CEDA: Australia Must Stop Using Subsidies And Monetary Policy To Prop Up Unsustainable Industries

Graeme Samuel

The Committee for Economic Development of Australia has called for an end to industry subsidies in favour of income-contingent loans to innovative SMEs.

In a report titled “Australia Adjusting: Optimising national prosperity”, released today, CEDA argued that taxpayers should not continue to prop up industries “that will not be sustainable in the long-term”.

“Australia is at a cross-roads, we have a new Federal Government and the peak of the mining boom has passed,” said CEDA CEO, Professor Stephen Martin.

“Rather than hang onto the past, now is the time to identify and focus on the industries that will provide our future prosperity and appropriately skill people to work in these industries.”

CEDA’s 202-page report looks at the current state of the economy, regulatory shortcomings, the innovation ecosystem and the workforce.

The government so far has looked to keep jobs onshore by subsidising car makers, for example, with Holden still waiting on a pre-Christmas pledge before committing to continue operating a manufacturing plant in Australia.

Here’s what Monash University professor and former ACCC chairman Graeme Samuel wrote about industry subsidies:

Too often we hear pleas for the Reserve Bank of Australia (RBA) and government to rectify the waning competitiveness of our manufacturing sector by some unidentified process of bringing about a devaluation of the Australian currency relative to those of our major trading partners.

But the levers for achieving this – in particular that of monetary policy – have become shortened stubs, with restricted capacity to engineer significant movements in the value of the Australian dollar, without bringing into play other deleterious economic side effects.

But more importantly, such pleas, directed to a short term “sugar-fix”, seek to ignore or avoid the underlying need to focus on long term structural issues which require at times difficult reform measures to be undertaken to embed the solid foundations for sustained economic growth and prosperity.

And these structural reforms are directed to creating a flexible economy, that will address the rigidities that have been embedded in decades past, and have left Australian business without the necessary flexibility to adapt to the constantly changing global economy in which it must now compete.

It is about productivity.

This is NOT a matter of sole interest to business. It is not an issue that is about job cuts or reductions in wages or conditions. It is about producing more efficiently and encouraging innovation.

Technically it is about producing more from what we input to produce. Why do it? Because increased productivity generates higher incomes and government revenue – both of which are necessary to raise living standards and rectify disadvantage in the community.

[…]

Middle class and business welfare imposes massive burdens on taxpayers. They are the handouts, incentives, protection, co-investment subsidies – call them what you will – which distribute billions to selected interest groups who have satisfied the ‘P’ test – do they provide a political solution – not the fundamental ‘P’ test – do they serve the public interest?

We so easily succumb to the implicit threat that investment will not occur, or existing operations will cease, unless the philanthropic hand of the taxpayer is extended to line the pockets of the rent seeker.

It is appropriate to reflect on the failure of successive schemes to subsidise the Australian automotive industry – in an amount of $12 billion over the past 20 years – with two of four manufacturers determining to cease production and a third (which has received $2.2 billion of assistance over the past 12 years) threatening to do so.

How much better it would have been to apply that taxpayer-funded assistance to retraining and relocating workers to other industries with a long term future.

And finally, before we hasten to embrace superficially attractive calls to divert government assistance from one industry that is losing public favour, to another that has not yet been subjected to critical examination – the recent calls for automotive industry assistance to be diverted to a food industry to create an Australian global food super-bowl is a prime example – we should apply the tests enumerated earlier.

They fail dismally.

Instead of industry subsidies, CEDA wants the government to introduce HECS-style loans to SMEs, to encourage them to undertake “innovative activities”.

The not-for-profit called for a series of reforms, called the National Productivity Policy (NPP), to replace the National Competition Policy of the 1990s.

There’s more in the report.

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