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PC News - December 2017

Government assistance to industry

Workers pointing and looking

The Commission’s latest Trade and Assistance Review estimates that Australian industry received over $9 billion in net government assistance in 2015-2016. This year’s review also examines some recently announced assistance measures that may stray from best practice.

The Australian Government assists industries through an array of measures, including tariffs on imported goods, budgetary outlays, taxation concessions, and regulatory restrictions on competition. The Productivity Commission is required to report annually on industry assistance and its effects on the economy. The Commission’s latest quantitative estimates of Australian Government  assistance to industry were released in July 2017.

For 2015-16, Australian Government assistance to industry was an estimated at $15.0 billion in gross terms. It comprised $6.8 billion in tariff assistance, $4.6 billion in budgetary outlays and $3.7 billion in tax concessions. As tariffs on imported inputs impose a cost on Australian industry of $5.9 billion, the net assistance to industry was $9.1 billion. This is a decline of 1.1 per cent on 2014-15, due mainly to a shift in imports towards lower or zero tariff items, rather than a reduction in tariff rates. The downward shift in both gross and net combined assistance continues the trend of declining assistance since 2011-12.

As in previous years, manufacturing received the most assistance – 56 per cent of gross and 77 per cent of net assistance – while tariffs imposed a penalty on the services sector. Service industries received no net assistance, with budgetary assistance outweighed by the tariff penalty (figure 1).

Figure 1: The incidence of assistance varies widely across industries. 2015-16

  • $ billion (nominal)

    The incidence of assistance varies widely across industries, 2015-16. Components of assistance.

    Data source: Commission estimates.

Over the past 40 years the industry assistance landscape has changed in fundamental ways. Tariff and import quota protection has declined to minimal levels. Complex and costly agricultural production, marketing, and pricing measures have been unwound. And highly selective and preferential grants, subsidies, and bounties provided to specific industries and firms are not as prevalent. Industry assistance today is  focused on support for R&D (which makes up 47 per cent of budgetary assistance), facilitation of regional adjustment, assistance for small business, WTO compliant export assistance, and support for achieving environmental objectives.

This change has been driven by government recognition of the efficiency costs of the old  protectionist framework. However, industry assistance in Australia continues to be influenced by reactions to specific events and disruptions, and assistance to individual industries and firms has not completely disappeared. The Trade and Assistance Review examined several recent developments in budgetary assistance where good practice has not been followed or is in some doubt.

Northern Australia Infrastructure Facility

While the $5 billion Northern Australia Infrastructure Facility (NAIF) had, at time of publication, yet to make any loans, to qualify a project would have to meet a number of criteria, including:

  • that it would not otherwise be able attract finance, but would be commercially viable once constructed
  • there would be a public benefit from the infrastructure (to justify the cost to the taxpayer of the short-term assistance provided).

Many of the projects suggested in the media as candidates for NAIF funding – such as the rail line to the Galilee Basin and various large irrigation dams – may fail at least one of these criteria. If the return on the investment does not cover the operational costs of the infrastructure and the costs of servicing the loan at market rates over the life of the asset, the small initial level of assistance provided by a concessional loan may simply become another case of inefficient resource allocation.

Arrium steelworks in the Upper Spencer Gulf

A $50 million grant to Arrium announced by the South Australian Government, with additional support proposed by the federal government, is the most recent measure in a long history of government support for the steel producer. Previous measures include wavering of mining royalties, protection through anti-dumping duties on imported steel, and local procurement practices, as well as financial support offered to new owners. This raises questions about whether assistance is an effective tool for building a sustainable business.

The need to support regions undergoing structural change is not in doubt, but the Commission has previously questioned the effectiveness of such assistance measures. There are few evaluations; assistance can be uncoordinated; and it is often targeted at maintaining existing business instead of helping workers and firms adjust to the changing environment. Rather than using industry assistance to resist inevitable changes driven by external forces, more effective approaches are required to assist workers in regions to adjust.

Electricity generation and storage assets

The Commission also examined responses to the problems afflicting the National Electricity Market, including prolonged black-outs in South Australia. Increased unilateral public investment in new energy generation and storage may not be the best solution if the fundamental problem is that investors do not have sufficient confidence in the market rules to make long-term investments.

Government investment in electricity market assets raises several concerns: a reduced pressure to resolve problems in the market rules; whether there will be pressure to keep prices down by reducing the return on the publicly-owned assets, which would undermine competitive neutrality; and the potential for ‘special deals’ to be offered to some customers, which can lead to a cycle of on-going assistance. The Alcoa smelter in Portland in Victoria is a case in point, receiving substantial government subsidies following the end of ‘cheap’ power from the now closed Hazelwood electricity plant.

Backward steps on sugar industry regulation

As the single desk export market arrangements were finally toppled in 2006, the marketer, Queensland Sugar Limited (QSL) was granted a ten year monopoly on marketing sugar exports from Queensland. Then, in 2015, the Queensland opposition introduced a bill, passed with cross-bench support, that effectively reregulated the industry, giving the growers control over where millers could market the sugar they mill. While a negotiated solution was reached in May 2017 between the miller, Wilmar, and QSL on sugar marketing, the legislation has yet to be repealed. To add to the advantages provided by this legislation to QSL, it has also been granted charity status, which gives it considerable payroll and fringe benefits tax exemptions.

Some progress in trade policy

The Trade and Assistance Review also reports on recent developments in trade policy. Recent multilateral trade negotiations have included: some success in the agreement to eliminate all agricultural export subsidies; entry into force of the Trade Facilitation Agreement; agreed tariff reductions for ICT products under the Expanded Information Technology Agreement; progress with building on the 2012 APEC Environmental Goods Agreement; entry into force in 2014 of the Government Procurement Agreement; and progress on the Trade in Services Agreement.

The Review also outlines the main conclusion of a Commission paper1 on Rules of Origin: untangling the noodle bowl of overlapping trade agreements through unilateral tariff elimination. It also provides a brief summary of the modelling results from another recent Commission paper2 on the effect that increased global protection could have on Australia, and appropriate policy responses.

Footnotes

  1. Rules of Origin: can the noodle bowl of trade agreements be untangled? Productivity Commission Staff Research Note, May 2017.
  2. Rising protectionism: challenges, threats and opportunities for Australia. Productivity Commission Research Paper, July 2017.

Trade and Assistance Review 2015-16

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