Avoiding picking losers: industry policy for a more rational era

The Grattan Institute isn’t normally to be found advocating for industry policy and support of manufacturing. Its latest report, on industry policy in the context of the drive to net zero, is both critical of existing industry policy — crafted by both sides in worship of the great god of manufacturing — and supportive of government assistance to help create a manufacturing sector that will prosper without carbon emissions.

One of the biggest criticisms of industry policy traditionally is that governments should avoid picking winners. “More important than not ‘picking winners’ is ensuring that the government is not propping up ‘losers’,” the report suggests. And in the context of existing industry policy and net zero, we’re propping up plenty of losers — wasting taxpayer money supporting high-emission projects. Some examples:

• the Olive Downs coal mine in Queensland, which is underwritten to the tune of $175 million by the Northern Australia Infrastructure Facility, amounting to a subsidy of $8.18 per tonne of CO2
• subsidies for gas exploration and production
• the propping up of the Mount Isa copper smelter, the owners of which threaten to close it every time a Queensland election comes around
• the Victorian government’s propping up of the Portland smelter at a cost of $200,000 per job.

The only way to stop such abuses — and this is a story that’s becoming common — is to prevent politicians from having a role in funding allocation and to make sure decisions are made to a clear mandate, targets and milestones by a body at arm’s length from government.

(In fact, is there any area of government spending that wouldn’t be better with politicians removed from decision-making?)

There’s a flipside to propping up losers — failing to tax winners properly. That’s the colossal, and extraordinarily expensive, mistake that’s been made by successive governments in relation to Australia’s offshore gas reserves, which are being sold for tens of billions a year right now with virtually no tax being paid by their exporters and no interest from the new government in ending that theft.

“The federal government seems unlikely to fix the petroleum resource rent tax, which is poorly structured and provides almost no revenue,” the report concludes. “However, at times of extreme international prices, it should consider a windfall profit tax on gas and coal exports above a fair return.”

But the report also recommends ensuring the benefits of the extractive industry boom, in minerals like copper that will be in huge demand from renewable industries in coming decades and that are put to good use. With the Queensland government already receiving half a billion in minerals royalties and the value of the global copper market expected to quadruple, the report recommends states establish sovereign wealth funds to invest the growing royalties from renewables-critical minerals, which even at current, low royalty rates would produce multibillion-dollar funds relatively rapidly.

The report, by Tony Wood and his team, points to a subtler issue that’s likely to be lost sight of once the Albanese government gets established. In a way, Scott Morrison and the band of spivs and shonks who made up his government did us a favour in demonstrating how unfit for purpose Australian policymaking institutions really are — how easily policymaking could be perverted into state capture, thievery, jobs for mates, policy for sale and outright corruption. Labor’s ambition appears to simply be to restore business-as-usual policymaking, without the egregiously corrupt aspects that marked the Morrison years.

But the opportunity for real change that would embed higher-quality policymaking in Canberra, to not just set a higher standard but change the system to make it less corruption-prone, is there for the taking, and it’s what the electorate voted for. An Albanese government that simply reverts to bog-standard industry policy, with heavily unionised manufacturing getting billions in handouts and assistance doled out for political needs rather than a coherent agenda, won’t get too much criticism. But there’s a much better way to spend taxpayer money.