The benefits of the federal government’s industry assistance programs in recent years have primarily flowed to large foreign-owned corporations. And small, mainly Australian-owned businesses pay the price for them.

That’s the conclusion of a new Crikey analysis of the Productivity Commission’s work on industry assistance.  Moreover, the flow to overseas companies has been strengthened by the Rudd government’s commitment to protectionism over the past two years.

Every year, the PC produces a report on how much the Commonwealth provides to industry through tariff protection, direct handouts and tax rebates, as well as the negative cost of tariffs for other businesses forced to pay more for imported inputs.  In 2007-08, the year of the most recent report, a net total of $9 billion was spent on industry assistance.

Australia made great strides in reducing tariffs from the 1980s through to the mid-1990s, but in recent years the decline in industry assistance has levelled off as falling tariffs have been more than offset by a 35% increase in the new protectionism — government payments through direct handouts or tax concessions.

In the five years to 2007-08, net industry assistance from the Commonwealth has actually increased 20%.

Seven industries, all but one in the manufacturing sector, attracted just under two-thirds of assistance in 2007-08: they were food, beverages and tobacco; automotive manufacturing; metal manufacturing; petroleum, coal and chemicals; textiles, clothing and footwear; wood and paper and finance and insurance (primary production also attracted large levels of assistance, but because of the drought).

Together, 57% of companies in those seven industries are foreign.  While some sectors such as wood and paper are dominated by Australian firms, the big recipients, especially motor vehicle manufacturing and food and beverages, are mainly foreign-controlled.

And nearly all assistance provided to the finance and insurance sector is via the offshore banking unit tax concession, which successive governments have used to try to establish Sydney as an international financial sector. That’s the most blatant example of industry assistance to attract foreign investment that would otherwise go elsewhere.

The biggest loser from industry assistance — the sector that pasy the most for tariffs that protect other industries — is the construction industry, which in 2007-08 paid $1.69 billion in extra costs because of tariffs.  The next biggest hit were retailers, who coughed up $740 million, then the hospitality industry, with nearly $400 million.  All three sectors have very low rates of foreign ownership — indeed, the construction sector has virtually negligible foreign investment.

And these sectors are all highly competitive, limiting companies’ capacity to pass on inflated costs.

The extent of domestic competition in the three fall-guy sectors also contrast with the beneficiaries, who are mostly oligopolists, whether Australian or foreign, like the remaining three car manufacturers, Bluescope and Onesteel in the steel industry or the big food and beverage multinationals.  Most of the recipient industries are small employers — automotive manufacturing 64,000, TCF 51,000, wood and paper 61,000.  Even counting everyone in the financial and insurance services sector — just under 400,000 — and the metal manufacturing sector  — 152,000 — their entire combined workforce is much less than those of retail (1.2 million) construction (987,000) or even hospitality (710,000).  Indeed, a little-noticed feature of recent labour force statistics is that the entire manufacturing workforce fell below one million for the first time in trend terms ever in November last year.

However, manufacturing is much more strongly unionised than the retail or hospitality sectors, and with more political muscle than the heavily circumscribed unions in the construction sector.

As the PC notes, the Rudd government has also significantly upped industry assistance during its two years in office (although not for the TCF sector, which lacks the political muscle and appeal to male politicians of the heavy manufacturing sector).  This is mostly explained by the stimulus packages, and wasn’t aimed at existing beneficiaries of assistance — indeed, by targeting the big-employing sectors of construction and retail, the government coincidentally helped those sectors that pay the highest price for industry assistance.  But the government also increased and extended assistance to the car industry and maintained parallel import restrictions for books.  The Productivity Commission showed that 60% of the benefit of PIRs goes to foreign publishers and authors, despite their purpose to protect Australian publishers and writers.

Plainly, the data is open to different interpretations.  From one perspective, successful domestic industries that can bear some additional costs are helping to support an important sector of the economy that employs a million people. Alternatively, a shrinking sector of the economy is being propped up by governments eager to lure foreign investment that would otherwise go elsewhere, with the costs being borne by taxpayers and competitive, high-employing industries that lack traditional political muscle.