PC News - June 2018

Government assistance to industry

Australian industry received more than $19 billion in assistance from the Australian Government in 2016-17 – this was a substantial increase over the previous year’s estimate.

The Australian Government provides assistance to industries in many ways – including through tariffs on imported goods, budgetary outlays, tax concessions, and regulatory restrictions on competition. Assistance is provided for a range of reasons. Some types of assistance, such as for R&D and measures aimed at meeting environmental objectives, may be designed to deliver net community benefits that markets, left alone, would not realise. Often, however, assistance measures are intended to favour some industries over others, to the detriment of the community as a whole. And sometimes measures that governments claim to serve the public interest actually favour specific groups.

While industry assistance benefits the firms or industries that receive it, it imposes costs on other sectors of the economy. For example, direct business subsidies increase returns to recipient firms and industries. However, to fund the subsidies, governments increase taxes and charges, or cut back on other spending. Similarly, tariffs shelter domestic goods producers from international competition, but they result in higher input costs for other local businesses, reducing the competitiveness of those businesses. They also effectively tax consumers by imposing higher prices on the goods subject to the tariff, leaving them with less money to spend on other goods and services.

Total industry assistance was significantly higher in 2016-17 than in previous years, with tax concessions increasing the most.

• Aggregate estimates of measurable assistance, 2011-12 to 2016-17
  Gross assistance by component

  

• Net combined assistance
  (Gross assistance less tariff penalty on inputs)

  

  Source: Commission estimates

Manufacturing receives the majority of industry assistance

• The incidence of assistance varies across industries, 2016-17
  Components of assistance

  

  Source: Commission estimates

For 2016-17, Australian Government assistance to industry was estimated at $19.3 billion in gross terms. This comprised $6.8 billion in gross tariff assistance, $5.3 billion of budgetary outlays, and $7.2 billion in tax concessions. Net assistance (after accounting for the cost to Australian business of tariffs on imported inputs) was $13.4 billion – an increase of over $4 billion (or 24 per cent) on 2015-16.

The largest contribution to the increase is the expansion in small business tax cuts. While some may question whether these cuts are industry assistance, they advantage one form of business over another, and if they continue to apply only to small business, they will skew investment and harm the economy over time.

Manufacturing receives the highest level of assistance due mainly to tariff assistance. The services sector records much lower net assistance, as it incurs about two thirds of the input cost penalty resulting from manufacturing tariffs.

Concessional project financing is playing an increasing role

There has been a recent trend towards delivering industry assistance through government finance facilities that extend credit to businesses or provide guarantees for their commercial loans. These include the Northern Australia Infrastructure Facility, the Defence Export Facility, the National Water Infrastructure Loan Facility and the Farm Business Concessional Loans Scheme. In total, these decisions will provide up to $12.8 billion in business finance.

The Commission has not assessed the costs and benefits of each program. However, Australia has relatively deep and liquid financial markets. Proponents of taxpayer-funded financing of commercial projects should demonstrate how this serves the public interest. Even where there is a convincing argument for government assistance, use of financing, as opposed to other policy options, should be explained. In light of the past poor performance of similar schemes, these new financing measures should be reviewed early in their operation to ensure they genuinely make Australians better off, and that they do not merely benefit project proponents.

Moreover, there should be strict requirements for transparency and due diligence in providing finance.

Rising protectionism – how should Australia respond?

The foremost global trade policy issue currently is the uncertainty created by changes in US trade policy, which potentially threaten the liberal, rules-based world trading system. The Trade and Assistance Review identified a number of these recent measures including:

• withdrawal from the Trans-Pacific Partnership (TPP)
• renegotiation of the North-American Free Trade Agreement and the United States Korea-Free Trade Agreement
• imposition of tariffs on steel and aluminium imports into the USA from a range of countries on national security grounds, but suspending application as negotiating leverage.
• further tariffs on imports from China, related to concerns about intellectual property rights.

In the event of a global rise in protection, Australia would not go unscathed. Previous Commission modelling of significant international increases in protection estimated that Australia’s GDP could fall by up to 1 per cent, 5 per cent of the capital stock could be mothballed, and up to 100,000 jobs could be lost.¹

Commission Chairman Peter Harris emphasised that ‘Australia’s interests clearly lie in resisting this protectionist trend. Trade liberalisation has contributed to Australia’s economic resilience, enabling over  25 years of uninterrupted growth, despite major disruptive events such as the GFC and the Asian Financial Crisis’.

Should global protectionist trends increase, Australia may face intense pressure to increase its own barriers to international trade and investment. The Commission’s analysis shows there would be no economic justification for joining such a trade war. Rather, Australia would still benefit from continuing to pursue freer markets and improving the functioning of the rules based international trading system.

In international negotiations, Australia will be best served by continuing to work with like minded countries to pursue freer markets and improve the functioning of the rules-based international trading system by:

• prioritising regional agreements that follow, or work directly towards, WTO ‘most favoured nation’ treatment (under which countries provide equal trade advantages to all their trading partners)
• promoting the greater use of plurilateral ² sector specific agreements negotiated in the context of the World Trade Organization
• pursuing only those bilateral trade agreements where there is a strong prior case that a clear net benefit to Australia will result
• broadening negotiations over agreements to include objective and critical assessment of their value, not just involving parties seeking an advantage or protecting a constituency
• adopting better consultation processes in negotiating agreements, including widening the access of stakeholder groups to draft treaty text on a confidential basis during the negotiation
• strengthening Australia’s reputation as an attractive destination for international investors through more consistent, transparent and predictable foreign investment approval processes while preserving our national security interests.

Footnotes

1. Rising Protectionism: Challenges, Threats and Opportunities for Australia , Commission Research Paper, July 2017. Return to Footnote 1 in the text
2. A plurilateral agreement is a voluntary agreement among some WTO members (whereas a multilateral agreement is a requirement of all WTO members). Return to Footnote 2 in the text

Trade & Assistance Review 2016-17

• Read the Report released April 2018

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