No Relief

Published as part of our sister-site GamesIndustry.biz's widely-read weekly newsletter, the GamesIndustry.biz Editorial, is a weekly dissection of an issue weighing on the minds of the people at the top of the games business. It appears on Eurogamer after it goes out to GI.biz newsletter subscribers.

The lows always taste most bitter when they come so soon after the highs, and after yet another great year for British development talent at E3, it was only a few days before the inevitable come-down arrived - in the form of the first Budget to be delivered by the UK's new Conservative/Liberal Democrat coalition government.

In the wake of the financial crisis, austerity and belt-tightening was expected. Even if economists are still divided over whether it's really necessary, politicians have succeeded in convincing a fair chunk of the public, and more importantly, themselves, of the need. Cuts in public spending and rises in taxation were both on the menu, and both promptly delivered.

Even as the country as a whole winced collectively, however, the games business was singled out for a particularly bitter pill. Only a few months ago, years of intensive lobbying finally paid off when plans to extend the film industry's tax relief schemes to videogame development were revealed. The plans were uncontroversial, winning support from all major parties in the house. Earlier this week, they were scrapped outright.

"Poorly targeted", our new Chancellor, George Osborne, announced. That pronouncement which will be puzzled over for months by the industry, as it regroups itself from the blow and resumes its lobbying efforts. Was there, perhaps, some way in which the relief could have been structured that made it better targeted, more focused on the objectives which the coalition government aims to achieve?

I suspect not, because my own feeling is that when Osborne described games tax relief as "poorly targeted", what he meant was that it targets the games business. At a time when the government is preaching austerity, extending tax relief to a sector such as videogames - which despite the advances of recent years, remains controversial with the tabloids and with large swathes of the older voters who make up the Tory heartlands - could easily be pounced upon by the press.

Osborne and his front-bench colleagues already know that selling a Budget which essentially sees a Cabinet full of millionaires imposing harsh cuts even on some of society's poorest people is going to be tough. Including support for an industry whose cultural and economic value is far from universally recognised would just make the job even harder. The games business has become much more proficient at lobbying and presenting its case in recent years, but when the chips are down, its weak public perception makes it into an easy sacrifice for a career politician to make.

The disappointment from the games sector, however, has been tempered somewhat by the fact that few really expected the promised tax relief to materialise in this Budget. The direction in which the wind is blowing has been fairly obvious - I proclaimed a few weeks ago that I'd eat any given item of headwear should the relief be confirmed by Osborne, so my fine collection of hats, at least, is safe.

It ought to be tempered further by the fact that while specific measures for the games business have not been included, there were a number of bright spots in the Budget for UK businesses as a whole. Corporation tax is being lowered, which should help the majority of British studios, while relief on National Insurance payments for small companies will be a big help for the small start-ups which make up a significant part of the UK games industry.

Not all bad news, in other words. The blow to the British games business will also be reduced by the continuing weak position of Sterling on the currency markets, which is allowing studios here to remain very competitive compared to their US colleagues, and even more so compared to studios in deflation-hit Japan.

If those aspects of the Budget lift the gloom, however, there ought to be a certain measure of dismay at how Osborne's ending of the relief plans has been greeted. Outside of the specialist press, and even in some corners of the enthusiast media, there has been much sage nodding at the apparent wisdom of Osborne's decision. It has been accompanied, worryingly, by serious questioning of the business case for the tax relief - an argument many within the industry probably thought they'd already won.

The business case is, after all, pretty solid. The UK industry isn't seeking tax relief to maximise profits, or to shore up a failing sector - it's asking the government to provide a level playing field on which it can compete effectively against regions like Canada, Singapore, France and Florida, all of whom have instituted games-friendly tax regimes.

Moreover, the calculations on the tax relief plans demonstrated fairly clearly that they would actually leave the Treasury in the black within a short space of time, with tax relief for development being more than compensated for in revenues from the sales of the resulting products, not to mention the income tax earned from the large number of development staff employed in their creation.

This is, as some commentators have pointed out, an argument the Treasury has heard before. "Prop up our industry and you'll make back a ton of cash when we grow" is a common cry from industries who are in crisis, and whose chances of growth are pretty minimal to begin with. Given the ease with which this argument has sprung to the lips of pretty senior commentators in the media, I suspect that this sense of financial deja vu wasn't far from the minds of those at the Treasury, either.

This is a perception which the industry's lobbyists will have to fight, and fight hard. Despite the incredible challenge of competing with rivals in vastly more supportive nations, game development is the British creative industries' most glowing success story. It's a sector which punches far above its weight and places the United Kingdom high on the export leaderboard in a global market which grows by double-digit percentages year on year. Moreover, it's a sector which, unlike most other creative sectors, can actually make a positive contribution to the country's balance of trade.

The danger is not that the games business will collapse, or shrink - pretty much nobody is worried about that prospect. Games will continue to grow, and British consumers will continue to buy lots and lots of them. The danger, instead, is that Britain's place in this global industry will decline. Contracts will go abroad, followed closely by development firms and their staff - primarily young, relatively affluent, well-educated and thus fairly footloose people. Remaining firms will find it increasingly hard to recruit from a pool of staff sapped by this brain drain, increasing the pressure to move abroad.

Gamers won't notice much - there'll still be lots of games on the shelves, although the uniquely British flavour of titles such as Fable or Grand Theft Auto (which may be set in a fictional version of America, but is thoroughly British in its spirit and humour) may be hard to replicate abroad. Britain, however, will have lost tens of thousands of jobs, many of them skilled roles for top graduates, a vast amount of tax revenue, and - for those who believe in the importance of Soft Power in international relations - its most successful source of cultural exports.

This is, of course, the most extreme scenario - but in a nation which has lost many of its major industries in the past 30 years, we would be foolish to imagine that the most extreme scenario could not play itself out.

Games have many strengths which lobbyists can seize upon when approaching the next round of this battle. By the next election, after all, an even larger percentage of voters will also be gamers, making the "it's an unpopular industry" argument invalid. It's a low-carbon, high-tech, knowledge-based industry in a rapidly growing market, with spin-off applications in areas such as medicine, education and defence. It's a sector which, unusually for the UK, actually makes things and then exports them to sell abroad. Politicians should, by all rights, absolutely love the games industry. After this week's setback, the UK industry must work harder than ever to spark that romance.