Budget Resources

Dr Becky Bathgate

At a conference held in the United States in 2023, the economist and Nobel laureate Joseph Stiglitz told the assembly, ‘Every country has an industrial policy. The question is whether it's explicit, whether it's implicit, whether it's coherent, or whether it's incoherent’.

On 11 April 2024 the Prime Minister announced that the government would introduce a Future Made in Australia Act, signalling the explicit adoption of a new industrial policy for Australia, that aims to capitalise on Australia’s advantages in resources necessary for the clean energy transition. The new policy will see government taking a more active role alongside the private sector. The announcement followed on the heels of a similar re-engagement with a more interventionist approach to industry policy among many of the world’s major economies.

Prior to the budget, the Treasurer’s speech to the Lowy Institute openly stated that a Future Made in Australia would be just as much about Australia staking its place within emerging preferential trading blocs as it would about stimulating growth and promoting structural change.

New industrial policy: Budget 2024–25

To support the government’s new industrial policy, the ‘Future Made in Australia’ budget measures encompass a $22.7 billion package of commitments aimed at ‘maximising the economic and industrial benefits of the move to net zero and securing Australia’s place in a changing global economic and strategic landscape’. Table 1 provides a summary of the payments expected from the ‘Future Made in Australia’ budget measures, with more detail available in Budget paper no. 2, pp. 65-73.

Table 1 Expected payments under ‘Future Made in Australia’ over the forward estimates period

Note: Some components of the payments are not available in the budget documents, instead labelled ‘nfp’(not for publication) due to commercial sensitivities, so are not included in the annual breakdown. Sum of years may not add to totals due to rounding.
Source: Figures for each of the measures are taken from Budget paper no. 2, pp. 65–73. Totals are Parliamentary Library calculations (see Note above).

The headline figures for investment sometimes quoted in media releases or in the first column of Table 1 do not necessarily align with the payments the government makes for the measures. This is because the headline figures incorporate funding through government loans and equity investments, which typically do not fall within payments.

While A Future Made in Australia is the most explicit industrial policy for the federal government in recent times, it is not new or uncommon for governments to develop policies to intervene in the free market to develop specific industries or locations. For example, the current government has previously announced the National Reconstruction Fund (Budget paper no. 2: October 2022–23, p. 153), and the previous Coalition Government had initiatives such as the Modern Manufacturing Initiative, Northern Australia Infrastructure Facility, and the Critical Minerals Strategy.

A Future Made in Australia and the National Interest Framework

A Future Made in Australia identifies a role for government to facilitate industrial investment, indicating that more direct government interventions are justified where ‘economic incentives are not aligned with broader national interest objectives’ (p. 5). Three such sources of market failure have been identified by the government (see National Interest Framework: Supporting paper, p. 5):

• externalities: where carbon is not priced into production creating an uneven playing field and an undersupply of products drawing on cleaner production methods.
• security: where firms fail to appropriately price the required level of security and resilience in critical sectors and supply chains.
• knowledge spillovers in infant industries critical to the net zero transition: where early movers cannot capture full economic rents, resulting in underinvestment in cleaner production methods.

As described in Budget paper no. 1 (pp. 15, 20–21) the government will establish a National Interest Framework (NIF) to guide investments, based on 5 criteria. In addition, ‘Community Benefit Principles’ will be applied to capture wider societal benefits of particular projects (National Interest Framework: Supporting paper, p. 1).

The NIF also identifies priority industries that warrant government intervention, grouped under 2 streams: the Net Zero Transformation Stream and the Economic Resilience and Security Stream. Based on analyses of Australia’s comparative advantage in particular sectors (pp. 15–29), the government has initially identified 5 priority industries as being consistent with the tests set out in the NIF (see Table 2 below):

Table 2 Industries consistent with the NIF in the context of the Government’s Future Made in Australia agenda in the 2024–25 Budget

Source: Budget paper no. 1: 2024–25 (p. 21).

The Treasurer has previously said that,

The Future Made in Australia Act will establish and impose very strict policy frameworks and institutional arrangements to ensure our priorities are rigorously determined and robustly implemented, focussed on where we have genuine economic advantages and compelling national security imperatives.

Appropriate development of the NIF, including strict adherence to the qualifying tests for intervention, and transparency with respect to application of ‘Community Benefit Principles’, will be critical in providing rigour to the new industrial policy. Ideally, the Framework should include appropriate governance, with reference to some of the lessons that can be learnt from history. For instance, some literature suggests that ‘Industry support should be provided in a transparent way that maintains competition and is incentive compatible.’

Production Tax Incentives

Of the overall $22.7 billion package announced in the budget for a Future Made in Australia, $13.7 billion has been allocated to production tax incentives for critical minerals and hydrogen. Specifically:

• $7.0 billion over 11 years from 2023–24, plus an average of $1.5 billion per year from 2034–35 to 2040–41 to introduce a Critical Minerals Production Tax Incentive — a refundable tax offset of 10% for the costs of processing the 31 critical minerals currently listed in Australia
• $6.7 billion over 10 years from 2024–25, plus an average of $1.1 billion per year from 2034–35 to 2040–41 to introduce a Hydrogen Production Tax Incentive.

Both incentives, as currently designed, are time-limited (available for a maximum of 10 years between 1 July 2027 and 30 June 2040), setting an endpoint to the period of taxpayer subsidisation. John Grimes of the Smart Energy Council has pointed out that the choice of production tax incentives as an investment lever ensures that subsidies only go to firms that are producing, ‘So it's not about picking winners, it means anybody who can produce at scale can qualify. It gives big industry, and small industry, an incentive to invest and start-up with the certainty of long-term support based on successful production’. The Opposition has said that it does not support the production tax incentives measure.

Challenges

Australia faces a number of key challenges in the implementation of its new industrial policy, including:

• providing clarity in the initiative’s objectives and how success will be measured, as laid out by the government in its document Australian Government Guide to Policy Impact Analysis
• ensuring rigour and transparency in investment and loan decisions
• building a skilled labour force in the required areas
• selecting and timing investments to avoid putting upward pressure on inflation.

Industry interest groups, including the Australian Chamber of Commerce and Industry and the Australian Council of Trade Unions, have supported the overall objective of boosting investment in jobs and sovereign manufacturing capability under a Future Made in Australia, whilst noting the need for transparency around government interventions. The Business Council of Australia welcomed the targeted tax incentives for critical minerals and green hydrogen.

Several economists, as well as Australia’s Productivity Commissioner, have expressed concern over the potential for a Future Made in Australia to mark a return to policy failures of the past, such as attempting to pick winners, or providing ongoing subsidies for industries that never become competitive. Economists have also expressed concern over some identified priority industries being in areas of manufacturing where Australia has no efficiency advantage, and which overlap with the identified priorities of other nations pursuing similar new industrial policies at much greater scale.

A Future Made in Australia Bill is expected to be introduced to Parliament in the 2024 winter sittings, following a period of public consultation.

The industrial policy pendulum

The role of industrial policy boils down to a question: who can most efficiently allocate investment resources across the economy, based on existing sources of information? The answer, historically, has been tied to pendulum swings in the prevailing economic orthodoxy which, themselves, tend to be prompted by economic or financial market crises.

The birth of western capitalism and the industrial revolution gave rise to classical economic theory, under which nations rejected government command-and-control and put their faith in the ‘invisible hand’ of the free market to guide optimal investment in the long run. The next global shift in policy was precipitated by the Wall Street crash of 1929 and ensuing Great Depression in the US, which spread like a contagion. Massive contraction in manufacturing output, mass unemployment and resulting economic recession ushered in a more interventionist and protectionist era.

Starting with Roosevelt’s New Deal and then into the subsequent Keynesian period of post-war reconstruction and stabilisation, nations introduced measures to protect domestic industry and erected barriers to trade. In Australia, Prime Minister John Curtin established the Department of Post-War Reconstruction, with its Division of Industrial Development. In the UK, the Labour Party was swept into power in 1963 under Harold Wilson’s pledge to harness the ‘white heat of technology’ to promote innovation-driven economic growth. Many governments began investing heavily in ‘infant’ industries and selected manufacturing sectors deemed crucial to economic prosperity such as the automobile, electronics, and consumer white‑goods sectors.

The global oil price shocks of the 1970s, combined with domestic wage-price spirals, and productivity declines ushered in the next major global economic crisis: stagflation. Industrial policy was seen as having played a central part in the failed post-war consensus and became a pejorative term associated with governments ‘picking winners’ and propping up uncompetitive industries with tax‑payer funds. For Australia, a worsening trade account and uncompetitive economy led to Treasurer Paul Keating’s warning that the country was in danger of becoming a ‘banana republic’.

In response, the policy pendulum swung back towards the free market and a rejection of interventionist policies. Governments worldwide, including the Hawke Government, turned to a neoclassical economic doctrine which emphasized the benefits of market liberalisation, removal of subsidies, and free trade. In this worldview, investment decisions were best left to the private sector which would optimise allocation of physical and human capital as well as research and development to promote improvements in technology.

Emergence of a ‘new industrial policy’

The latest swing of the global pendulum back towards a more interventionist ‘new industrial policy’ has come in the wake of the 2008–2009 global financial crisis and in the context of several market failures that are viewed as having been insufficiently addressed by governments, including:

• missing markets for environmental goods (such as clean air, water, and biodiversity) have resulted in a failure to capture environmental externalities. Prices do not incorporate the true economic cost of negative externalities such as greenhouse gas emissions, leading to consumption decisions and private sector investment that fail to incorporate these costs, leading to the current climate crisis.
• public goods that are non-excludable or characterised by spillover effects, where the private individual or firm cannot capture the full benefit of their investment, and which will result in the market underinvesting. This is particularly true for public goods such as knowledge. Rising incomes come not from capital accumulation but from technological progress. Knowledge is, therefore, a key determinant of economic growth, meaning that underinvestment in knowledge matters.

Recently, economists have argued that industrial policy should also be driven by societal goals, including tackling issues associated with climate change and the need to transition to a low-carbon economy. These longer-term issues typically have payoffs that occur beyond the time horizon valued by private sector investment.

Ideally, then, a ‘coherent’ industrial policy intervenes when it can correct for these market failures without introducing greater costs of ‘government failure’. In this context, 'government failure’ is not, per se, the act of picking winners, but the creation of welfare-reducing inefficiencies that would otherwise not exist. Fundamental to an industrial policy that operates as efficiently as possible are the following: accurately diagnosing and correcting for market failures (where possible and practical); crowding-in private investment without replacing it; and making sound and transparent investment decisions.

All online articles accessed May 2024

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