Free money: Is it really free?

Are grants the best way for the government to assist business?

Businesses are also taxpayers. And given the vast majority won’t receive “free money” from the government, they have an interest in whether the money is well used.

In 2008-09, the federal government dispensed $7.7 billion in grants and tax concessions to businesses, according to the Productivity Commission. This is an 11 per cent increase over the $5.2 billion spent in 2003-04 (with inflation).

“The nature of budgetary assistance to industry has also been evolving,” the commission notes in its review of 2008-09 assistance released in June. Tax concessions to small business and for research and development now dominate, while assistance to specific industries continues to fall.

The evolution of government assistance away from tariffs and industry-specific subsidies reflects today’s consensus among economists and policymakers: markets, not governments, should determine which firms and industries survive. To the extent there are market failures – say, under-investment in R&D owing to some firms “free-riding” on the investments of others – remedies should be available to all-comers.

Purists decry even this concession. “Just because economists can imagine a theoretical market failure this does not imply that real markets actually fail,” argues Sinclair Davidson of the free-market Institute of Public Affairs. Jonathan West, director of the Australian Innovation Research Centre, agrees industry assistance is not always money well used, but for different reasons.

First, industry-agnostic measures are usually anything but, he says. In the case of seemingly neutral R&D tax concessions, research-intensive firms such as those in biotechnology, benefit much more than industries such as farming, in which the bulk of research is done outside individual firms. “Not only that, to raise the resources to have that policy, some sectors have to pay more tax,” he says.

“Something that looks on paper and is argued to be sectorally neutral, in fact penalises some sectors and advantages others.”

But West blames the policy consensus rather than the idea of industry assistance itself. In dismissing all industry-specific help as “picking winners” in vain, economists pretend the comparative advantage of firms and industries is a “gift from the gods”.

In fact, he writes in the Griffith Review, “in the principal industries that have driven economic development over the past two centuries – manufacturing and services – comparative advantage is not endowed by God but created by human effort, ingenuity and organisation: comparative advantage can be brought into existence by deliberate investment and sustained commitment.”

West is not for erecting barriers to the outside world. Instead, “we must expose candidates for strengthened comparative advantage to competition, while improving their ability to survive in that competition”.

Importantly, the candidates he puts forward, such as mining services and food, should not be “starting from scratch”.

West worries about the social consequences of the economy narrowing around primary production. Over time, he predicts the government “will incrementally expand its control over the resource industries, seizing an ever- expanding share of the proceeds”.

“The result would be a society in which the ability to undertake a task effectively is less important than getting along well with government, a society in which politics dominates self-reliance,” he writes.

If West is right, the now resolved but still unedifying stoush between miners and government over the former super profits tax is the first of many to come.

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Anthony Sibillin

BRW

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