A future made in Australia: Can it work, what are the risks?

Apr 30, 2024
Solar panel farm at sunset located in South Australia. Image: iStock/moisseyev

Claims that industry assistance comes at a cost to other industries and consumers are too often right. Industry policy should therefore be limited to areas of identified market failure and requires tight evaluation of each case and that performance targets are met.

Editor’s note: We apologise to the author, Michael Keating, and to our readers that this article did not fully publish on Saturday 27 April, missing the second section of the article title The way forward. As such the intent of the author’s position was misrepresented. Today we are republishing the full article to correct this.  


Since the Prime Minister’s announcement of A future made in Australia an old debate about the value of industry policy has reignited again.

The Prime Minister’s starting point is that we can make Australia a renewable energy superpower. But while we have “unlimited potential … we do not have unlimited time”. And according to the Prime Minister what he is proposing “is not old-fashioned protectionism or isolationism – it is the new competition.”

The critics reaction
Perhaps not surprisingly the Prime Minister’s speech prompted a round of criticism led by some prominent economists.

First, all industry assistance comes at a cost to other industries that are not assisted. Second, the track record of governments picking winners has not been good in the past, and on the whole private entrepreneurs have typically been better, not least because they are risking their own money.

As the chair of the Productivity Commission, Danielle Wood, has warned in response to the Prime Minister’s speech, the risk is that this new industry policy will divert “jobs and capital investments from elsewhere in the economy where they could generate higher value.”

Similarly, Wood was subsequently supported by another previous Productivity Commission Chair, Gary Banks, who warned against “the risk of government sponsoring businesses that will never be internationally competitive, creating a long-term dependency on public support at significant cost to the wider economy and community.”

Given the failures of industry protection in this country before it was wound up by the Hawke-Keating Governments in the late 1980s and early 1990s, these warnings need to be taken seriously.

According to the Prime Minister, however, this time is different. Specifically, he thinks that “This decade marks a fundamental shift in the way nations are structuring their economies. …. Nations are drawing an explicit link between economic security and national security.” “We must recognise there is a new and widespread willingness to make economic interventions on the basis of national interest and national sovereignty.”

The Prime Minister then goes on to contend that in other countries “The heavy lifting of economic transition and industrial transformation is not being done by individuals, companies or communities on their own. It is being facilitated, enabled and empowered by national governments from every point on the political spectrum.”

But personally, I think we need to be very careful, and copying other countries is not necessarily sufficient justification.

Industry assistance always comes at a cost to other industries and/or to consumers. First, when the assistance is budget financed, that will require either cutting other expenditures or raising taxes, or a bigger deficit.

Second, if we are genuinely worried about the security of Australia’s supply lines and our economic resilience, rather than trying to produce everything here, it would often be cheaper to hold larger stockpiles. For example, right now Australia’s oil stockpile is way below what is recommended by the International Energy Agency.

Third, if successful the industry assistance will put upward pressure on the exchange rate at a cost to the other industries, and this upward pressure is likely to be even higher if the assistance is financed by budget deficits. In the case of the US, for example, its shortfall in national savings, because of its huge budget deficit, and China’s excess savings is the reason why compared to the purchasing power of the two currencies, the exchange rate for the US dollar is clearly massively over-valued relative to the Chinese yuan. And that is the obvious reason why the US is finding it so difficult to compete.

In short, while the assistance offered through the US Inflation Reduction Act may be increasing investment in clean energy, it is also harming the prospects of many other US industries.

Therefore, industry assistance can really only be justified where it is directed to correcting instances of market failure.

That said, it must be acknowledged that the encouragement of innovation and the development of new industries are very likely to provide examples of market failure because of the uncertainties and coordination problems involved. Furthermore, the potential gains consequently lost are likely to be greatest if we rely solely on markets for the innovation and development of new industries where Australia clearly has a comparative advantage.

Indeed, Australia has a long history of failing to capitalise on its research achievements, such as the science behind the original development of solar panels. And there is good reason therefore to be confident that facilitating the development of Australia as a renewable energy superpower will prove beneficial if implemented well.

Furthermore, in this regard, it is encouraging to note that despite the negative reaction of some prominent economists to the Prime Minister’s speech, a recent survey of 42 leading economists, reported in The Conversation, found that more than two thirds of these economists backed government “grants to innovative firms across the economy” as the best way to respond to the assistance being made available under the US Inflation Reduction Act.

The way forward

Given these risks from a poorly directed and financed industry policy it is reassuring that there are a number of positives in the Prime Minister’s speech.

First, while short on detail, it is clear that the Prime Minister envisages that his government will focus its industry policy on investing where we have a comparative advantage, starting with clean energy and critical minerals.

Second, he also draws attention to the importance of:

  • A better and fairer education system
  • Skilled workers, secure jobs, fair wages
  • Modern infrastructure
  • Shared ambition with business and private capital
  • And a positive regulatory environment.

All of these policy aims relate to traditional government responsibilities and prioritising them will assist in lifting Australia’s economic growth and future prosperity.
Third, while extra funding is expected to be announced in the May Budget, it seems likely that most of the funding will not significantly worsen the budget balance as it will be drawn from already existing programs.

In addition, and most importantly, the Treasurer has said “what we are talking about isn’t some kind of free-for-all of public funds, we’re talking about incentivising private investment rather than replacing it.” “The heavy lifting will still be overwhelmingly done by the private sector but there’s an important role to play by governments and by public investment as well.”

Nevertheless, even if the government is not the major source of investment, it will still be important to ensure value for money from the public money that is spent, especially given the track record of too many governments in the past.

To ensure future value for money any government assistance should be based on:

  • An independent and evidence-based assessment of the risks associated with each proposal for financial assistance and a proper cost-benefit analysis.
  • Tight criteria specifying the outcomes to be achieved, and performance monitoring against those specified outcomes.
  • There should be a presumption in favour of finance, especially for private projects, being provided by loans rather than by equity.
  • An expectation that non-performing projects that don’t meet their commitments will be wound up.

Finally, it is disappointing that the Prime Minister has ignored the proposals by Ross Garnaut and Rod Sims who are very much at the forefront of pushing for Australia to become a clean energy superpower. As summarised in my article, Restoring Australia’s prosperity by becoming a superpower, (Pearls & Irritations, February 17, 2024), Garnaut and Sims have proposed two other major policy initiatives:

    1. Revise the government’s capacity investment scheme (CIS) so that instead of officials determining which projects should be built, the government should underwrite a portion of any project that meets the pre-determined standards.
    2. Introduce a carbon solution levy (CSL) that would price the damage that fossil fuels impose on us all. Apart from being good economics, this levy would then help pay for the CIS and any other government assistance programs directed toward realising Australia’s future as an energy superpower.

In sum, there is good reason for cautious optimism about Albanese’s plans for A Future Made in Australia, but the devil will be in the detail.

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