The ACT Government has announced that it will give up cash grants as a method of attracting industry to the ACT. Instead it will concentrate on indirect assistance such as tax concessions and land grants to tempt new businesses and to help existing businesses expand.
It has cut direct grants from $2 million over the past three years to just $250,000 for the next financial year.
The reason given by Chief Minister Kate Carnell for the change of method was that the ACT could not compete against enormous amounts of money given by other states. Given the large amounts handed out by Tasmania and South Australia, that may be so.
Nonetheless the ACT will still hand out large amounts of industry assistance for new business or business expansion in future years under deals done earlier. In the past year it made 20 deals involving $550,000 in direct grants and $1.75 million in discounts on land, but these deals also contain revenue arrangements that will last into future years involving $49 million in forgone revenue.
These deals, however, are expected to bring 1800 new jobs to the territory. The question is whether on balance the deals are beneficial. At least some of the new jobs will be filled by the businesses from outside the ACT, rather than employing Canberrans. It may be that the new jobs created will more than compensate for the lost revenue because they will increase the tax base. Equally, however, these new jobs will be filled by people who will have families requiring health, education and other territory services.
There may not be much gain in the long run. Indeed, this is the conclusion of the Industries Commission. The commission argues that incentive schemes that merely bring a business from one state to another are not in the national interest. They may slightly benefit the receiving state but this is outweighed by the detriment to the losing state. And this is without considering all the staff disruptions of moving businesses solely for the reason of state subsidies.
Attracting business from overseas has some pluses on the national scale, but they do not warrant an unseemly auction between states and territories that only bargain away whatever national advantage there might be in attracting the industry in the first place.
The Federal Government and the Grant Commission should move in to stop this nonsense. Some vigorous penalty should be imposed on states that engage in these schemes. All the taxes and land revenue forgone should be sliced off any Commonwealth equalisation grant.
These schemes are unfair to existing businesses and residents who often have to pay higher taxes to support the subsidy. They also make competition with existing businesses unfair. Mostly, governments trumpet the created jobs, but with the jobs comes the need to provide infrastructure and services like roads, schools, social welfare and so on.
There is another problem, which looks like getting worse in the ACT. A lot of these subsidies are not transparent, especially payroll-tax exemptions, and that leads to a danger of allegations of favouritism and corruption. At least cash grants have to appear as a line entry in the Budget.
The grants commission should force every state and territory government to list all the subsidies. The excuse of commercial-in-confidence should not be available.
The best thing a government can do for business is to provide a generally good fiscal environment. Coupled with Canberra’s excellent natural, cultural and educational environment that should be enough.