Subsidies Under the Future Made in Australia Act Could Continue Forever: Productivity Commission

Productivity Commission Chair Danielle Wood is seen during a panel discussion at the Australian Financial Review Business Summit, in Sydney on March 12, 2024. AAP Image/Bianca De Marchi

Productivity Commission chair Danielle Wood has cautioned that subsidies established under the Future Made in Australia Act, announced by the Prime Minister on April 11, could continue forever without a well-defined exit strategy.

She said that clearly, the government is responding to significant global changes, shifts in geopolitics, and the pressure to decarbonise economies.

“But ... we shouldn’t pretend … that this is going to be costless,” she told The Australian Financial Review.

She emphasised that supporting industries lacking long-term competitive advantages may lead to ongoing expenses, diverting resources from sectors with greater potential for value generation.

“We risk creating a class of businesses that is reliant on government subsidies, and that can be very effective in coming back for more,” she added.

Ms. Wood suggested incorporating an exit strategy into the Act, urging the government to regularly review and potentially withdraw support to mitigate the long-term costs of these policies.

Regarding solar and battery subsidies, Ms. Wood expressed skepticism about their potential for long-term competitive advantage, stating that it is “certainly hard to see that those would be industries where we have an obvious, longer-term competitive advantage.”

Competition From Abroad

However, Mr. Albanese argued that the new law was necessary to compete with America’s Inflation Reduction Act and similar schemes adopted by nations such as Korea, Japan, Canada, and the European Union.

He warned that relying solely on the free market was no longer sufficient and that Australia needed to safeguard its capacity in clean energy and advanced manufacturing, especially after the pandemic exposed supply chain risks and deficiencies.

The peak national employer organisation, Australian Industry Group (Ai Group), welcomed the “broad contours” of the plan, but warned of “clear risks and unanswered questions which will need to be addressed as the plan is fleshed out.”

“There is a welcome focus from the Prime Minister on the vital need to address vulnerabilities to supply chain risks,” said the group’s Chief Executive Innes Willox.

“Some areas of defence capability are clear examples of these vulnerabilities with other candidates in areas such as health products and essential materials. Making more things in Australia is one strategy to mitigate these risks.”

Mr. Willox also praised the Prime Minster’s commitment to improving government coordination, noting that the current mix of policies lacks coherence.

“Industry policy is fraught with pitfalls. It works best when there are clear objectives, well-designed policy instruments, and the administrators charged with their implementation have a willingness to accept responsibility for, and respond quickly to inevitable failures,” he said.

“Fundamentally, governments should be enablers, not deliverers.”

Obvious Risks

He said the announcement today highlights the most glaring risks, stemming from a decade of policy and political failures that have hindered our progress.

“Too often, government policies distort activity, create unintended consequences, and are slow to adapt as circumstances change and flaws are exposed,” Mr. Willox said.

“Yet we are today invited to make a leap of faith that more government guidance and support is the answer to our ills. Industry will naturally view the promise of more government intervention with suspicion, if not alarm.”

For the strategy to succeed, he said the government also needs to address “woefully inadequate” skills and training systems.

“Suggestions of cutting apprenticeship incentives in the upcoming Budget are the polar opposite of what is needed. We have an energy transition to manage but no one knows where the thousands of electricians needed to deliver it are going to come from,” Mr. Willox said.

He also notes that infrastructure and housing needs will still need to be met, and “overly complex and under-coordinated” regulatory structures addressed, as does the tax system.

While not specifically addressing The Future Made in Australia Act, the International Monetary Fund (IMF) warned on April 10 that most industrial policies rely heavily on costly subsidies or tax breaks, which can be detrimental to productivity and welfare if not effectively targeted.

The IMF said that history was “full of cautionary tales of policy mistakes, high fiscal costs, and negative spillovers.”

“This is frequently the case, for example when subsidies are misdirected toward politically connected sectors,” the IMF said.

“In addition, discriminating against foreign firms can prove self-defeating, as such policies can trigger costly retaliation and most countries—even major advanced economies—rely on innovation done elsewhere.”

Mining Body Welcomes Announcement

However, the peak body for one of the largest contributors to the economy—the Australian Minerals and Exploration Association (AMEC)—welcomed the announcement.

CEO Warren Pearce said the initiative was closely linked to the mining and exploration sector.

“By leveraging our unique position with natural resources and expanding investment opportunities by developing new industries right here in Australia, our country can benefit from this once-in-a-lifetime energy transition,” Mr. Pearce said.

AMEC is already working with the federal government on a proposal to introduce a Production Tax Credit (PTC), which would offer a 10 percent tax credit for downstream materials producers

Mr. Pearce said that a PTC was a proven mechanism to incentivise investment in new industries, reducing production costs and levelling the playing field for Australian projects compared with international counterparts.

With the world transitioning towards a net-zero economy, Mr. Pearce stressed the importance of Australia creating and maintaining a competitive edge in minerals critical to that transition, such as those used in batteries.