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Feb 18, 2013

Mostly harmless industry policy fits Labor's broader narrative

The government's manufacturing policy is better than it might have been. Our man in Canberra reckons it reflects a coherent mix of economic policy and political strategy.

The government’s industry statement released yesterday defies expectations in being, probably, the least worst possible statement of industry policy reform that we could expect from a Labor government — and a Labor government that finds itself under threat of being out-protectioned by an opposition apparently determined to be crassly populist on the issue.

There are three strands to the policy: more red tape and bureaucracy to encourage operators of large projects to consider using Australian content; establishing “Industry Innovation Precincts” to encourage innovation and commercialisation; and measures to stimulate additional investment and foster growth in SMEs.

Funding for the package — a bit of which is a reheat from previous announcements — will come from barring companies with turnover of greater than $20 billion from accessing the R&D Tax Incentive, which is expected to save up to $250 million a year.

There have been some predictable complaints about cutting access by very large firms to R&D incentives, but the savings measure has an honourable antecedent curiously overlooked in the media coverage: it was proposed by the Business Tax Working Group last year as a possible savings measure to fund a cut in the company tax rate. The BTWG discussion paper somewhat allusively noted “evidence suggests that tax incentives have different impacts on the R&D performed by small relative to large firms. To the extent that the incentive is not, or is unlikely to be, effective in influencing company R&D investments there is an argument that the revenue forgone could be better employed.”

That is, the working group seemed to suggest, why is the taxpayer paying for R&D when companies would do it anyway? The Australian Financial Review’s John Kehoe put it more forthrightly in an excellent piece calling the incentive a rort being gamed by big firms and their accounting and tax advisers.

Simply shifting $250 million a year away from funding research that would happen anyway, or paying for mining companies to build roads, to encourage innovation and improve SMEs’ access to capital is likely to be of net economic benefit regardless of how the policy is implemented. Too bad the government couldn’t apply the same logic to the huge handouts it gives to multinational automotive manufacturers to keep them running inefficient plants in Australia.

The installation of more hoops for large project proponents to jump through in terms of local content, up to and including embedding “Australian Industry Opportunity Officers” in the biggest corporations, and yet another new bureaucracy, the Australian Industry Participation Authority, to encourage use of local content, is all unnecessary red tape. But at least it still stops short of the sort of protectionism demanded by unions and the Greens such as the mandating of minimum levels of local content in large projects.

“As a political narrative and as an economic policy it all hangs together, in a way this government has never previously achieved …”

In launching the policy, the Prime Minister gave a speech that was almost cringingly awful at times.

“Innovation can be coming up with new ways of combining old things. We are all used to opening a tin and getting fruit out to have for dessert. But, of course, it was innovation that put that fruit in a plastic cup with a lid you could peel back so that you could take it with you to work to have at lunch time or you could put it in the kids’ school pack for lunch at school. Those things are all innovation, and if we can focus on innovation, that will drive productivity growth and new jobs.”

But she also located the statement in the government’s broader economic narrative, again discussing the impact of a stubbornly high dollar and the need to respond to the challenges it presents industry, and the importance of Australia’s proximity to Asia. Whatever huge political problems the government has, it now has a coherent and nuanced economic message, one that artfully exploits the impact of the high dollar in a way reminscent of Keating’s exploitation of the sense we were economically falling behind in the 1980s.

While Keating had the challenge of motivating a national embrace of the need for economic reform to prevent us from falling behind, Gillard has the challenge of governing when our economy is outperforming most of the developed world. The high dollar is thus central to the story the government therefore wants to tell about reform; it’s now playing the same bogey-man role the current account deficit played in the 1980s. Gillard’s speech, again:

“We need to have a real plan to deal with a persistently high Australian dollar. Some would say to you ‘Well it’s all about cost cutting. If we just keep cutting and cutting and cutting, if particularly we cut wages and conditions, then we will be able to compete around the world.

“But that ignores the fact just how severely you would have to cut in these conditions. If your currency has gone up more than 50%, if you were looking at your wages cost in your business to try and get back to something that looked like square, you would have to be cutting wages by 30%. We would have to see the average wages for a full-time income earner move from $70,000 a year to $50,000 a year. Well Australian working people don’t want to see that and I don’t want to see that for them.”

And in that statement, Gillard links up the government’s economic policy message with its key political message, about managing the economy in the interests of working Australians.

As a political narrative and as an economic policy it all hangs together, in a way this government has never previously achieved, particularly under Kevin Rudd. Maybe it’s the influence of John McTernan in the PMO.

It’s unlikely to help save this government, of course — there was something very apt about the way this statement simply vanished beneath a slew of leadership stories today based on the latest of Fairfax’s once-in-a-blue-moon polls — but at least it’s finally doing the basics right. Hopefully someone is taking notes for the next time Labor is in government.

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41 comments

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41 thoughts on “Mostly harmless industry policy fits Labor’s broader narrative

  1. Jimmy

    Bernard – You last paragraph basically stole my comment.

    The PM has now made 2 speeches in the last month that articulate the challenges facing the Australian economy and outline the very Labor way of tackling them, both of which have been praised on this site.

    However in the MSM the coverage these speeches have receivied can be boiled down to, “PM announces poll date” and “Poll shows Labor behind” – well done MSM.

    Meanwhile the Herald Sun had the letters to the editor headline as something like “Reader find lots to like about Abbott” and Blot’s second article blaming the “Drugs in sport” issue on Gillard. I just hope News Ltd especially is happy to reap what they sow.

  2. Ginas new vajazzle

    ‘defies expectations in being, probably, the least worst possible statement of industry policy reform that we could expect from a Labor government.’

    This may be true but it actually fits perfectly with expectations that the government will do something that does not lay a glove on the issue before it – the high AUD creaming services and manufacturing jobs. 

    Every other Central Bank in the world is out there pumping, putting up barriers, taxing – doing whatever – to prevent their currencies appreciating. The RBA and Australian government are doing nowt.

    This isnt to say the Liberals would/will do anything better, but it is to say that the ALP has done nothing on the defining economic issue of the moment, the same as it has done nothing on the equally important (to its core constituency) of doing something about Australia’s ludicrous real estate prices except to suggest to those at the bottom of the ladder that they take out larger mortgages (and presumably ignore the implicit message in the government/RBAs lack of preparedness to do something about the AUD and the effect it is having on Australian employment – which will become far more obvious from circa 2H2013.

  3. Steve777

    ” you would have to be cutting wages by 30%”

    That would suit Gina just fine.

  4. Scott

    Not a big fan of R&D incentives being removed.
    Economic growth in developed countries increasingly requires technological advancement, usually on the back of R&D.
    There is an argument to suggest that as the public ultimately benefits from this R&D (even industry R&D), public investment via subsidies or tax rebates can be warranted. Removing incentives for big business (who are the most likely to be running large R&D programs) and hoping that business will invest anyway is a bit weak in my opinion. May not be the case.
    As for the dollar, ironically, the Government is already doing the best thing it can to reduce the dollar’s value – run a large deficit. But probably won’t be enough. Currency is all about comparison….and we are looking the goods in just about any measure compared to the US. Hence our dollar will remain high until the Yanks get their house in order…

  5. Jimmy

    Gina – “Every other Central Bank in the world is out there pumping, putting up barriers, taxing – doing whatever – to prevent their currencies appreciating. The RBA and Australian government are doing nowt.” What are our RBA interest Rates and how do they compare to the other countries you allude to?
    What is our unemployment rate and how does that compare?
    What is our growth rate and how does it compare?

    What impact would “pumping, putting up barriers, taxing” have on our inflation rate?
    How has the removal of barriers in the 80’s effected our economy today?

    Also given the RBA is independent of govt how is it the ALP’s fault the RBA isn’t acting like “Every other Central Bank in the world”?

    And why would we be “pumping” when we haven’t hit 0% interest rates?

  6. Jimmy

    Scott – “Not a big fan of R&D incentives being removed.” The threshold is pretty high, I rqad today it will only effect about 15 -20 companies all of whom would continue to do the same amount of R&D anyway.

    “As for the dollar, ironically, the Government is already doing the best thing it can to reduce the dollar’s value – run a large deficit.” While I agree with the sentiment could you define “large”?

  7. billie

    This morning on 774 Greg Combet said that R&D incentives are being removed from the 20 largest companies, including retailers, banks & miners, they can still claim R&D as expenses against their tax bill.

    Greg Combet’s explanation made the existing R&D incentives sound like an additional subsidy for the 20 largest companies by turnover.

    Companies embarking on $500 million projects will have to submit their outsourcing and tendering requirements to Australians first. We need to be more than just a quarry!

  8. Apollo

    But does the general public listen to this government anymore, especially on this topic?

    I find the calibration of unemployment target at 5% quite wrong and that probably reflects their performance in the poll. In 2008 it reached 4%, the structure of the economy has been changing since the GFC, people save and don’t spend as much as prior to the GFC, the high dollar has not only been helping to contain inflation but also help people to save and go overseas and spend on holiday instead. This has big impact on local businesses from retail to manufacturings.

    Industry policy should have some link up with Regional Development Policy. Dairy farmers are in dire situation. The regional development office should help dairy farmers to come together and be a distributor or wholesaler, a part of their productions will supply the stocks, and traget small supermarkets and convenience stores. These can’t compete with large supermarkets as they buy bulk cheaply while killing both the farmers and the small outlets. Another problem is wastage, I noticed milk getting out of date at Wooly and Coles sometimes, and I know that it is a problem for small supermarkets and convenience stores to manage because their price is higher and it is much harder for them to sell all of the stocks at such price when customer demands for them are quite unpredictable.

  9. Apollo

    BTW, Singapore exports about $100 billions more than Australia per year eventhough it is a tiny place with little natural resources.

  10. Jimmy

    Billie – “Greg Combet’s explanation made the existing R&D incentives sound like an additional subsidy for the 20 largest companies by turnover.” That’s correct.

    Apollo – “But does the general public listen to this government anymore, especially on this topic?” Do you think the medias cover age has anything to do with this?

    “Dairy farmers are in dire situation.” – That is a vry big generalisation. In my region dairy farmers might not be making the money they did a few years back but most of them are still making very good money, althoug I am in one of the best regions in the country.

    “help dairy farmers to come together and be a distributor or wholesaler, a part of their productions will supply the stocks, and traget small supermarkets and convenience stores.” Not sure if you know this but dairy farmers don’t sell the milk direct to supermarkets, they supply the milk factories, it is the factories who sell to the supermarkets. Most dairy famrers would have shares in Murray Goulburn or Warrnambool Cheese or whoever which have generally evolved from co-operatives so what you are suggesting is basically happening.

    And contrary to media suggestion it is the high dollar that is impacting milk prices much more than the milk wars and there is also an easy way to help farmers avoid the impact of the milk wars, don’t buy the home brand product.

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