Manufacturing votes and hindering business

Pledges from both major parties to pour cash into manufacturing exaggerate its importance at the expense of taxpayers. Cutting taxes and regulation would better boost activity.

Manufacturing holds an unearned lofty place in Australian politics. The sector employs only 8 per cent of the workforce and contributes less than 8.5 per cent to GDP. Yet each year, $7.35 billion in taxpayer assistance goes to the industry.

Attempts to justify this largesse – protecting Australian jobs, supporting local suppliers, and wanting Australia to be a country that makes things – are not persuasive. Yet both major parties have used this rationale in releasing election policies aimed at supporting manufacturing.

Earlier this year, the Labor government announced A Plan for Australian Jobs. This jobs plan included several initiatives such as Australian Industry Participation Plans, 10 Industry Innovation Precincts and further incentives for venture capital.

The spending initiatives in the jobs plan come with the slogan: "A $1 billion investment in productivity, prosperity and jobs." AIP Plans mimic similar participation requirements in the defence industry – plans that increase compliance costs and have largely failed as a panacea. The percentage of contracts awarded to Australian-based defence companies has fallen from 80 per cent in 2007 to 53 per cent in 2012, according to the Australian Business Defence Industry Unit.

Of even greater concern is unions and government using AIP Plans to pressure bidders for major projects to prefer Australian suppliers. Such a policy will invariably increase costs and reduce competition.

Despite the enthusiasm for innovation precincts, there is precious little data on what makes these precincts successful. If political imperatives cause hubs to be established on the outskirts of cities where land is cheap and votes are needed, then they are likely to fail.

As for Venture Australia, it is hard to argue that government should prioritise increasing "access to high-risk finance" over funding for DisabilityCare.

International evidence from the American Enterprise Institute suggests access to funding is not the key problem facing small business. The Australian Chamber of Commerce and Industry's quarterly surveys of small business also consistently find the main inhibitors of growth are taxes and government charges, with excessive regulation following close behind.

In addition to its jobs plan, Labor has announced $700 million in future assistance for the car industry, with scant detail on how it will spend the funds and most of the funding provided beyond the forward estimates period.

Thousands of jobs lost across the car manufacturing sector in the last 18 months make further support for this ailing industry both ineffective and a waste of taxpayer money. The Coalition’s proposal to focus instead on assisting transition workers and communities to competitive industries is a better idea. Transition assistance in the Hunter Valley after BHP Billiton’s closure helped reduce unemployment from 10.4 per cent in 1999 to 4.6 per cent by 2011.

Unfortunately, while the Coalition has indicated it will reduce assistance to the car industry, it has not committed to abolishing the remaining billions squandered each year in corporate welfare. Instead, it has proposed additional assistance for manufacturing by appointing a new minister, improving R&D funding and restoring export market development grants.

The Coalition is also trumpeting the benefits to manufacturing of broader policies such as abolishing the carbon tax, lowering the corporate tax rate, and cutting red tape, as well as anti-dumping measures (though anti-dumping measures now have bipartisan support).

While lowering the corporate tax rate and reducing the burden of regulation are likely to benefit all industries, the Coalition has provided little detail on how it will achieve the projected $1 billion in red tape savings. And since much of the increase in energy prices has come from other factors, cutting the carbon tax is unlikely to reduce costs enough to bridge the massive cost gap between Australia and Asia (How did Rudd miss Abbott's giant tax grab?August 22).

Other Coalition proposals have demonstrable problems. Measures to combat differential pricing (‘dumping’) are unjustified protectionism, especially considering Austrade routinely advises Australian companies to engage in similar tactics when first entering a foreign market.

Export market development grants are simply corporate welfare, in many cases paying for costs that businesses would have met anyway or encouraging unprepared businesses to waste money on unnecessary export plans.

Government incentives for private sector innovation are also flawed, with programs like the R&D tax credit often funding research that would have happened anyway, and the vast majority of productivity benefits from innovation coming from applying ideas invented overseas rather than local R&D.

Appointing a minister for trade and investment to spruik Australia internationally will do little to attract inward investment without wasteful financial inducements. Both parties’ policies have serious drawbacks, and both unnecessarily elevate the importance of manufacturing to our economy. Neither party focuses enough on taxpayers or consumers – the real losers in the race to protect industry (and marginal voters).

Ultimately, providing regulatory stability and reducing the impact of government would be much more beneficial in the medium to long term for the health of competitive manufacturing industries and business as a whole.

Simon Cowan is a research fellow at The Centre for Independent Studies.

To read Per Capita's David Hetherington's analysis of the major parties' manufacturing stances, click here

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