Assistance to industry

Budget Review 2015–16 Index

Anne Holmes

During the investment phase of the mining boom, resources of capital and labour moved into the construction of mines, and the high exchange rate meant that Australian exports were less competitive in overseas markets. Many companies closed down or shifted production offshore.

Now that the investment phase of the boom is winding down, the Australian economy will need to adjust. Other industries will need to take up the slack in the economy to provide jobs and growth. However, there will not be a simple reversal of the processes of the boom. The companies that provide growth will not simply be the ones that were there before. To maintain high standards of living it will be necessary to develop innovative, highly productive, knowledge intensive industries.

The necessary adjustments will be assisted by macroeconomic conditions including a lower Australian dollar, low wage growth and low interest rates. However, as the Reserve Bank of Australia has observed, ‘non-mining business investment has been subdued, although many of the conditions typically associated with stronger investment are in place.’[1]

Several commentators have pointed to the need for active policy to stimulate the growth of new industries. Former Treasury Secretary Ken Henry noted that the endowments on which we have to build include natural ones and ones that previous generations have built. His list includes systems supporting research and innovation, and other economic and social infrastructure. He implies that the need to build on them creates a role for government.[2]

The Business Council of Australia has called for a more active industry policy, involving:

  • ‘adopting a global mindset in everything we do and coming to terms with what it means to operate in a truly global marketplace
  • returning to a more thoughtful role for government in facilitating and coordinating economic development and social progress
  • dramatically increasing our competitiveness through innovation
  • growing those sectors of our economy that can win on a global scale and make the greatest contribution to lifting our national wealth.’[3]

The Commonwealth Budget is regarded as the most important economic statement of the year. So it is perhaps surprising that the word ‘industry’ did not occur in the Budget Speech.[4]

There are few new budget measures in the Industry and Science portfolio. All are savings measures, except for $13 million in 2016–17 for the Australian Nuclear Science and Technology Organisation’s operation of the Australian Synchrotron, and payments to the automotive industry, which are dealt with below.

In the 2014–15 Budget the Government established the Entrepreneurs’ Infrastructure Programme to implement its new approach to industry policy. Elements of the program are:

... the commercialisation of good ideas, job creation and lifting the capability of small business, the provision of market and industry information, and the facilitation of access to business management advice and skills from experienced private sector providers and researchers.

The new approach involved funding of $484 million over five years, but represented a net saving of around $360 million.[5] In this Budget there is a further reduction in funding for the Entrepreneurs’ Infrastructure Programme of $23 million in 2014–15, and a $32 million reduction in funding in 2014–15 and the two years following for the grants programs that were closing on 1 January 2015.[6] 

Budget Paper No. 2 shows an expense of $783 million over five years for the Automotive Transformation Scheme. This is a reversal of the reduction in funding to the industry which had been announced but not passed by the Parliament. However, the description of the measure notes that the Government does not expect most of this money to be spent, because of ‘decisions taken by motor vehicle manufacturers’ (p. 126).  

One of the central features of the Budget is the Growing Jobs and Small Business package.[7] None of the measures in the package is in the Industry and Science portfolio. The package comprises:

  • tax measures, most importantly a reduction in the tax rate for small businesses, which are dealt with in another article in Budget Review 2015–16[8]
  • workforce measures, mostly aimed at helping at-risk job seekers into work, which are dealt with in another article in Budget Review 2015–16[9]
  • $32.4 million over five years for the Australian Taxation Office, the Australian Securities and Investments Commission and the Department of Industry and Science to develop a single online portal to facilitate the establishment of a new business and
  • $8 million for the Australian Securities and Investments Commission to improve the regulatory environment for crowd sourced equity funding, in part by making it easier for a business to become a public company.

The tax measures are not selective: they treat all small businesses alike. This may be equitable, but it is not necessarily a good way to encourage economic growth. The Productivity Commission in a recent report notes that most small businesses are not innovative (and that larger businesses tend to be more innovative). While the PC warns against directing assistance to particular business models, technologies, sectors or locations, it does suggest that:

... criteria based on desired outcomes (such as technology transfer and spillovers) with matching private sector investment, are less likely to distort incentives and behaviours, particularly in a rapidly evolving environment.[10]

In this case the PC is referring to establishing new businesses, but the general suggestion that assistance should be directed to outcomes that benefit the economy, and should not distort behaviours, is worth noting. In particular, the new accelerated depreciation measure favours asset acquisition above, for example, purchasing advice on improving management or developing export markets.

The economic theory underlying this approach to industry policy appears to be that the economy will make its own adjustments. And understandably there is a reluctance to ‘pick winners’. But there are some features of the Australian economy and society, and some developments in the rest of the world, which make it possible to identify policies with a good chance of payoff. The Department of Industry and Science last year released two reports, The Australian Industry Report and The Australian Innovation System Report, which could be the basis for a strategic approach to developing industries where Australia has a competitive advantage.[11] Some action has been taken under existing programs towards the establishment of Industry Growth Centres for industries identified in the Australian Industry Report, but the limited funding available for the five industries specified ($188 million, presumably over five years) suggested that they can at best be consultative.[12]



[1].              Reserve Bank of Australia, Statement on Monetary Policy, May 2015, p. 35.

[2].              K Henry, ‘Why Australia needs a new economic reform narrative‘, Asia and the Pacific Policy Society Policy Forum, September 2014.

[3].              Business Council of Australia (BCA), Actions Needed to Build Australia’s Comparative Advantages, BCA media release, 28 July 2014.

[4].              J Hockey (Treasurer), Budget Speech 2015.

[5].              Australian Government, Budget measures: budget paper no. 2: 2014–15, 2014, p. 164.

[6].              The budget figures in this article have been taken from the following document unless otherwise sourced: Australian Government, Budget measures: budget paper no. 2: 2015–16.

[7].              Australian Government, Growing jobs and small business, Budget 2015–16 overview paper, 2015.

[8].              K Swoboda, ‘Small business tax changes’, Budget Review 2015–16, Research paper series, 2014–15, Parliamentary Library, Canberra, 2015.

[9].              M Thomas, ‘Workforce participation measures’, Budget Review 2015–16, Research paper series, 2014–15, Parliamentary Library, Canberra, 2015.

[10].           Productivity Commission (PC), Business Set-Up, Transfer and Closure—Draft Report, PC, May 2015.

[11].           Department of Industry, Australian Industry Report, 2014; and Department of Industry, Australian Innovation System Report 2014, 2014

[12].           Australian Government, Industry Growth Centres, Australian Government Business website.

 

All online articles accessed May 2015. 

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