Activity 10f: Reducing assistance to Australian industries
- Because there is a possibility that businesses spend too much time and resources on lobbying governments for assistance instead of spending this time (and resources) on genuine efforts to improve performance and competitiveness. For example, a business might direct five employees to use the business’ resources to write a proposal and visit Canberra to convince members of parliament of the need for some form of assistance. This time and energy could be spent on R&D or investment efforts that have the potential to increase innovative and boost productivity.
- This is because without government stimulus measures during this time, the length and depth of the recession 2020 will have been longer and more severe. The support measures introduced during this time were temporary in nature and were steadily withdrawn as the economy recovered. This helped to ensure that any subsidy support provided during this time (such as the wage subsidy/JobKeeper) did not become entrenched.
- The policy objective to reach net zero emissions by 2050 implies that the government will need to either introduce or increase environmental taxes (e.g. taxes on carbon) and/or increase subsidies for businesses who demonstrate a commitment to reduce pollution (e.g. the operation of the direct action measures that were the hallmark of the previous government’s approach to reducing carbon emissions. The resurgence of protectionist measures across the globe implies that tariffs and other forms of assistance, such as subsidy support, both in Australia and abroad, will increase.
- This is because in the existence of subsidies has the potential to encourage and entrench inefficiency over time if the industry becomes over reliant on the subsidies. While there might be a valid argument to support industries on a temporary or short term basis (e.g. new and infant industries), the costs of this protection can quickly mount such that the overall net benefits for the economy can be negative over time. The distortion in the allocation of resources typically comes from the change in relative prices that occurs. Protected industries will experience a lower relative price compared to other industries whose prices will also tend to rise (as taxes will generally increase over time to pay for the subsidies and the protected industries are better able to bid up the price of resources, including labour). The higher prices in non-protected industries discourages resources from flowing into them as demand and production declines. In contrast, the lower prices in protected industries things to attract resources. This distortion is amplified over time if and when protected industries become less efficient in an environment where they are protected from (foreign) competition. this leads to a less technically efficient allocation of resources, and reducing the productive capacity of the economy.
- Aggregate supply policies, such as further dismantling of trade and protection and/or more liberal/less restrictive foreign investment laws, will help to encourage ongoing trade liberalisation around the world, rather than the retreat from trade liberalisation that has been seen over the past few years. Despite the fact that Australia is relatively small compared to countries such as the USA, China and those in western Europe, the continued reduction in subsidies and tariffs in Australia does indeed help to encourage other countries to do the same (or at least discourage them from becoming more protectionist). A less protectionist global environment will then expose Australian firms to greater levels of competition, which forces them to become more dynamic and efficient over time. For example, firms will be more inclined to invest in new technology and/or seek out productivity enhancements given that competitive pressures are more intensified. To the extent that this leads to higher levels of productivity, it results in an increased capacity for businesses (and the economy more generally) to produce goods and services, which lower average costs of production, exerts downward pressure on prices and stimulates low inflationary growth in real GDP.