Cost of industry support balloons

James Riley
Editorial Director

The cost to taxpayers of government industry support measures continues to balloon, according to the Productivity Commission’s latest Trade and Assistance Review. And Commissioner Peter Harris has further warned that government’s small business tax cuts add substantially to that industry support cost.

In fact, Mr Harris says if tax cuts continued to be limited to small businesses, it would ultimately stunt long-term economic growth.

“Tax breaks to small companies will, if they remain isolated to that group, also skew investment and harm the economy,” Mr Harris said.

Peter Harris: The cost of industry support measures has grown ‘substantially’ in the past year

By limiting the tax cuts for only small businesses, Mr Harris said the Parliament had essentially provided “preferential pecuniary benefit” industry support for some business, but not others.

“Were the general company tax rate to decline in line with the rate applying to small businesses, then this would no longer be treated as assistance,” he wrote in the report.

The Australian Government announced in 2016 its policy to reduce company tax rate on all firms from 30 per cent to 25 per cent by 2026-27. However, as amended and passed by Parliament, the law in its current form only provides a tax reduction for companies with a total annual turnover of $25 million or less.

The government is now pressing for changes to be made to include larger businesses. That debate is currently before Senate.

According to the review, small business tax concessions have been the main contributor to the increase in the total industry assistance this year, mainly through lower tax rates and more generous depreciation arrangements.

The Commission found Australian industry received more than $19 billion in support from the government during 2016-17, which Mr Harris said was a “substantial” increase on last year’s estimate.

While the bulk of industry assistance still favoured manufacturing over other export industries, support for R&D represented about 36 per cent, equating to approximately $4.4 billion.

The majority – roughly $3.3 billion – of R&D industry assistance was in the form of R&D tax incentives, while the remainder was made up by funding for research institutions, including $544 million for the CSIRO, $280 million for the Regional Rural Development Centres, Cooperative Research Centres, and Austrade.

When it came to direct budgetary assistance, the review said the government spent a total of $12.5 billion, a 41 per cent increase from 2015-16.

The Productivity Commission also reviewed global trade policy developments, which Mr Harris said is currently at a “dangerous cross-roads”, mainly because “major political parties have in recent times taken confusing and inconsistent positions.”

In turn, he recommended that Australia continue to further reduce tariff and non-tariff barriers, and cease to view the anti-dumping regime as a “cheap card to play every time an industry claims to be threatened by imports.”

In addition, the commissioner also raised questions about recent developments in industry assistance, such as the Defence Export Facility, which was announced in January to provide export finance to Australia’s defence manufacturers.

“The justification for assistance appears to be simply about a desire to sustain and grow an industry that has historically been an expensive failure in Australia,” Mr Harris said.

The commissioner also touched on how the introduction of national security measures, such as the mandatory data retention requirement, could have some trade and assistance implications.

Mr Harris said while security measures often necessitate secrecy, it should not impede on transparency surrounding government’s spending and regulatory measures.

“National security policy would benefit from systemic periodic review by an agency with the appropriate security clearance and access to understand thoroughly the costs, benefits and risks inherent in the system,” Mr Harris said.

“In addition, the development of a rigorous and publicly available framework for decision-making in security-related policy would provide a tool for good decision making, especially when decisions must be made quickly as the form and nature of threats change.

“Such a framework would also foster public understanding and support for national security decisions.”

Do you know more? Contact James Riley via Email.

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