Stephen Anthony is chief economist at Industry Super Australia, and has worked as a senior policy officer at both Federal Treasury and the Department of Finance in Canberra in fiscal policy and budget analysis. In the following excerpt from his presentation to the NCC National Conference, Mr Anthony outlines what an integrated industry for Australia would look like.
What do we mean by industry policy? It is that set of policies aimed at helping to stabilise living standards and help households manage risk. So, it’s a broad suite of possible initiatives basically to generate jobs and economic security for households.
The last two decades has been a story of secular stagnation: that is, the tendency for economic growth to slow down in the advanced economies, and for returns on capital to decline, as opposed to returns on the stockmarket, for example.
Basically, we have ageing populations; and, as these populations have aged, people have tended to save more, which has driven up their stock of productive capital but driven down the returns to capital.
At the same time, there has been a concentration of productive ownership through technology: the FAANG companies (Facebook, Amazon, Apple, Netflix, and Google); and that has contributed to the slowing of economic growth.
Over the last two decades, we have also seen the rise of the Chinese economy. It rose from 2 per cent of global gross domestic product (GDP) to 26 per cent of global GDP in two decades.
Where did all that GDP come from? Well, it came out of Middle America, it came out of Australia, from our manufacturing sector, and from a host of other countries.
The shift of manufacturing to China led to very low capital spending in the Western economies, as there were no further productive opportunities for manufacturers and other producers, which crimped wages.
Our economy at the moment is a big beach, a big mine. We have tremendous natural assets, but only a mediocre education sector. Critically, we have a low-complexity economy; we are very undiversified. And that brings with it a series of risks that we must deal with for an improved future.
Government policy at present is dogmatic and self-defeating. It considers returns and growth, but it does not consider risk-adjusted returns, which is why we have adopted free trade when what we really need to do is manage risk. And that requires making our economy more diversified.
If you look at our industry structure, we’ve got a lot of banks, we’ve got a lot of mines, and we’ve got a lot of play-it-safe executives. But we don’t have much entrepreneurialism. In other words, too many are fed by too few.
What are the principles of good industry policy? Macroeconomic stability is the key; strong growth. Strong growth underpins a sort of virtuous circle or upward spiral of technological development and productivity enhancement, which leads to higher wages, greater business investment, and ever increasing living standards for Australians.
So, a first suggestion is to call for a reassessment of monetary and fiscal policy targets. Right now, monetary and fiscal policies are anchorless and thus are really not contributing to the goals of industry stability and industry success.
Also the linkages between policies must be considered: how macro policy and industry policy are complemented by population policy and regional development policies. There has been incoherence among policies.
For example, we have had incredible population expansion over the last 15 or so years, relative to the previous 30 years, almost doubling our population. Yet, at the same time, the composition of our migrant intake has tilted towards temporary visa holders away from permanent visa holders.
So, the incentives for migration have changed and, perhaps, the perspective of the migrants has changed. Whereas, in the past, our migrants were encouraged to contribute to national prosperity, now our state premiers essentially are running a population Ponzi scheme as a way of keeping the education sector in business.
So, what is needed is to relink immigration policy to regional economic prosperity, to industry policy and to macro policy.
In 1983, the Hawke government established EPAC, the Economic Planning Advisory Council. Its task was to coordinate macro and micro policy to drive growth and to manage risk. This institution was abolished early on in the Howard government. That was a serious mistake, because a small number of people in this institution generated a lot of intellectual capital, which provided important signals to the rest of the bureaucracy and to the broader private-enterprise economy.
EPAC should be re-established to keep tabs on the structure of Australian industry, and the structure of national export industries. It could figure out where our imbalances are greatest and watch for significant technological deficits.
It should monitor foreign ownership. It should identify blue-chip assets in real estate, and in our supply chains, that must be off limits to foreign ownership.
We must focus on value-adding in this country, not offshore, and we must focus on technological input, research and development, and local control.
Moreover, we need to focus on company viability. What companies need to succeed is low-cost energy. Australia has never done worse than today in terms of providing low-cost energy to producers. We need a technology-neutral energy mix.
We need to stop telling companies how to reduce carbon emissions. In particular, we need to start allowing energy companies to generate lower-carbon energy as they see fit, and to back them no matter what technology choices they make.
The next proposal may sound radical but is actually before Parliament right now. That is to abolish the corporate income tax and replace it with a cashflow tax. A cashflow tax allows all capital spending to be deducted upfront, so companies can no longer write off debt because they have already had the big capital write-off upfront.
A cashflow tax would be a revolution for most Australian producers because it would mean that they could write off the cost of establishing business projects upfront, and then spend the next few decades benefiting from the revenue gained from those write-offs.
Also, once foreign companies are taxable in Australia, they would no longer be able to write off their marketing, debt costs, or development of technology offshore, through transfer-pricing arrangements. So, Google and Facebook and the like would all pay tax in Australia or be forced to add value here, one or the other.
Another policy proposal is to fix coastal shipping in Australia, especially on the east coast, and between the east coast and the west coast. This would be good for everyone, but especially for Tasmania, so that we could really ramp up manufacturing nationally.
We also think that federal and state governments and local councils should adopt a buy Australian campaign like nothing we’ve ever seen before.
On infrastructure, there is a real case for governments to identify their big priorities, and to just tender those priorities directly to superfunds, whether they be offshore or here in Australia, and to the Future Fund.
Finally, on skills, we think that a German-style apprenticeship scheme that focuses on digital and traditional tech would enhance current arrangements, which are, at best, fragmentary.
Queensland LNP senator Matt Canavan was formerly an executive at KPMG, and an economist at the Productivity Commission. He served as Minister for Resources and Northern Australia between February 6, 2016, and 2020. Senator Canavan told the Conference that in particular two circumstances are holding back development in Australia: costly energy and the breakdown in the international trading system that from directly after World War II until the mid-1980s served Australia well.
We face enormous challenges here in Australia. Due to the global pandemic, economically the nation has completely changed. We now are approaching $1 trillion in government debt, the highest level since the end of World War II. We face security challenges in our region, with increasing aggression from China to its near neighbours and bullying of Australia on the trade front.
We have to do more to improve our resilience as a country to invest in our own natural strengths. And I know that has always been something the NCC has championed over the years. It’s time to take on these challenges to secure our nation.
Just over seven years ago, when the Coalition Government came to power, there was a lot of talk about defence spending. Keep in mind, this was in the context when China was not seen as a threat. At the time we were negotiating a free trade agreement with China. But still, there was a widespread recognition that it was not right for Australia’s defence spending to have fallen by 2012 to the lowest it had been since 1939.
Prime Minister Tony Abbott promised that he would restore defence spending in Australia and lift it back up to around 2 per cent of GDP. We are on track and over the next decade we will hit 2 per cent of GDP. We have invested billions of dollars in new submarines and new naval vessels and upgraded infrastructure for our army in new bases and invested in new bases in Northern Australia.
But we still have a weakness in this country. Because, although a strong defence force is one measure of national security, it is not the only thing. When you look back to World War II, it wasn’t the countries that started the war with the biggest armies, the biggest air forces or the biggest fleets that won the war. It was the countries that had the strongest economies, that had the strongest industrial capacities that could turn their countries onto a war footing relatively quickly, that ended victorious.
To make sure that the free world continues to be victorious, we must ensure that it has sufficient industrial capacity, such that we can defend it if a conflict should ever come to our region again. And we are not doing so well on that front.
Over the last decade, our industrial capacity has been declining. We made fewer things in 2020 than we did in 2010. While some might not see that as being that shocking, given that Australian manufacturing has been in relative decline for some time, that decade was the first time that Australian manufacturing output actually fell.
For the last 30 or 40 years, it is true that Australian manufacturing has been in relative decline – its share of our economy has been falling at least since the 1970s. But even in the 1980s and 1990s, and in the 2000s, we still made plenty of stuff, it was just that the rest of the economy grew faster. So manufacturing’s relative share fell over those decades.
But these last 10 years have been an absolute disaster for Australian manufacturing. Output of almost all products fell over that period, particularly in automobile and steel manufacturing.
Why are we in this position? What has led us to this decline over the last 10 years? I believe that there are two main factors behind that decline.
Number one: we have destroyed our nation’s energy competitiveness.
Ten years ago, in the late 2000s, Australia had some of the cheapest electricity prices in the world. Today we have some of the most expensive. We haven’t lost our natural resources, we haven’t run out of coal or gas, or uranium, or other renewable sources. But we have adopted silly energy policies that have prioritised certain types of energy, like renewables – intermittent power sources – over reliable sources that can be on all the time.
Manufacturers in Australia pay 91 per cent more for their power today than they did in 2010. We are not going to be able to compete if we continue destroying our energy competitiveness, even as we sell our coal and gas to other countries.
The other main factor that has led to this decline is the breakdown in the international trading system that was established after World War II. After World War II, countries did get together and sign a general agreement on trade. And that largely served this country well as other countries did open up new export markets to Australia.
But with China’s entry into the World Trade Organisation (WTO) in 2001, the whole system has come under enormous pressure. When China was accepted into the WTO, it was expected to be transparent on its own subsidies, it was expected to sign up to a bunch of commitments that you made for getting “most favoured nation” trading status.
In truth, China has never disclosed the full extent of its government assistance and subsidies to its own industries. China flaunts international trading rules, and preferences its own industries and domestic jobs over those of its trading partners.
And everyone else is meant to sit back and not complain about it: buy the cheap TV sets and just be fat and happy. Now some countries have started to fight back, particularly the United States under Trump. Europe has done the same. But Australia has not responded in a significant way.
Now we’ve seen starkly over the last year the implications of China’s law-breaking attitude. The trade agreement we signed with China five years ago is now not worth the paper it’s written on. China just slaps unreasonable and illegal bans on Australian goods. But it has been doing the same through the international trading environment for much, much longer. We must now recognise that and respond to protect our own industrial capacity and our own jobs.
Ronald Reagan said, there are no easy answers, but there are simple ones. The solutions are pretty simple to come up with but can be hard to carry out. And the simple answer to get back to making things in this country, is to lower power prices and stand up to China.
These solutions will require us to re-evaluate some of our long-held truths about international trade. They require us to turn away from the siren song of renewable energy, which might be immediately popular in the electorate but it is not in our long-term interest as a nation. Even if we did just those two things, that would help this country re-establish its manufacturing strength and create jobs.
Which is why I got together with a bunch of National Members of Parliament last year, and we devised a nine-point plan to strengthen Australian manufacturing. We concentrated on the need to strengthen our protection for jobs in this country and to lower energy prices.
Pat Byrne from the NCC played an integral role in pushing us in this direction. So, I want to recognise again the NCC’s contribution to this public policy effort.
We need to strengthen the Anti-Dumping Commission.
We need to do a review of the subsidies and assistance that China gives to its industries and, if that review finds that China is unfairly subsidising its own industries and protecting its own jobs ahead of its competitors, we would be well within our international legal rights to take countervailing action against China to protect jobs here in Australia.
That would mean we could impose tariffs on Chinese imports or give direct assistance to our own industries – to keep the steel industry here, to keep aluminium here, to keep copper refining here, to keep adding value to our products here so that we can maintain some level of industrial capacity in our nation.
We need to restore energy competitiveness by building base-load power stations. We cannot rely on just renewables, which are only on when the wind blows or the sun shines; stuff that just doesn’t turn up for work when it wants to!
We should build a coal-fired power station in the Hunter Valley to replace the Liddell power station, slated to close in a few years’ time. The technology exists: high-efficiency, low-emissions technology exists. We could start building that tomorrow.
In North Queensland there is no base-load power north of Rockhampton. We should build one up there too.
Then we should look at nuclear long term as well. That’s why my Nationals colleagues in the Senate in late February moved amendments to change the Clean Energy Finance Corporation’s legislation so that we can invest in nuclear technology and things like carbon capture and storage.
We should dedicate specific tax incentives to manufacturing so as to attract more investment. And while the instant asset tax write-off that was announced in last year’s Budget is a great start, we need to put more tax incentives into manufacturing.
I hope you get the time to take a look at the Nationals’ plan to recover Australian manufacturing. Because we need your support. We need your political support. Contact your Members of Parliament, and tell them that you support the Nationals’ plan to rebuild Australian manufacturing. And hopefully we can continue to work with great people like Pat Byrne and the NCC to make this country better and to recover Australian manufacturing.