While most of the coverage of the Productivity Commission’s annual Trade and Assistance Review (TAR) concentrated on its singling out of various pet projects of different governments for criticism, as always if you dig a little deeper into the report there are some long-running horror stories on which to reflect.
The TAR is a vehicle for the commission to reflect on various developments across the year in economic, fiscal and trade policy, and the 2015-16 edition is no exception, with the federal government’s Northern Australia boondoggle fund, Malcolm Turnbull’s Snowy 2.0 media stunt and South Australia’s plans to re-enter the energy market, all taken to task.
But as always, the review tots up the level of assistance to industry during the relevant financial year across the economy, enabling us to see who has enjoyed government protection and largesse, and who has missed out. There’s also a third question: who has paid for it? Protectionism and industry handouts don’t come free. And while taxpayers pay for subsidies, and consumers pay for tariffs (which go to the government), business also pays for tariffs via higher input costs. These higher costs make industries less competitive, and they get passed on to consumers who end up using the end products.
So one of the most useful exercises the PC does is to calculate all the different costs and handouts for each industry and come up with a “net combined assistance” figure — made up of net tariff assistance (the benefits of tariffs minus the costs) plus taxpayer assistance. Different industries have different mixtures of costs and benefits.
As always, manufacturing and farming are the two big winners. In 2015-16, farmers got just under $1.6 billion in net assistance, manufacturing got $6.2 billion. Farmers got a lot of handouts (though less than previous years because of less drought relief) and a little bit of tariff protection; the manufacturers get a lot of handouts (though that’s declining as the car industry closes) and even more from tariff protection. Mining comes out around $300 million ahead — they get a lot of handouts but lose half of it via tariffs. And the whole services sector comes out about even — a net loss of $34 million — because they lose a lot on tariffs but there’s lots of assistance for the financial sector.
But there’s one industry within the services sector that loses out, big time. You probably don’t think of it when you picture “services”, but it’s one of our most important industries. As the mining investment boom has come back to earth in recent years, construction has kept the economy afloat, particularly residential construction, as low interest rates and an inflow of money from Chinese investors encouraged a boom in dwelling construction up and down the east coast. Without that housing construction boom (and both Labor and the Coalition continuing to pump deficit spending into the economy), it’s likely we would have sunk into recession in 2013 and 2014.
But as if to demonstrate that in industry policy, no good deed goes unpunished, construction is the biggest victim of protectionism in Australia. The PC has argued this before, noting the impact of anti-dumping provisions on the cost of inputs for the construction sector, especially in steel. In 2015-16, construction lost a net $1.5 billion to other industries, an 8.4% increase on 2014-15 (the net figure is around $1.5 billion in tariff losses, minus a lousy $36 million in assistance). Year in and year out, construction gets slugged. No other industry even comes close to construction in terms of the punitive impact of assistance policies. The next worst is the miscellaneous category “other services” (-$323 million) and then accommodation and food (-$238 million).
The construction industry, Malcolm Turnbull said last year, “employs more than a million people, and it is at the centre of our competitiveness.” It was, according to the Prime Minister, “absolutely vital for our economic growth”.
Get Crikey FREE to your inbox every weekday morning with the Crikey Worm.
But not vital enough not to be a milch cow for other, less competitive, lazier sectors that have the political influence to be protected by politicians.