Entrepreneurs Should Not Get Government Support

The 2014 Federal Budget cuts back family payments, places tough new rules around welfare for young people, taxes doctor visits to fund medical research, and reindexes the pension.

But it’s not all bad news!

If you own a business that’s more than three years old, has good turnover, and operates in any one of 14 favoured sectors, you’ll be eligible for $20,000 of taxpayers’ money to hire management consultants.

Better, you could receive a $50,000 grant to employ a researcher for a few months.

Or, the jackpot: if you own a company that’s about to launch a new product or service, you might get $250,000 of matched government funding to help.

The base immorality of corporate welfare is never clearer than in times of austerity.

These obscenities are part of what’s called the Entrepreneurs’ Infrastructure Programme. The program was announced in the May budget, but it’s only now the subject of a public discussion process. (An incredibly short discussion process. The program starts on July 1.)

The program partly rationalises and partly replaces a bunch of other grants and subsidies from the previous government.

It’s worth $484.2 million over five years – the better part of half a billion dollars. This is huge. The change in Work for the Dole payments will only save $1.2 billion over four years, and that will affect many more people.

The entrepreneurs program is funded from a larger cut of industry programs, so the government can say it is reducing expenses somewhat.

But it is still incredible that even in a horror budget the federal government plans to give money away to successful companies.

After all, we’re not talking about bailing out firms in trouble here. We’re talking about handouts to firms the government believes have “growth potential”. Of course, the real winners will be the management consultants paid to pore over business plans on the taxpayer penny.

The Australian government is awash with small grants, minor programs, petty subsidies. State governments are too. Yet these sorts of policies are rarely discussed, let alone justified.

The Australian government has always been in the business of giving privileges to private firms.

The great tariff barriers of the 20th century acted as an indirect transfer of wealth from consumers to manufacturing interests. By preventing cheaper goods from entering the country, consumers were forced to spend more in order to protect certain politically connected industries. Think the car industry.

Tariffs were not presented to the electorate as a gift to private enterprise. The justifications were more complex – Australia needed temporary barriers to build industries until they were adult enough to compete globally, or that the government knew which industries were “industries of the future” and needed a little kick along.

In retrospect these claims were absurd. The “infant industry” argument never went away, even after decades of tariff protection. Somehow our industries were always young.

And with 20-20 hindsight those “industries of the future” just look like wrong turns. Again, think the car industry.

But for all the intellectual debate, the practical, real-world effect of protectionism was to subsidise private companies; a privilege those companies lobbied hard to defend.

The Whitlam government took the first axe to the Australian tariff. Much of the growth in living standards over the last few decades is thanks to tariff liberalisation.

So what’s going on with the Entrepreneurs’ Infrastructure Programme?

It’s tempting to see programs like this as the last gasp of corporate welfare – simply the trinkets that remain after three decades of liberalisation, waiting to be swept up.

But such programs really demonstrate that the political dynamic that supported protectionism is still with us. Rent-seekers and their political supporters have just gotten smarter.

Instead of the implicit taxation of the tariff, governments just hand firms money directly. The grants are given fashionable titles. Labor had a “Green Car Innovation Fund” and “Innovation Precincts”. The Coalition talks about entrepreneurship.

This is a bit strange. Every minute entrepreneurs spend filling out a grant applications is a minute stolen from doing what makes entrepreneurism so valuable: developing new products, finding new markets, and adding value to the economy.

One of the successes of the economics profession has been to persuade politicians that entrepreneurs are important. Entrepreneurs take risks, and those risks are tested in the marketplace. That’s great. But politicians took that lesson to mean they should give money to entrepreneurs. Never say politics doesn’t have a sense of irony.

To the individual taxpayer, the Entrepreneurs’ program will cost a fraction of a cent a year. Who could be bothered complaining about a few cents of tax? To the recipients, though, these subsidies are huge. Politicians will like the subsidies, too. What better publicity than being photographed with innovative entrepreneurs – to have job creators thank politicians for their support in front of TV cameras?

Tony Abbott is fond of an Abraham Lincoln quote: “Government should do for people what they can’t do for themselves and no more.”

How on earth does taxpayer-funded management consultants for private businesses fit that criteria?