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 $22.7 billion
package of commitments aimed at
‘maximising the economic and industrial benefits of the move to net zero and
securing Australia’s place in a changing global economic and strategic
landscape’. Table 1 provides a summary of the payments expected from the ‘Future
Made in Australia’ budget measures, with more detail available in Budget
paper no. 2, pp. 65-73.
Table 1 Expected payments under
‘Future Made in Australia’ over the forward estimates period
| ($ million) |
2024–25 |
2025–26 |
2026–27 |
2027–28 |
Total
over forward estimates |
| Attracting Investment in Key
Industries ($68.0 million over 4 years) |
51.1 |
11.0 |
3.0 |
3.0 |
68.0 |
| Investing in Innovation, Science
and Digital Capabilities ($1.7 billion over 10 years) |
56.5 |
107.2 |
106.5 |
127.9 |
398.1 |
| Making Australia a Renewable
Energy Superpower ($19.7 billion over 10 years) |
192.9 |
349.2 |
358.1 |
1,010.5 |
1,910.7 |
| Promoting Sustainable Finance
Markets ($17.3 million over 4 years and $1.9 million per year
ongoing) |
5.8 |
4.5 |
3.6 |
3.5 |
17.3 |
| Strengthening Approvals Processes
($182.7 million over 8 years and $4.5 million ongoing from
2031–32) |
26.1 |
18.0 |
16.1 |
11.4 |
71.6 |
| Workforce and Trade Partnerships
for Renewable Energy Superpower Industries ($218.4 million over
8 years and $1.3 million per year ongoing) |
82.5 |
53.3 |
34.7 |
49.4 |
219.9 |
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
| Net
zero transformation stream |
Economic
resilience and security stream |
| Renewable hydrogen |
Processing
and refining of critical minerals |
| Green metals |
Manufacturing
of clean energy technologies |
| Low carbon liquid fuels |
|
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