Pearls and Irritations

12½ years ago I wrote, in a column published in the Fairfax (now Nine) mastheads, that “the surest way to gain acceptance for policy proposals that former Treasury Secretary Ken Henry might have called ‘frankly, bad’ is to wrap them in a ‘security’ blanket”.

That is, I went on, “if you want a government to do something that entitles you to some form of protection from competition (especially overseas competition), some kind of subsidy or tax break, or some other privilege not enjoyed by ordinary folk, but you know that your proposal wouldn’t pass any kind of rigorous, independent, arms-length scrutiny – such as might be undertaken, for example, by the Productivity Commission – then your best chance of getting what you want is to succeed in portraying it as being somehow essential in order to enhance some form of ‘security’”.

I am starting to get that feeling again, as the Albanese Government seeks to embed its economic strategy – in particular, its “Future Made in Australia” strategy which, we are told, will (along with the fight against inflation) form the centrepiece of this week’s 2024-25 Federal Budget – in considerations of ‘national’ and ‘economic’ security.

I don’t dispute for a moment that there’s a crucial role for government in ensuring that Australia’s transition to net zero happens within the time frame that, based on the science, it needs to happen.

And while I’m not entirely convinced that the world economy is ‘churning and changing’ as much as the Treasurer keeps insisting, I don’t question that there may be good reasons for wanting to be less dependent than we have allowed ourselves to become on a single source for many products that might turn out to be ‘critical’.

But neither of those valid observations should be used as an excuse to waste taxpayers’ money on fruitless pursuits – as history tells us all too often happens when ‘security’ is used as the primary rationale for policy decisions.

There are three things about the use of ‘security’ as the principal justification for government policy decisions that concern me.

The first is the tendency of governments to cite ‘security’ considerations as a reason for failing to explain why they have taken a particular decision. As soon as ‘security’ is given as the reason, we’re expected to take that at face value, and not ask or expect to know or be told anything more about the reasons for that decision, since it is a matter of ‘security’.

The Government’s principal rationale for what it appears to be proposing to do under the “Future Made in Australia” banner (as outlined in a speech by Prime Minister Albanese in Brisbane on 11th April) is that lots of other countries are seeking to ‘incentivise’ investment in various types of manufacturing (through generous subsidies and tax breaks), so Australia ought to be doing it too – because our ‘security’ or ‘sovereignty’ will be at risk if we don’t. And to question that logic is (apparently) to be pilloried as a ‘flat-earther’, or worse.

The second is the tendency of governments to use ‘security’ as a means of shutting down debate about the merits of a particular decision. If something is a matter of ‘security’, then it is impertinent, if not borderline treasonable, to allow grubby considerations of value for money, or cost and benefit, to intrude into it.

And the third is the tendency of governments to use ‘security’ as a reason to conceal some or all of what they are doing.

This is particularly a risk in the context of the policy decisions the Government seems likely to make under the “Future Made in Australia” banner. We’ve already seen that these decisions may take the form of investments – in the form of equity or debt – in private (and sometimes foreign) companies.

Transactions such as these are classified in the Budget Papers as ‘net investments in financial assets for policy purposes’.

The biggest single item within this category over the past decade has been student loans. But it has also included almost $30bn of equity investment in or loans to NBN Co over the past decade, the Turnbull Government’s $6bn investment in Snowy Hydro, $4.5bn in loans and investments by the Clean Energy Finance Corporation, $2bn in loans to West Connex, and almost $1.4bn into Barnaby Joyce’s Northern Australia Infrastructure Facility.

Importantly, these items aren’t included in Table 3.2 of Budget Paper No. 1, which shows the respective contributions of ‘parameter variations’ (that is, changes in economic and other assumptions) and ‘policy decisions’ (that is, conscious decisions by the Government to increase or decrease payments or receipts) to movements in the budget ‘bottom line’ from one budget to the next.

And they don’t count towards the ‘underlying’ cash balance – which over the past 27 years has come to be regarded as ‘the’ measure of the Budget’s ‘bottom line’. They represent the difference between the ‘underlying’ budget balance and the ‘headline’ balance which, despite its name, not only doesn’t attract headlines but in practice attracts almost no attention at all.

As a result, government decisions that fall into this category tend to attract far less scrutiny than more conventional decisions to raise or cut spending, or to raise or cut taxes.

‘Net investments in financial assets for policy purposes’ are already slated (according to Table 3.7, on page 72 of last December’s MYEFO) to increase significantly over the next three years, to an average of over $15bn a year between 2024-25 and 2026-27, from just over $4.5bn a year between 2020-21 and 2023-24. And apart from student loans and CEFC loans and investments, the biggest single contributor to this increase is ‘net other’, which a footnote says consists of “amounts that have not been itemised for commercial-in-confidence reasons”. This is the most likely place for investments made under the banner of “Future Made in Australia” to be buried.

This ought to be worrying for anyone concerned with public moneys being spent wisely – especially given the timely warning in the International Monetary Fund’s most recent Fiscal Monitor that “historical experience suggests that getting industrial policy right is a tall order” and that “an abundance of failed programs in countries with strong institutions shows that it is difficult to avoid policy mistakes”.

“Getting industrial policy right” in Australia will surely be harder – and making “policy mistakes” more likely – if the rationale for spending or revenue decisions in this area is cloaked behind a veil of ‘security’, and if the amounts involved are buried behind a ‘commercial-in-confidence’ wall.

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