax implications for Government. As noted, they do not measure the same things, and cannot be simply added to identify a total impact. The results have been calculated for each of the three scenarios (Section 1.5 above). 3.2 Net Additional ExpenditureA challenge by Team New Zealand would inject an estimated $85m into the New Zealand economy over the 2003-07 period, inclusive of salary and wage and contractor costs, but excluding GST. Of this amount, some $30m would be based on Government funding. For this study it is estimated that there would be $35m from other NZ-sourced funding (allowing for an amount in the $30-$40m range), plus $20.5m from overseas-sourced funding (being the balance of total overseas sourced funding less that paid to cover overseas expenses, and allowing for an amount in the $16-$25m range). This would sustain two main types of spending - direct spending by the syndicate on goods and services in order to mount a challenge for the America’s Cup, and spending by syndicate crew and contractors directly employed by Team NZ over the next 3-4 years. The first component covers the effect of operational spending by Team NZ excluding salaries and wages, the second covers the spending sustained by those salaries and wages. The estimated $85m injection would not all be additional, however. The net additional amount varies between the scenarios. In each case, the amount sustained by Government funding ($30m excl GST) and overseas funding ($20.5m) is considered net additional. The additional effect of NZ-sourced funding varies between $23.4m and $7m. In Scenario 1, where the sponsorship is all additional, then the gross additional amount would be $35m. In Scenario 2, the assumed alternative is that the $35m would have mainly been spent in New Zealand regardless of Team New Zealands presence. In total 20% of the $35m is considered net additional ($7m). In Scenario 3, approximately half of the $35m is considered net additional from an expenditure point of view (either through distribution as dividend or through repatriation of an offshore marketing campaign). Table 3.1: Net Additional Injection and Expenditure 2004-2007 ($m) 3.3 Taxation ImpactsThe taxation assessment provides an estimate of the direct and total “return” to Government from their investment in Team NZ (up to $30m), and the additional activity and expenditure. The taxation impacts have two components:
Direct Tax FlowsBased on expenditure and sponsorship information provided by Team NZ, the estimated direct tax revenues to Government range between $11.4m and $12.3m (Table 3.2). While the gross tax amounts and the tax deductibility offsets vary between scenarios, the net outcome is fairly consistent. The differences in gross amounts arise from the assumption of whether NZ-sourced sponsorship is additional or a transfer.
Table 3.2: Team New Zealand Direct Tax Revenue, 2004-2007 Indirect and Induced Tax RevenueThe consequent tax flows calculated from the economic modelling show the additional effects, as the Team NZ expenditure flows through the economy. This is additional to the direct tax revenue from PAYE, GST and so on identified above. The tax revenues have been calculated according to expected volume of additional economic activity required to support Team NZ’s demands in the New Zealand economy. As Team NZ purchase goods and services from their suppliers it sets in train a number of rounds of economic transactions as direct suppliers request additional inputs from their suppliers and so on up the chain. There is a similar effect from the consumption spending by the Team NZ crew (sustained by the Team NZ salaries and wages). This results in increases in gross output within the economy, with consequent increases in operating surpluses and company taxes, as well as salaries and wages and PAYE. The total GST amount has been calculated from the total net additional value added generated by these transactions (at a rate of 12.5%). Since GST is a value added tax, then it can be estimated from the additional value added in the economy. As long as the value added calculations in the economic models exclude GST (in terms of the inputs of additional expenditure) and the value added coefficients for each sector also exclude any GST effect, then the model estimates of net value added can be used directly to estimate the implied GST. In addition, the additional expenditure sustains wages and salaries for people working in the sectors providing the additional goods and services. Their consequent expenditure sustains the induced increases in output and value added, and also generates tax revenue, mainly through PAYE. It is important to note that the process of calculating the total flow on effects incorporates the Company Tax, additional GST and FBT calculated in the direct tax flows above. It does not, however, incorporate the PAYE which would be paid directly by Team New Zealand crew members and contractors, nor the initial direct GST recovery (from the difference between the GST components of the Government and NZ-sourced funding, and the GST on goods and services purchased directly by Team NZ). Neither of these amounts is included in the economic modelling, so they need to be added in, to identify the total tax revenue amount. Table 3.3 shows the total taxation revenue to Government, under the three scenarios. Table 3.3: Total Tax Flows from Direct, Indirect and Induced Activity, 2004 - 2007
Scenario 1, with net additional direct injection of $73.9m into the economy, would generate tax on indirect and induced activity of some $14.3-15.8m. This is in addition to the initial $9.7m from PAYE, GST, FBT and company tax. In total, the activity associated with a Team NZ challenge would generate between $24.0 and $25.5m of tax revenue. This compares with the net $30m of government funding. In broad terms, the total tax revenue from the consequent indirect and flow on effects would be slightly more than double the direct net tax effect. In Scenario 2, where the NZ-sourced funding is a transfer but not net additional, would generate between $18.9 and $19.8m in total tax revenue - $8.6-9.5m tax from indirect and flow on effects, on top of the $10.3m in net direct tax from Team NZ. In Scenario 3, where half the NZ-sourced funding is additional, the total tax revenue would be $21.5m to $22.8m – with $11.5-12.8m tax from the indirect and flow on effects, and $10.0m in net direct tax from Team NZ. Total TaxThe presence of a Team New Zealand challenge for the 2007 America’s Cup is expected to generate between $18.9m and $25.5m of tax revenue for the New Zealand Government, over the 2004-2007 period. Approximately half would arise from initial and direct tax recovery through PAYE on salaries and wages of crew, and the net GST amount. The balance would arise from the additional activity sustained in the economy by the Team NZ expenditure, driven by the total funding for the syndicate. This compares with the $33.75m of Government funding, including GST. In broad terms, between 56% and 75% of the Government funding would be re-couped over the course of the challenge campaign, from activity sustained by the challenge. This does not allow for any additional activity in the economy which may be indirectly enhanced by the syndicate’s presence – for example, additional tourism or demand for marine sector services outside the America’s Cup activity. 3.4 Economic Impact AssessmentHaving established the taxation position in relation to Team New Zealands presence it is important to assess the wider economic impacts that arise from the spending that occurs. Direct spend is expected to be concentrated in the marine, retail, transport, property and business service sectors (legal, accounting, insurance, finance, technical services etc). A detailed breakdown of expenditure under the three scenarios is appended to this report. Under each scenario impacts have been assessed against the Auckland regional economy and at the national level. Scenario 1Under Scenario 1 it is expected that the presence of Team New Zealand will inject $44m in direct spend into the Auckland and national economies over the next 4 years (Table 3.4). Table 3.4: Team New Zealand Economic Impacts, Auckland Region and NZ (2004-2007), This expenditure is expected to generate $22m in direct value added and 410 FTE years of direct employment in Auckland. Including the indirect and induced effects, the total value added impact would be $48m, supporting 770 FTE years of employment in the Auckland economy. In the context of the national economy, the $52m of direct additional spend generates $22m of direct value added and supports 400 FTEs. Once the flow on effects are incorporated this increases to a value added impact of $53m sustaining almost 830 FTEs (equivalent FTE years). Scenario 2Under Scenario 2 it is expected that the presence of Team New Zealand will inject $34m in direct spend into the Auckland and national economies over the next 4 years (Table 3.5). This expenditure is expected to generate $14m in direct value added and 270 FTE years of direct employment in Auckland (Table 3.5). Including the indirect and induced effects, the total value added impact would be $31m, supporting 500 FTE years of employment in the Auckland economy. In the context of the national economy, the $34m of direct net additional spend generates $14m of direct value added and support 260 FTEs. Once the flow on effects are incorporated, the total value added impact of is $35m sustaining some 540 FTEs. Table 3.5: Team New Zealand Economic Impacts, Auckland Region and NZ (2004-2007), Scenario 3Under Scenario 3 it is expected that the presence of Team New Zealand will result in $44m in net additional direct spend into the Auckland and national economies over the next 4 years (Table 3.6). This expenditure is expected to generate $19m in direct value added and 350 FTE years of direct employment in Auckland (Table 3.6). Including the indirect and induced effects, the total value added impact would be $40m, supporting 650 FTE years of employment in the Auckland economy. For the national economy, the $44m of direct net additional spend would generate $18m of direct value added and support 340 FTEs. The total impact, including flow on effects, would take value added to $44m, and sustain 700 FTEs. Table 3.6 Team New Zealand Economic Impacts, Auckland Region and NZ (2004-2007), Implications for the Marine IndustryAs well as the direct impacts from additional economic activity, there would be wider effects for the marine industry from the presence of an America’s Cup challenging syndicate. These would arise in part from the level of additional demand – which will mean the sector is larger than it would otherwise be – but especially from the nature of the additional demand. This is because an America’s Cup challenge requires specialised, leading edge services and products from the marine industry, and the presence of such activity has flow on effects throughout the industry. Four key effects – over and above the additional demand for the industry - can be identified. Effect One - Skill Retention
Effect Two - Demand for NZ products & services
Effect Three - Flow-on Innovations
Effect Four - Brand NZ
These benefits for the New Zealand marine industry are significant, and have proven to be in the past decade. While they are not quantifiable in the same way as the economic impacts, they are nevertheless important and additional to the economic and taxation impacts identified in the preceding sections.
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