Paul Wallbank – Brilliant Communications

Should we be subsidising industries?

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Paul Wallbank

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The 2012 UK “austerity” budget has one bright side with big tax breaks of the games and television industries.

Meanwhile down under, the Australian government is about to announce more massive subsidies to the local motor industry.

While protecting jobs and trying to help struggling industries is admirable, we should ask if the cost to the taxpayer and economy is worthwhile.

Squeaky wheels

“The industry has lobbied for such changes for several years” says the BBC report on the UK budget and this is one of the problems with industry specific support; that it’s the ones who complain the loudest who get the assistance.

Often the companies and industries lobbying for subsidies spend too much management time and resources duchessing ministers, public servants and key media “opinion makers” than actually listening to their customers.

The fact they have staff dedicated to lobbying efforts in itself shows where their investment priorities lie. It isn’t in building better products or delivering what their customers want.

Missing voices

It’s often lamented that the high growth and small business communities don’t receive support, this is because they are running and building their businesses rather than shmoozing journalists, public servants and politicians.

Industry support programs often end up helping established insiders or those with a talent for filling in government grant applications rather than those who genuinely need help.

The Australian film industry is a good example of this where talented film makers struggle to attract funding from government agencies while a generation of well connected, experienced form fillers keep churning out subsidised movies that no-one wants to see.

Behind the times

One of the problems with government picking industry winners is they are often well behind the times with support going to mature or fading industries; both the Australian and UK announcements illustrate this.

The UK games announcement is at least ten years behind the times; strategic investment in the games and TV industry a decade or two ago may have been a wise move, today it’s just supporting another mature sector that is struggling to adjust.

At least though the UK’s policies are somewhere near the 21st Century, the massive Australian support for the failed motor industry shows Canberra’s politicians are mired in an era somewhere Henry and Edsel Ford.

It’s worth noting one of the first moves of the incoming Australian Labor government in 2007 was to axe the Commercial Ready program that was designed to help commercialise new technologies and innovations yet motor industry support dwarf any savings from abandoning this scheme.

The investment problem

In most countries the real problem to building jobs and industries is investment. Both the UK and Australia illustrate this with their domestic investment being largely directed at the housing industries.

The two countries have taxation and social security policies that favour over-investment in property. In Australia the problem is exacerbated by a retirement saving scheme that directs domestic savings to index hugging fund managers.

Australia’s sinking of money into an industry that have been struggling for nearly forty years and currently suffering massive worldwide oversupply is one of many damning indictments on the country’s political classes squandering of the current resources boom.

Making things worse, massive subsidies to uncompetitive industries already distorts a twisted economy.

Real economic reform that encourages investment in research, development, training, innovation and entrepreneurs is tough and means losses for many in those vocal, dying industries.

For the average politician a feel good announcement giving a bucket of money to a noisy group is a much better short term investment.

The challenge, and opportunity, in the democratic world is to make the politicians aware that the economy has moved on from the times of John Major in Britain or Bob Menzies in Australia.

It may well be that industries do need, and deserve, government support although we need far more scrutiny and justification from our political leader of why certain groups get help while others do without.

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Comments

4 responses to “Should we be subsidising industries?”

  1. Matt

    It’s a tough issue. Ahadi Hooper had a related piece in B&T which I commented on also. http://bit.ly/GE0LHG.

    The govt. needs to do much more at the structural level to encourage alternative investment. Stimulating innovation through smarter tax structures (not just tax breaks). The Rudd govt. implementation of income tax on the vesting of shares and options as opposed to the exercise of same has been disastrous for start-ups. The objective of catching largess granted to executives through these mechanisms has destroyed the entrepreneurs capacity to attract and reward talent in a high risk area. Imagine taking a significant pay cut to join an exciting start up only to be slugged with a massive tax bill without the cash to pay for it. OUCH!.

    As to the outdated industries such as automotive. Is it just a cost/benefit analysis? $200m in support today = $400m saved in social support services later? Certainly we shouldn’t be saying no more jobs to 1,000’s of workers in one industry with the promise of investment in another which yields nothing in the short to medium term for those just out of work?

    The investment in alternatives should come ahead of the cut back of support to the incumbents and at some point, one will outstrip the other and the end of subsidies should be less contested.

    Ireland is a great current example (RN The Science Show 17/03) of continued investment in innovation in the face of broader economic cut backs due to the long term significant yield.

    As for index hugging investment managers…automate it and strip the costs out, and the managers, and allocate the savings in fees to investments in innovation, entrepreneurship and start-ups.

    Matt

    Reply
  2. Kevin Loughrey

    Paul…the commercial-ready debacle, you mentioned in your article, really touched a nerve.

    dPId Pty Ltd had approval in principle for funding by the Commercial-Ready Government R&D encouragement scheme. In our business planning were really relying on that money and, on that basis, we had managed to scrape together $350,000 from small investors.

    We launched forth only to be told that the approval for funding had been withdrawn thanks to Mr Rudd’s fiscally responsible approach to the budget. It hurt doubly because, only a few months later, the Government was handing out money to the needy so that they could buy a new TV from Harvey Norman! It never occurred to anyone that as a stimulus to the economy they should spend money on firms performing genuine R&D to the benefit of all Australians.

    Later the Government introduced a new R&D incentive scheme. It was only 1/3rd of what the old scheme was and required that we hire a company to process the applications. We then had to pay for a public servant to audit our accounts. Finally, after around 6 weeks of effort, we received a grant and had to pay 15% to all the hangers-on.

    To say I am heartbroken, distressed to the point of tears and disappointed would be an understatement. I have never drawn a wage and all the investors’ money, less a small sum paid to accountants for tax returns, was spent on R&D and the promotion of this idea.

    The idea we are pursuing has the potential to change this world for the better and earn over $100 million per year in foreign exchange for Australia.

    Because we have not been able to develop commercially-ready hardware due to our inability to attract further investment, it is likely the funds and the effort thus expended will be lost.

    So much for being fiscally responsible!

    Reply
  3. Peter Holland

    I doubt that you remember the plan for a local computer company to establish a factory in canberra, injecting $$ millions into the local community and creating over a hundred jobs. The plan was to build the site at symonston, between hume and fyshwick. The ACT Govt at the time vetoed the proposal – they claimed that as the land was under the flight path, they were averse to building there. Fast forward to today and there is a Gaol on pretty much the same site…

    R&D is the old skeleton in the closet. With the NBN ban imposed by the Gillard Government, a move that throws the China / Australian Business agreement into question, where are the R&D facilities in Australia? Most international outfits don’t set them up here, they can get cheaper locations elsewhere and great australian ideas usually go overseas as our own government cannot think past their precious carbon tax.

    Reply
    1. Paul Wallbank

      Hi Peter,

      I certainly don’t recall Canberra losing a factory for zoning issues but it doesn’t surprise me although I suspect a computer assembly plant wouldn’t have added much to Australia’s industrial capacity and probably would have ended up being offshored anyway.

      The point about local R&D is spot on. I’m always amused when people talk of Sydney’s North Ryde precinct as being “Australia’s Silicon Valley” when its full of sales and distribution offices and is probably no more innovative than the Footscray Centrelink office.

      Australia desperately needs to overhaul its taxation and social security policies to encourage growth and innovation, the real tragedy of the last ten years is the nation’s inability to do this.

      Reply

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