Labor’s industry policy “least worst possible”: Analysis

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.

This article first appeared on Crikey.

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