Here's how governments can help the sugar industry without the FTA

The fallout over sugar’s exclusion from the Australia-US free trade agreement has once again put the spotlight on the question of how much money the federal government should devote to industry assistance. An honest and open debate over industry subsidies – including sugar – will be healthy for Australia. But it should not be restricted to federal aid. In our view, the most serious flaw in our system of corporate welfare is the interstate bidding war among the states and territories.

To see how industry policy now works, imagine if states and territories offered the same incentives to people that they now offer to firms. Bored with your current address? Perhaps you’d like to consider Queensland’s tempting offer of an $11,000 property tax rebate? Or Victoria’s offer of $11,000 in theatre subscriptions? Or the Northern Territory’s unique offer to pay your first $11,000 in speeding fines?

If this sounds crazy, it shouldn’t. If the total amount of state and territory government money given as incentives to firms was instead divvied up among those who move interstate each year, it would amount to about $11,000 per person. And despite the tenuous truce signed last August, there is every reason to think that state industry assistance will continue apace. After all, the most aggressive provider of corporate welfare, Queensland, refused to sign up to the deal.

Total industry assistance by state and territory governments amounts to $3.3 billion annually – nearly as much as is spent on policing. As Productivity Commissioner Gary Banks has pointed out, the rationale for much industry assistance is rather muddy thinking: “investment is beneficial, so subsidising investment must also be beneficial!”. Instead of paying high-profile companies to relocate, states and territories should concentrate on improving the business environment for all firms, regardless of whether they are as sexy as the biotech industry, or rich enough to hire as many lobbyists as Richard Branson.

Troublingly, our research suggests that there is a political cycle in industry assistance. Comparing Productivity Commission figures for industry assistance in 2000 01 and 2001-02 (the latest figures available), we found that in an election year, state and territory governments raised corporate welfare by an average of 33 percent. By contrast, in non-election years, industry assistance seems to be basically unchanged. Governments seem to be hoping that splashing around a little extra pre-poll cash will help endear them to the punters.

While corporate welfare may provide a clear benefit to politicians, it is far from clear that the benefits that taxpayers receive from industry assistance outweigh the cost. Industry assistance is typically designed for maximum media coverage, and minimum transparency. Watching the behaviour of some state Premiers, it’s hard not to feel like they’re buying you a lavish birthday present with your own credit card. . . and then hiding the bill.

One valid rationale for assistance is to mitigate the potentially devastating effects of structural unemployment when large employers shut down operations, affecting large numbers of people in particular cities (BHP and Newcastle quickly come to mind). Providing assistance for retraining and relocation of redundant workers is extremely important. In limited circumstances, it may even be preferable to provide assistance directly to the firm so that they remain viable. But this assistance should be provided by the federal government, ensuring coordination, and preventing a race-to-the-bottom competition between states.

We propose two alternatives to the current industry policy. First, we should demand transparent, quantifiable statements of the benefit that an industry assistance package is expected to bring to the taxpayer. Voters deserve better than the lazy claim that “Thanks to our help, Pete’s Pork will create 100 new jobs”. The media has an obligation to probe further. How many jobs would have been created if the government gave nothing? How many will simply be diverted from surrounding firms? And how much will each job cost the taxpayer? With public expenditure comes public accountability, and commercial-in-confidence should not be a smokescreen for governments. We should make sure that politicians make quantifiable claims, so our state auditors-general can follow up on them in years to come.

A second alternative would be for states and territories to replace industry assistance programs with more direct forms of job creation. Here, the best strategy would be for states to create an earned income tax credit – a work subsidy to make employment more attractive for low-wage workers.

Like the Five Economists’ plan put forward in 1998, state-based income tax credits would have the advantage of bringing down long-term unemployment, while transferring money to the working poor. The money could either be paid as a direct state wage subsidy, or administered by the federal government through the income tax system.

Wage subsidies have been proven to be effective in the US. About one-third of US states currently offer some form of tax credit to low-wage workers, and state income tax credits have been shown to lower poverty and unemployment. With Labor governments now in power in every state and territory, the heirs to Ben Chifley might consider which approach he would have preferred: selective tax breaks to large corporations, or wage subsidies for all low-paid workers?

In its current form, industry assistance is clearly good for politicians, but is it really in the interests of voters? With a bit more hard thinking from policymakers, and scrutiny from journalists, we might well find that there are smarter ways of creating jobs for those who need them most.