Trade and Assistance Review 2014-15

• For 2014-15, estimated assistance to industry (provided by the Australian Government) was $15.1 billion in gross terms.
  • It comprised $7.8 billion in tariff assistance, $4.2 billion in budgetary outlays and $3.1 billion in tax concessions. While tariff assistance is inherently distortionary, not all budgetary outlays create distortions that result in a misallocation of resources.
• After deducting the cost penalty of tariffs on imported inputs ($7.5 billion, two-thirds incurred by services industries), net assistance to industry was $7.6 billion.
• The incidence of assistance varies widely between sectors.
  • Manufacturing received an estimated $7.0 billion in net assistance (largely due to tariff protection), Primary production received an estimated $1.3 billion (mostly through budgetary assistance), and Mining recorded a small but positive assistance ($0.3 billion).
  • The measured industry assistance arrangements imposed a net cost of $1.6 billion on services industries (as the tariff cost penalty on inputs outweighed budgetary assistance).
• Of the eight categories of measured budgetary industry assistance the two largest are:
  • R&D support (generally available to all industries and specific to rural industry), which represented around 40 per cent ($3.1 billion), the majority of which relates to the R&D Tax Incentive (around $2.2 billion)
  • Industry specific assistance, which consists of a range of grants and concessions such as for the automotive, film, finance and ethanol industries, and represented 18 per cent ($1.3 billion) of measured assistance.
• The measured estimates are conservative as they exclude significant assistance that is difficult to quantify. This includes: favourable finance (loans, debt, equity, guarantees); local purchasing preferences for defence equipment; and regulatory restrictions on competition. The estimates also exclude state and territory government support to industry.
• A number of recent developments will likely add to the level of assistance in coming years. Measures providing assistance have been proposed in the Agricultural Competitiveness White Paper, the Defence Industry Statement, programs to increase renewable energy and reduce carbon emissions, and programs targeted at innovation, collaboration and commercialisation.
• Regional industry investment grant programs continue to be introduced as a response to the closure of iconic local employers.
  • These schemes deliver high subsidy rates to recipient businesses, but the outcomes of these programs are uncertain. A review is needed to determine what design best assists displaced workers and regions to adjust.
• Australia continues to negotiate on a wide array of trade agreements and in a multitude of membership forums. Apart from the conclusion of negotiations on the Trans-Pacific Partnership Agreement, and the China Australia Free Trade Agreement coming into force in December 2015, developments include:
  • final arbitration in Australia's favour of the investor-state dispute in relation to tobacco plain packaging
  • a tightening of screening thresholds for foreign investment proposals in Australian agribusiness and pastoral land purchase
  • an increase in anti-dumping protection.

Productivity Commission warns against backsliding

Australian industry received over $15 billion in assistance from the Australian Government in 2014-15, down slightly from last year.

'$15 billion is the assistance we can readily measure and does not include all industry assistance. While overall assistance has fallen considerably since the early 1990s, government continues to provide substantial support to some industries through tariffs, grants, concessional loans and other budgetary assistance,' said Commissioner Paul Lindwall.

The report states that a tariff of up to 5 per cent continues to apply to around half of imported manufactured goods delivering $7.8 billion assistance to the local manufacturing sector. These tariffs impose costs on consumers and to the services sector, to such an extent that services records net negative total assistance.

'Service industries account for about 85% of the Australian economy. We are penalising our largest employing sector and burdening agriculture by continuing to protect selected industries through tariffs.' said Commissioner Paul Lindwall.

Budgetary outlays and tax concessions add a further $7.3 billion to measured assistance. Around 40 per cent of this support goes to promote R&D, over half of which as a general R&D tax concession. The number of regional adjustment packages has also expanded, in response to the closure of car manufacturing in Victoria and South Australia and slow growth in Tasmania.

The report calls for evaluation of these regional assistance programs to ensure that they deliver the best outcomes for the people and local regions affected by industry closures. These schemes appear to involve very high subsidy rates to some individual companies.

'Governments naturally want to help large groups of people who find themselves suddenly out of work due to the collapse of a major industry in the area. But it is difficult to find effective evaluation of whether this assistance is meeting its stated objectives, be that helping people transition to new careers or regional diversification' said Commissioner Paul Lindwall.

The report also draws attention to preferential assistance that is not measured and included in the $15 billion assistance figure. Anti-dumping measures and domestic purchase criteria for government contracts (such as defence procurement) are two classic examples of industry assistance that is not measured.

The report also maintains the Commission’s stance on trade agreements that allow foreign companies to sue the Australian government for policy changes beyond the rights available to all firms from our well-respected legal system. The success in defending the recent Investor State Dispute Settlement (ISDS) case relating to tobacco plain packaging entailed reported legal costs of around $50 million. As it was resolved on a technicality, and costs are apparently yet to be recovered, this success should not be taken as an indication that ISDS is essentially harmless.

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Gross Industry Assistance

In 2014-15 Australian industry received over $15 billion gross assistance consisting of:

• $7.8 billion tarrif assistance
• $4.2 billion budgetary outlays
• $3.1 billion tax concessions.

Net industry assistance was $7.5 billion.

Net assistance is the assistance provide to business once you take into account the cost penalty of tariffs on purcahses. Tariffs protect some businesses but also tax other businesses.

Assistance varies between sectors

• Manufacturing $7 billion
• Primary production $1.3 billion
• Mining $0.38 billion
• Services -$1.6 billion.

Tariffs on imported goods effectively means service industry receives negative industry assistance.

There are a number of recent developments likely to add to the level of assistance in coming years such as:

• Agricultural Competitiveness White Paper
• Defence Industry Statement
• Renewable Energy and Carbon Emission Reduction Programs
• Business Innovation Programs.

Trade Agreements

We need to be cautious on trade agreements that allow foreign companies to sue the Australian government for policy changes beyond the rights available to all firms.

Defending tobacco plain packaging case cost around $50 million in legal fees.

Trade agreements should provide a net benefit to Australia.

Read the draft report and make a submission.