Business Council says federal budget needs to react to the US Inflation Reduction Act incentives

The government must respond to the US Inflation Reduction Act in its May budget because Australia is increasingly uncompetitive at attracting investment, the Business Council says.

US President Joe Biden signs the Inflation Reduction Act in August 2022. Picture: AFP

Businesses want the federal government to respond to the US Inflation Reduction Act in the May budget, saying that without incentives investment will be diverted offshore.

Business Council of Australia chief executive Bran Black said this country was “missing out” on potential investments “because our settings are not competitive enough”.

He said the federal government needed to “be responsive” to the challenge of the US Inflation Reduction Act passed by the Biden Administration in 2022 which has $550bn in incentives to invest in renewable energy and green manufacturing acts.

Mr Black said that some response to the US act, which business hopes will be part of the May federal budget, was needed “to ensure capital remains in Australia”.

However, he said Australia could not attempt to “engage in a direct subsidy war with the United States”.

Business people, particularly those in the energy sector such as Fortescue Metals founder and executive chair Andrew Forrest, have been warning for more than a year that the multibillion-dollar package of incentives in the US act could divert investment in the sector from Australia to the US.

Prime Minister Anthony Albanese indicated in a speech in February that the government could make announcements in the May budget in response to the US act as well as incentives for investment in green energy projects in Europe, Japan and South Korea.

“We don’t have to go toe to toe, dollar for dollar in our spending,” he said. “But we can go toe to toe on the quality and impact of our policies.”

The BCA has been saying for some time that Australia is becoming less competitive as an investment destination for global capital as world governments offer more incentives. As well, the cost of doing business in Australia has risen due to increased regulation such as the potential cost of new industrial relations laws which will come into force this year.

Business Council of Australia chief executive Bran Black. Picture: Britta Campion

Businesses agree with comments from federal Treasurer Jim Chalmers made to a BCA dinner in Canberra last week, that Australia should not sit back and accept a future of lower growth.

But there are considerable differences of opinion between businesses and the federal government on the policies needed to encourage more growth, particularly more productive investment in Australia.

BHP chief executive Mike Henry has said the mining industry faces “headwinds” in Australia over its development proposals.

“The single biggest thing that the government needs to do is to ensure the policy settings in Australia ensure high levels of competitiveness globally,” he said recently.

He said Australia needed to support “new and exciting” export industries but that this could only happen if workplace laws and tax policies supported high levels of productivity.

The BCA’s budget submission says countries, including the US, India, Canada, Japan, Saudi Arabia and those in the European Union were all competing for investments in renewable energy and climate change projects.

It says the US “has become a more attractive destination under the IRA, particularly in green industries such as hydrogen”.

“The huge scope and open-ended financial commitment of the IRA means the program will continue to have a significant influence on investment into the US (which) could cruel investment that would otherwise have flowed into Australia,” the submission says.

Releasing a report on the outlook for world infrastructure investment, the head of infrastructure for industry superannuation fund management vehicle IFM Investors, Kyle Mangini, said the US Inflation Reduction Act was proving to be a major impetus to infrastructure investing in the US as part of the energy transition.

“It is one of the most successful pieces of legislation I have ever seen in terms of encouraging people to invest quickly right across the spectrum,” he said.

“Other governments are scrambling to work out how to respond to it.”

The legislation has already encouraged investment by an IFM-owned US-based renewable energy company, Swift Current Energy, in a new solar power project in Pennsylvania on land from a reclaimed mine.

The IFM-owned company has been given a $US90m investment by the US Department of Energy under the IRA for the project which the company said would produce enough electricity to power at least 70,000 homes in the area.

IFM, which has about $100bn invested in infrastructure projects globally, believes the US incentives are a factor in new investment there.

The BCA said that although the federal government could not duplicate the billions of dollars in incentives under the US act, it could look at specific areas including measures such as targeted incentives for renewable energy projects, more encouragement for investment in critical minerals, and improving processing times under the Foreign Investment Review Board.

As concern rises about the impact of new industrial relations legislation on potential new investment in Australia – particularly for companies with global investment options – businesses hope that the budget will contain some specific measures to encourage more local investment in key sectors.

Mr Black said Australia “urgently needed to lift (its) productivity growth” if it wanted future generations to enjoy the same living standards we have now.

He said he “frequently” had conversations with CEOs who told him that Australia was “missing out on capital and economic opportunities because our settings aren’t competitive enough”.

Federal Treasurer Jim Chalmers. Picture: Christian Gilles

Mr Black said he welcomed recent comments by Mr Chalmers on the challenges faced by Australia and the need to “focus on improving productivity and boosting economic growth”.

But he said more specific policies needed to be adopted to achieve these goals.

Another BCA proposal for the budget was the establishment of a national reform fund to give state governments an incentive to undertake reform such as harmonising stamp duty and payroll taxes.