PM’s manufacturing plan risks creating business ‘class’ system: Productivity Commission

The Productivity Commission is an independent Australian government agency that provides advice on economic, social, and environmental issues. Its role is to conduct research and inquiries and provide recommendations to the government and the public on ways to improve productivity and efficiency across various sectors of the economy.

In recent times, the Australian government has announced plans to subsidize local manufacturing industries as part of its economic recovery strategy from the COVID-19 pandemic. The aim is to boost domestic production and reduce reliance on imports, particularly in key sectors such as medical supplies and critical minerals.

However, according to Productivity Commission Chair Danielle Wood, this approach could create a "business class" system where some companies become overly reliant on government handouts instead of focusing on their own productivity and competitiveness. In her view, such a situation could hinder the long-term growth and sustainability of these industries.

Wood's concerns stem from past experiences where similar initiatives have led to unintended consequences. For instance, during the 1970s and 1980s, the Australian government implemented protectionist policies to shield local industries from foreign competition. While this strategy did help some industries grow, it also led to inefficiencies and a lack of competitiveness in the long run.

Moreover, Wood argues that subsidies can distort market signals and create moral hazard problems, where companies may become complacent and fail to innovate or invest in productivity-enhancing technologies. Instead, they might focus on maximizing their share of government grants and subsidies, which could ultimately harm their long-term viability and competitiveness in the global market.

To mitigate these risks, Wood suggests that the government should focus on targeted and time-limited support measures that encourage self-reliance and competitiveness among manufacturers. This could include measures such as research and development grants, investment incentives, and skills training programs. Additionally, she emphasizes the importance of maintaining a level playing field by ensuring that subsidies do not create unfair advantages for some companies over others and do not distort international trade.

In conclusion, while the government's push to support local manufacturing industries is well-intentioned, there are concerns that it could create a "business class" system where some companies become overly reliant on government handouts and lose focus on their own productivity and competitiveness. To avoid this outcome, it is crucial for the government to design and implement targeted and time-limited support measures that encourage self-reliance and competitiveness among manufacturers while maintaining a level playing field and avoiding distortions to international trade.