‘Old-fashioned protectionism’: Government warned on industry handouts

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Australians’ living standards are being risked by governments rushing to protect local businesses and post-COVID supply chains while using taxpayers’ money to reduce greenhouse gas emissions, the nation’s top independent economic agency has warned.

The Productivity Commission, in its annual stocktake of federal government assistance to the business sector, found a record $13.8 billion in direct handouts and tax concessions were provided in 2021-22.

The Productivity Commission says efforts by all governments to prop up supply chains, deal with climate change and target special businesses will undermine living standards.Credit: Nine News

Assistance lifted by almost $500 million over 2020-21, with all of that due to tax concessions to favoured industries or sectors within the economy. Handouts to businesses are now worth more than what was spent last year on childcare subsidies or JobSeeker payments to unemployed Australians.

Expressing clear concern about Albanese and Morrison government policies, the commission’s Deputy Chair, Alex Robson, said protectionism was on the rise locally and around the world in a development that could ultimately leave people worse off.

“The world’s largest economies are increasingly engaged in policies to favour selected domestic
industries through subsidies, local content rules and trade barriers. In many cases, this is simply a
form of old-fashioned protectionism,” he said.

“As a small, open economy, our future prosperity depends on global economic integration and low
trade barriers. It is unlikely to be in Australia’s interests to try and compete in a protectionist contest via large-scale industry assistance.”

Governments around the world have ramped up concessions and assistance to businesses to deal with supply chain issues that developed during the pandemic or to overhaul their power networks.

The Biden administration in the US has led the way, with a huge investment in renewable energy and last year’s CHIPS and Science Act that will sink up to $US53 billion ($78 billion) into the US-based semiconductor industry.

In Australia, the Productivity Commission said organisations such as the Clean Energy Finance Corporation and the National Housing Finance and Investment Corporation were already providing taxpayer-supported assistance to businesses.

The Albanese government is also creating new funds or using tax concessions in its critical minerals strategy, its Hydrogen Headstart program, the National Reconstruction Fund and the National Battery Strategy.

The commission said handouts to businesses here and overseas were no longer quotas or tariffs but “less visible” protections such as subsidies, concessions, budget spending on favoured sectors and local content rules.

“Collectively, these measures risk winding back some of the gains in living standards of recent decades, by encouraging countries to direct their scarce national resources towards sectors that are not a natural fit for their economies,” it said.

The commission said tax concessions now accounted for $5.6 billion of the $13.8 billion in assistance to businesses. The rest was made up of direct assistance.

The property, professional and insurance services sector received almost a quarter of the $7.7 billion in help that went to services businesses. The mining sector received the least assistance of any part of the economy.

Luxury cars attract the luxury car tax, one of the few remaining tariffs imposed on imports.Credit: Peter Braig

The government is using its $15 billion National Reconstruction Fund to help address what it says are key risks to the nation’s supply chain network.

But the commission said this ignored the full economic cost of sinking money into areas that were better off conducted elsewhere.

“While the costs of disruptions to Australia are likely to be limited, the costs of building and maintaining a domestic production capacity in non-comparative advantage sectors are likely to be large,” it found.

“Each dollar spent on subsidising domestic production capacity in non-comparative advantage sectors is a dollar taken away from sectors in which we enjoy a comparative advantage.

“This trade off is particularly binding in a near full-employment economy, where the redirection of labour towards one sector inevitably comes at the expense of another.”

The government is also spending billions on overhauling the nation’s electricity system, moving it away from fossil fuels toward renewable sources of power.

The commission said the absence of an economy-wide price on carbon meant there were now a “proliferation of piecemeal” sectoral policies that appeared to operate like assistance programs for private power companies.

The commission, which has long championed the end of tariffs on imported goods, also found the revenue raised by tariffs was less than the economic problems they caused for local businesses.

It estimated the federal government collected $1.8 billion in tariff revenues in 2021-22 but the compliance costs borne by businesses because of those tariffs was between $1.2 billion and $3.6 billion. Almost 90 per cent of imports now enter the country tariff-free.

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