The fuss about corporate welfare, deemed “unsustainable” by Treasurer Joe Hockey, appears almost diversionary considering the relative size of industry assistance in overall government spending.
Industry assistance made up around 2.5% of government expenditure in 2011-12, the most recent data. At A$9.4 billion for outlays plus tax breaks it was tiny relative to GDP of $1.47 trillion for that year. Moreover, attention appears to be focused quite selectively on budget outlays, and is lacking toward the other side of the budget, the substantial tax breaks and tax avoidance opportunities which mainly benefit the big end of town.
If “corporate welfare” is taken to mean industry assistance, it is not a straightforward or transparent measure. Industry assistance is a combination of government expenditure, tax reductions and tariff protection, plus any regulatory measures, any or all of which may favour some activities over others. Such assistance may be granted according to the type of industry, or granted on an ad hoc basis to specific companies, often big ones. Industry assistance also varies counter-cyclically, increasing with the GFC and drought, offering a beneficial stabiliser effect on the economy.
How big is industry assistance?
Based on the most recent Productivity Commission report, overall assistance to industry, including tariffs, is lower than it has ever been in real terms.
Tariff assistance has fallen tenfold over 40 years, from around 30% of industry output in 1970-71 to around 3% in 2011-12. In 2011-12 the Commission estimated industry assistance from tariffs to total $7.9 billion, less the cost of tariffs on imported inputs of $6.8 billion, amounting to a net $1.1 billion.
Total assistance from the government budget was estimated at $5.1 billion in expenditure plus $4.3 billion in tax concessions, for a total of $9.4 billion. This figure as a share of government expenditure is slightly lower but very similar to that of the previous five years.
However assistance through government expenditure and tax concessions is not necessarily manifest in the government budget and details may be buried elsewhere. This was the case with a lot of the assistance to the insurance industry after the failure of HIH in 2001. Government budget figures are highly rubbery anyway, as with any forecast, let alone one so complex.
The impact on industries of items such as the fuel tax credit of $5 billion (over $2 billion of it in mining), the practice of accelerated depreciation for the mining industry, or negative gearing which favours residential property over other industries, should be considered. Tax avoidance by larger companies appears unaccounted for.
It is even more difficult to compare Australia’s industry assistance with that of other countries, but it is apparently low and tends to come from tariff regimes rather than taxes and subsidies. This is the case even in industries with a big share of support such as automotive, agriculture and energy. Other rich countries have extensive government ownership in many industries, which makes comparison more complex.
Primary production is still winning
Figures are generally small in relation to the size of industries, and in millions rather than billions. According to the Productivity Commission, beneficiaries of more than $200 million in government expenditure in 2011-12 included sheep, beef cattle and grain farming ($213 million, decreased due to the end of drought), mining ($400 million, increased), metal and metal products ($220 million, increased) and motor vehicles and parts ($580 million, increased).
Tax concessions of more than $200 million in 2011-12 went to sheep, beef cattle and grain farming ($355), mining ($300 million), financial and insurance services ($845 million), property, professional and admin services ($418 million), and arts and recreation ($234 million).
Industry assistance also includes tariffs, which the Productivity Commission indicates amounted to a mere $1.1 billion overall, once the cost of tariffs on imported inputs is subtracted from the gains from output tariffs. The effect of tariffs is a net positive sum for manufactures and negative for services. Horticultural industries including bananas faced net protection worth $146 million in 2011-12.
While noting the small scale of assistance, the combined assistance measures appear to favour primary production and manufacturing over services. The service exceptions are electricity, gas, water and waste services, financial and insurance services, and arts and recreation.
Remember the market failure test
There is a case for industry subsidy or tax where there is market failure. Market failure occurs where the price and quantity of goods and services produced doesn’t adequately reflect the benefit to the economy or society of the activity, for instance in infrastructure and utilities, health, education and the arts.
Government assistance is also well recognised as promoting technological development where private industry is unlikely to do this on its own. Funding for research and development includes that for the CSIRO and the universities. Australia has amongst the lowest rate of government support for innovation of the richer group of countries and even lower rates of invention.
However addressing market failure appears not to be the reason for corporate welfare currently in many cases. Moreover some government assistance can be judged to be detrimental to society. This includes the highly subsidised logging in native forests in Australia, and tax breaks to resource intense energy producers where it encourages resource using and polluting activity.
A coherent industry policy calls for application of a set of criteria relating to the long-term path of development that is appropriate for Australia’s resources, human, physical and intellectual. But this tends to run up against short term political objectives time and again. In the scheme of things, “corporate welfare” appears a storm in a teacup.