PM warned against ‘slippery slope’ of picking business winners with taxpayer billions

Former Productivity Commission chiefs have backed a key economic warning about Labor’s vow to help key industries with billions of dollars in support, declaring the huge intervention could lead to a “slippery slope” in wasting public funds.

The former chiefs, Peter Harris and Michael Brennan, entered the growing row over the policy by endorsing the warning from their successor, Danielle Wood, about the risk of creating a new class of companies that could not survive without taxpayer aid.

Productivity Commission chair Danielle Wood and Prime Minister Anthony Albanese.Credit: Bloomberg, AAP

The comments heighten the doubts about the government plan after Prime Minister Anthony Albanese vowed to offer new assistance to growth industries to make solar panels, develop critical minerals and generate clean energy.

Harris and Brennan entered the debate on Friday morning after former treasurer Wayne Swan rebuked Productivity Commission chair Danielle Wood for being “out of touch” for expressing concern about the long-term cost of the new policy.

As the federal government’s peak source of independent economic advice, the Productivity Commission has expressed caution for years about the cost of industry assistance that can divert funds into failing industries and hurt economic growth.

“Danielle Wood is doing what the Productivity Commission was created to do,” said Harris, who led the commission from 2013 to 2018.

“That is, remind governments of the risks they run and the history of failure they need to acknowledge and learn from, before they try their hand, again, at funding individual firms.

“Credible governments appreciate commonsense advice, even if they don’t always adopt it.

“It’s hardly any more than common sense to say ‘work out your limits, stick to them, tie your obligations explicitly to your public interest objective and be very clear about those with people who are going to be spending someone else’s money’.

“Because this is a slippery slope and most times the investment fails.”

Brennan, who led the commission from 2018 to 2023, also defended Wood and said Australia did not have to follow countries such as the United States, which offers tax credits to industry under the Inflation Reduction Act.

“It is possible to understand the dramatic changes in Australia’s external environment and still question and debate what is the right policy response,” he said.

“There are multiple strategies available to us, and it might be that our best response is a policy mix quite different from that of the US or Europe.”

Albanese unveiled the new plans on Thursday in a major speech that promised a new law, to be called the Future Made in Australia Act, to offer industry support for renewable energy, making solar panels and encouraging investment in critical minerals.

While there is no price tag on the total plan, the government aims to announce new measures before the May 14 budget to add to the $15 billion National Reconstruction Fund and the $1 billion promised for solar panel manufacturers last week.

“This is not old-fashioned protectionism or isolationism – it is the new competition,” Albanese said on Thursday.

Independent economist Saul Eslake countered that this would “make us poorer” by using taxes and subsidies to encourage resources to move from one part of the economy to manufacturing.

Treasurer Jim Chalmers named Wood as the Productivity Commission chair last September after her career as an independent economist at the Grattan Institute, but her comments on Thursday showed she took a different view to many in the government about using subsidies.

“If we are supporting industries that don’t have a long-term competitive advantage, that can be an ongoing cost,” Wood told The Australian Financial Review.

“We risk creating a class of businesses that is reliant on government subsidies, and that can be very effective in coming back for more.”

Swan, who was treasurer from 2007 to 2013 and hired Chalmers as a top advisor over those years, said Wood was “completely out of touch with the international reality” because every major economy had launched similar policies to help new industries.

“What we don’t do is make some of the things we need so we can be independent and stand on our own two feet,” Swan told the Nine Network on Friday morning.

Former NSW auditor-general Tony Harris said Wood was right to raise concerns about industry assistance despite the sympathy for the idea of making Australia more independent in making solar panels or batteries.

Harris said the list of wealthiest Australians was full of people who benefited from government help and the new policy should not compound that problem, although he acknowledged the details were a mystery.

“The whole thing is quite fraught and quite dangerous,” he said of the new plan.

“It will be very interesting to see how they do it and how they justify it.”

University of Canberra professor Stephen Bartos, a former deputy secretary in the federal department of finance, said the new plan needed strong safeguards and full transparency, including the release of decisions for the investments and the assessments of the results from money spent.

“We’ve had too many instances in Australia where we’ve stuck with losing industries for too long,” he said.

“Rather than that, what’s needed is transparency in the decisions, what the criteria are, and why we’re deciding to invest in one industry versus another industry.”

The government plan has been backed by the renewable energy industry and companies that want to manufacture advanced technology, while Centre for Policy Development program director Toby Phillips said the investment could not be left to capital markets alone.

“We need an intentional, targeted and integrated approach that capitalises on Australia’s unique competitive advantages,” he said.

“We need to use a diverse mix of policy levers and ensure that beyond just capital investment, the government is also supporting things like R&D, workforce training, investing in common infrastructure and stimulating the demand for these industries.”

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