There is little doubt that the U.S. and European economies are on a roll.
That is, for now.
Companies are expanding, creating jobs and spreading wealth at a breakneck pace. In response, governments are working harder than ever to attract that prosperity through incentives.
When a government offers incentives to a company, it causes a reduction and/or postponement in the expected benefit that the government would otherwise receive. If the incentives are paid for with borrowed money, then the government has leveraged its future and taken on risk.
Each time a similar deal is done, the risk grows.
Economies are therefore destabilized because they become dependent upon growth as the only means of servicing the ever-increasing debt load. If the expected growth is not forthcoming, it will be the companies that have already expanded in that country that will be left with a legacy of poor planning and a bankrupt economy.
Unfortunately, this harmful relationship is often facilitated because governments have historically encouraged local banks and investors to buy development bonds by allowing certain tax benefits for their ownership.
This interwoven codependency only hastens a collapse if anything goes wrong.
Incentives, after all, can be boiled down to the study of macroeconomic cash flows. When viewed this way, seeing a potentially dangerous relationship should not be difficult. A company that allows itself to participate in leveraged incentives becomes an unwitting accomplice to the crime of fiscal irresponsibility.
To avoid letting this happen, the first step is to know in detail the types of incentives that a government is offering.
Figuring out how significantly those incentives leverage a government's economy is the second step. Fortunately, in the United States and most of the stronger European economies, leveraged incentives are not as significant a concern as they are with smaller countries. If a country's economy is not very robust to begin with, and it chooses to use leveraged incentives, more prudent companies may want to invest elsewhere.
| If a country's economy is not very robust to begin with, and it chooses to use leveraged incentives, more prudent companies may want to invest elsewhere. |
Simply ask the government's representatives about the frequency and the extent that their government uses leveraged incentives. After all, the most important incentive a foreign country has to offer is stability.
Ask for specifics, and make sure the country has a solid bond rating.
Hopefully, when you start evaluating the government's overall incentive policy you will see the use of "development safe incentives"-- that is, incentives that are revenue neutral by design.
By using revenue neutral incentives, a government guarantees that it will never give away more than it gets in return. Typically a revenue neutral program will give money back to a company after it has been collected, like a refund of taxes.
Unfortunately, when incentives are not revenue neutral, there is no easy way to discount the possible macroeconomic effect they may have. When the next significant economic downturn occurs and investment stalls, overly leveraged governments will suffer far greater than those that maintained a more conservative approach to economic development.
Opting for a country that uses revenue neutral incentives, and which has a strong economy to begin with (even if doing so saves less money up front) may pay off big in the long run.
John Skowronski is the director of proactive incentives programs at MINTAX Inc., an East Brunswick, N.J., economic development consulting firm specializing in incentives.
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