The prospect of Victoria walking away from a business investment anti-poaching agreement will hinder rather than help the state's economic competitiveness.
There is growing speculation that the Baillieu government will not sign the Interstate Investment Co-operation Agreement, due to expire later this year, which forbids all states and territories, except non-signatory Queensland, from luring business investment from each other using expenditure subsidies or tax breaks.
The idea behind the agreement is to stop the business bidding wars that cost taxpayers, yet do little but inefficiently shuffle investment funds and jobs across state borders. The Productivity Commission estimated that states provided outlays of at least $3.3 billion on help to industry in 2001-02, as well as a range of tax concessions.
The proposal originated in the mid-1990s, with calls by economist Wolfgang Kasper for an interstate pact banning industry or company-specific handouts, followed by an Industry Commission report examining the parameters of such a potential non-discrimination pact.
In 2001, New South Wales and Victoria agreed to not poach business investment from each other and this was followed by a broader agreement in 2003 between the states (excluding Queensland) and the territories to end investment bidding wars. The 2003 agreement was renewed in 2006 for five years.
During last year's Victorian election, the Coalition parties raised concerns about the state's declining national share of business investment. During the Bracks/Brumby governments' term the share of Australia's investment raised in Victoria fell from 25 per cent to under 22 per cent.
Capital accumulation is essential to economic development and, through it, a sustained improvement in living standards, and the Victorian Coalition identified an aggressive pursuit of foreign and interstate investments as the key to arresting the slide in investment share.
Queensland's share of business investment grew over the past decade or so, from 17 per cent to 20 per cent, and Queensland premiers Peter Beattie and Anna Bligh have shown little hesitation in using tax concessions and subsidies to lure companies north.
But it is not clear that restrictions on the ability of other governments to secure interstate business investments using taxpayer funds was the cause of Victoria's fall in investment share.
After all, Western Australia, Tasmania and the two territories, which are signatories to the anti-poaching pact, have increased their national investment share over the past 10 years.
There are factors that explain divergent state investment share trends, such as economic growth rates and the composition of industries. It is no surprise that Victoria, the national base for manufacturing and subject to intense import competition, is seeing its investment share come under pressure.
While Queensland has hailed its go-it-alone approach, making claims about the amount of investment and jobs generated by paying investors to set up or expand operations, there are costs.
For a start, poaching investments is funded by taxpayers. Many state taxes are paid by businesses that don't receive government handouts, disadvantaging economic activities that already exist.
Investment attraction schemes must also be administered by bureaucrats, adding overheads to the costs imposed on taxpayers.
The prospect of a business securing a handout encourages companies to lobby politicians and bureaucrats about their applications. Such rent-seeking runs the risk that businesses will divert their attentions from the need to innovate and add value in a globally competitive economy.
While governments may believe that poaching private investments might enhance their political standing, the lack of transparency on the details can undermine public trust in the process.
Indeed, every major report by state auditors-general on industry grants over the past decade has expressed concerns about the transparency of investment incentive programs.
These problems suggest that states tend not to benefit from unilateral investment attraction schemes. The likelihood is that the shareholders of companies receiving government handouts get a free kick at taxpayers' expense, serving to shuffle investments interstate.
Given the limits on funds that governments can acquire from taxpayers and the need to prioritise spending, the reality is that corporate welfare handouts will do little to raise the total amount of business investment in a given state. From an economic standpoint, it is likely to render significant economic harm.
Victoria would be better served to tackle policy obstacles, such as inefficient taxes and regulations, that impede additional capital accumulation within the state.
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