Beware the classic industry policy trap

But in responding, the government is straying towards the jaws of a classic industry policy trap, that props up uncompetitive firms and creates a drag on productivity.

The benign economic conditions that informed past orthodoxy on industry policy have gone. Inflation worries are back, free trade is no longer a given, energy prices are higher, geopolitical tensions are ratcheting up by the day. And there is an increasingly urgent need to respond to more severe natural disasters brought on by climate change, while also reducing emissions swiftly to lessen the impact of future ones.

Interventionist industry policy is now back in vogue: governments see it as a way of positioning their economies to flourish in more challenging conditions while also grabbing the economic advantages that shifting to net-zero presents.

And herein lies the trap. We worry a lot about governments “picking winners”, and in the process distorting efficient investment and leading to lower growth overall; and rewarding firms for being effective rent-seekers. But the bigger worry in challenging economic conditions is that losers pick the government.

It’s the firms that fall over quickly in tough times who are first to line up for industry policy support, often on the grounds that they are important for national resilience and sovereign capability; or that they are potentially a new ‘green’ industry. And every one of them will invoke the importance of “protecting regional jobs”.

The Albanese government is flying blind when it comes to assessing these claims. It has limited information about the operation, competitiveness, and structure of these firms. While the government is switched on to the opportunities in the transition to net zero, it is yet to do the detailed work to figure out exactly where Australia’s strategic advantage lies, and how policy should be structured to capture it.

The result is policy on the run and announcements of big sums of money with no detail behind them. Like the $1 billion green iron fund announced when GFG’s Whyalla plant was forced into administration – a big cheque but nothing about how to access it, what green strings are attached, what outcome it’s designed to achieve, or how the decisions to allocate money from the fund will be made.

Treasurer Jim Chalmers could take the blindfold off and avoid the trap by making a single phone call to his department.

The Future Made in Australia Act, passed by Parliament last year, gives Chalmers the power to request “sector assessments” from Treasury. These are independent reports, intended to give the government the information it needs to structure industry assistance for success. The reports must assess whether Australia could be competitive in a sector; whether the sector could contribute to an orderly path to net-zero transformation, including through the use of renewable energy; and whether support for the sector could improve Australia’s economic resilience and security.

Crucially, the reports must also assess whether government support would leverage private sector action; and deliver genuine value for money.

Once the sector assessments are complete, they must be tabled in Parliament. They don’t bind the government to support or not support a sector, but they do give it a better evidence base for decisions. Done well, they should position the government to avoid more situations like 30 years of subsidies for the Portland aluminium smelter in Victoria; or decades of propping up the car industry in the name of ‘national interest’.

If the Treasurer commissioned a suite of sector assessments now, he could use them to underpin his next budget. It may turn out that the firms seeking assistance today are good bets for future growth. Chalmers and Industry Minister Tim Ayres could announce well-structured, strategic industry assistance, that would give these firms a good chance of seizing genuine opportunities and helping Australia weather global turmoil. Perhaps even attracting more international investment.

Chalmers and the government would still be picking winners, but they’d be doing so with solid knowledge and a form guide to hand. And they’d have grounds to say no when the losers try to pick them.