In the face of tax breaks in Australia incentivising expansion over the Tasman for video game developers, Digital Economy Minister David Clark is looking into ways to keep them growing at home
Last Saturday, Stephen Knightly hopped a plane for Brisbane to see if the Australian city provided more fertile ground for the expansion of his company than back in Aotearoa.
As chief operating officer of video game developers RocketWerkz, Knightly stands to earn more by operating over the Tasman due to new tax breaks offered to the video game industry.
With 45 percent tax discounts available in Queensland, Knightley is sorely tempted – even though he’d much rather be creating jobs in New Zealand.
“We’d prefer to grow teams in New Zealand,” he said. “But you can’t just ignore 45 percent.”
As a leader at RocketWerkz, Knightley is doing the math on following companies like Wellington’s A44 games, who have already expanded to Melbourne.
But as a board member of the New Zealand Game Developers Association, he’s calling on the Government to kickstart the growth of the video game sector here by including developers in screen production grants and providing staged funding for start-ups to keep future jobs in the country.
The association met with Minister for Digital Economy and Communications David Clark, asking for targeted assistance to keep game developers competitive with Australia.
For although expanding across the Tasman to the land of tax breaks and incentives may be good for individual companies, Knightly said game developers shifting focus to Australia isn’t good for the New Zealand economy as a whole.
“Who does lose out is New Zealand Inc.,” he said. “These are the kinds of jobs we want in New Zealand.”
Association chair Chelsea Rapp said after a meeting with Clark on Monday she was confident he was aware of the urgency of the situation for the sector, but wasn’t sure the budget would allow him to make a move in time.
“We’ve been very clear about the support we need for a long time,” she said. “[The Government] would have to accept responsibility for the degradation of an industry that represents everything they’ve been talking about… high-skilled, they’ve been talking about the digitisation of the economy for years.”
Clark said he has a constructive relationship with the game developer sector, which is fast-growing and well-placed to contribute to a low-emission, high-wage economy due to its focus on weightless exports and high skill, high wage jobs.
While there are already some initiatives in place or on the way to support the sector’s growth further, he said longer term plans are needed to maximise the sector’s potential, as well as a shorter-term response to Australia’s incentives.
“In light of the Australian Government’s recently announced support programmes for the gaming sector, shorter term measures, including those aimed at providing a competitive environment are needed now in New Zealand,” he said.
He said he and the association discussed a range of options last week, including opening up screen production grants to the sector.
“Officials will be working through what the support would most appropriately look like, remaining mindful of Australian competition and will report back in due course,” he said.
The Australian tax rebate kicked off from July 1, with a 30 percent digital games tax offset and 10 to 15 percent rebates in some states.
Dr Eric Crampton, the chief economist at the New Zealand Initiative, rejected the idea the New Zealand Government should try and match overseas subsidies by using the example of film subsidies, which he called a “bad deal”.
“Film companies play countries off against each other, seeking the largest subsidies and tax breaks. While consultancy reports tout large benefits for the countries bidding the most, academic work struggles to find any real benefit at all,” he said.
He said subsidies like this have unintended side effects, like companies being able to outbid for workers whose skills may be needed in other industries.
“New Zealand learned in the 1980s that heavy subsidies are an unsustainable response to foreign subsidies,” he said. “Better to abolish our own subsidies, and encourage others to do likewise.”
Crampton argued making sure Immigration New Zealand is equipped to quickly process visas would be a more approach, making sure sectors like video games have access to overseas staff they may need.
But Chelsea Rapp said it’s an “absolutely critical” moment for the industry - although she couldn’t think of any companies completely upping and leaving and expansion like this may serve individual businesses.
“Expansion overseas is ultimately beneficial for the business itself,” she said. “But from an economic development perspective, it's a tragedy.”
So although the rebates may not mean a loss of jobs here right now, Rapp said there’s a loss that may be felt down the road.
“Expansion overseas now means the talent is not being developed and nurtured in New Zealand, and overtime jobs in NZ will be lost as people leave studios and their jobs are filled overseas instead of being filled here,” she said. “In addition, it means that our studios aren't hiring New Zealand talent, so recent graduates will still have to go overseas to get jobs as studios prefer to hire where it's easier and more profitable to do so.”
She also cited tax revenue lost as jobs that could have been realised here never come to be.
“So while expansion overseas isn't the worst for NZ businesses themselves, it would be better for them, the industry, the economy, and the government to develop a strong game development ecosystem with a healthy talent pipeline here in Aotearoa,” she said. “This industry has a weightless, digital export so there's little reason for studios to expand overseas unless they are forced to, which is where we are now.”
According to the association, there’s an estimated 300 jobs that won’t be created here if the industry takes a fork in the road away from the current forecast of video games being worth $1 billion to the economy by 2025 that make the moment crucial.
The video games industry created 222 new jobs during 2020’s lockdowns and earned $276 million in the 2021 financial year.
“The economic case is incredibly sound,” Rapp said. “Even if you just open up the grant, it would stop the bleeding of talent and would pay for itself via the tax already paid by developers in New Zealand.”
The New Zealand Screen Production Grant supports the film sector with tax rebates of 20 percent for international productions and 40 percent for domestic productions.
The association wants to be included in the 20 percent tax backs of the post digital and visual effects grant, which Rapp says would stem the flow of jobs out of the country.
But in the association’s meeting with Clark, which Rapp called “useful and constructive”, they also brought up the lack of support for start-ups in New Zealand.
Around 12 studios account for 96 percent of the revenue out of an industry of more than 60 studios.
Rapp pointed to initiatives like the $10 million Centre of Digital Excellence (CODE) pilot in Dunedin, paid for by the Provincial Growth Fund. CODE aims to support game developers in the city put game prototypes together or found new studios.
“We all know and understand the problem. If the Minister and his Cabinet colleagues are serious about expanding our digital economy and retaining one of New Zealand’s fastest-growing sectors they need to take action now,” said Rapp.
Camille Cowley is the chief operating officer of Shoggoth Games, a nascent developer based in Dunedin who received funding through the CODE pilot.
She said although systems make it nigh on impossible for her company leads with disabilities to make the move over to Australia, she can see how it’s an attractive prospect for many in the industry at the moment.
“The main concern here at the moment is the cost of living,” she said. “A lot of companies are finding it hard here just because of the high cost of running any company in New Zealand.”
She said if the Government wants to drive New Zealand productivity, it needs to get behind the tech sector and widen the specific criteria of grants that at the moment see game developers vying for funding alongside the film industry.
“There isn’t much recognition of games as a separate industry,” she said. “That’s why so many companies are turning their heads to Australia.”
For managing director of Grinding Gear Games Chris Wilson, the Australian tax credit tempts a move across the Tasman.
The developer of popular action role-playing game Path of Exile said without similar initiatives in place in New Zealand, it's hard to attract fresh talent.
"It's extremely hard to compete with companies that are receiving such subsidisation. If a company receives a 30% rebate on someone's salary, then they're able to offer that employee over 40 percent more salary than a company that receives no such rebate," he said. "I believe that unless a similar scheme is established here, it's going to be very negative for the local industry."
