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Trade and assistance review 2012-13

Government expenditure Subsidies Tariff Regulatory instruments Australia

This review contains the Productivity Commission's latest quantitative estimates of Australian Government assistance to industry.

  • draws attention to areas of government intervention that could be impeding economic growth
  • identifies recent developments in industry assistance and international trade policy
  • includes a chapter on the industry assistance aspects of defence procurement.

Key points:

  • Government assistance to industry is provided through an array of measures including tariffs, budgetary outlays, tax concessions, and restrictions on competition.
    • This benefits the industry receiving it, but comes at a cost to other industries, taxpayers or consumers. A critical issue is whether the benefits accruing to industry outweigh the costs.
  • Estimated tariff assistance to industry was $7.8 billion in 2012-13 in gross terms, accruing overwhelmingly to manufacturing. Budget and tax related support was worth a further $7.8 billion, thus total gross assistance was $15.6 billion.
  • After deducting the cost penalty of tariffs on imported inputs ($7.1 billion, two thirds incurred by services industries) net assistance to industry was $8.5 billion.
  • Budgetary assistance in 2012-13 was about $2.2 billion less than in 2011-12. The largest reductions were from the winding down of transitional assistance afforded by the Energy Security Fund ($1 billion), the Coal Sector Jobs Package ($219 million) and the Steel Transformation Plan ($164 million).
  • Since November 2013, the current Government has announced, amongst other things, that it would:
    • reduce funding to motor vehicle manufacturing between 2015–2017 by $500 million, not provide a debt guarantee or line of credit to Qantas, nor provide assistance requested by processing company SPC Ardmona, but would proceed with support to Cadbury for a tourist facility.
  • Australia recently agreed to bilateral trade agreements with Korea and Japan. Trade agreements can distort comparative advantage between nations and consequently reduce efficient resource allocation.
    • The rules of origin in Australia's nine bilateral agreements differ widely, are likely to impede competition and add to the compliance costs of firms engaging in trade.
  • Government outlays on defence capability represent one of the largest discretionary items in the Commonwealth's budget.
    • Defence industry assistance includes cost premiums for local purchasing preferences and budgetary support for skilling, research and exporting (with expenditures up to $500 million directly and indirectly benefiting industry).
    • Significant cost premiums can also be incurred by choosing to modify off-the-shelf equipment or pursuing bespoke designs.
  • To be justified, cost premiums and defence industry assistance need to be commensurate with any additional security and operational benefits. Publishing these additional costs and benefits would assist understanding of apparently huge cost differentials.
  • The efficiency and effectiveness of direct defence industry assistance programs could benefit from independent scrutiny.
  • Three short reviews also comment on topical areas of public interest: R&D; Foreign Investment Rules; and Special Economic Zones.
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