DIMITRI BURSHTEIN & PETER SWAN: Taxpayers shouldn’t be propping up foreign-owned private equity firms

Canberra is in the grip of a powerful nostalgia. Somewhere in the collective memory of Australia’s political class sits a romantic image of the post-war decades, a time when government sat at the commanding heights of economic life, directed capital, picked industries, and made itself indispensable. Never mind that Australians of that era were considerably poorer for it.

The longing to return is real, and it is now reshaping policy. Manufacturing is fashionable again, both major parties have rediscovered the language of industrial activism, and the machinery of intervention is being rebuilt, subsidy by subsidy, loan by loan. The flagship instruments of this revival are the National Reconstruction Fund and the broader Future Made in Australia agenda.

The intellectual packaging is modern. Policy papers refer approvingly to the Harvard Economic Complexity framework, which maps the sophistication of countries’ production structures. The implication is that governments can guide economies up the value chain by subsidising strategically chosen industries.

The ideas sound sophisticated. They are also deeply misleading.

Economic complexity analysis describes what economies already do well and how those capabilities connect to adjacent industries. It does not identify which sectors will be commercially viable in a particular country, nor which projects investors would finance absent subsidies.

It measures patterns of production, not profitability or comparative advantage. Using it as a blueprint for industrial policy risks confusing diagnosis with prescription.

More fundamentally, Australia faces a structural problem that policy enthusiasts prefer not to discuss. Industrial policy has become a global subsidy race, and Australia is a very small player.

The United States’ Inflation Reduction Act is committing roughly US$369 billion to clean energy and manufacturing incentives. The European Union, China, Japan and South Korea are pursuing similar strategies. These are large economies with vast domestic markets and deep industrial supply chains.

Australia’s equivalent spending is tiny by comparison. The National Reconstruction Fund provides about $15b, and the broader Future Made in Australia package about $22b. Attempting to build globally competitive manufacturing industries against competitors spending multiples of that amount is less a strategy than fiscal futility.

Subsidy competition favours the largest economies with the deepest supply chains. Firms locate where the biggest markets and most generous incentives coincide. Australia has neither advantage.

The result is a risk that taxpayers subsidise industries that remain permanently dependent on government support, while resources are diverted from sectors where Australia already holds durable comparative advantages.

Which raises an obvious question. Who is better at identifying those advantages: politicians and Canberra officials, or the undistorted market? Experience offers a clear answer.

The most visible illustration is the National Reconstruction Fund. In theory, it finances projects in priority sectors such as advanced manufacturing and critical minerals. In practice, it risks becoming a vehicle through which governments distribute taxpayer funds to projects that photograph well and carry convenient national symbolism.

Consider two early examples. The NRF contributed $45 million to refinancing Arnott’s, the biscuit company owned by American private equity firm KKR. The official announcement celebrated this as helping to “take Tim Tams to the world”.

In reality, Australian taxpayers simply joined more than 150 lenders refinancing the existing debt of a foreign-owned biscuit manufacturer. Another loan of $36m went to Patties Food Group, the Hong Kong-owned maker of Four’n Twenty pies, to modernise pie production.

These examples illustrate a broader problem. Once governments begin allocating capital, lobbying inevitably follows. Projects with strong political narratives, iconic brands, regional employment stories and nostalgic industries become attractive regardless of whether they represent genuine economic strengths.

This is mercantilism in modern dress: the belief that national prosperity depends on producing particular goods domestically rather than allowing markets to allocate resources efficiently.

For much of the 20th century Australia protected domestic manufacturing behind high tariff walls. Manufacturing industries produced real jobs and real products, but they survived largely because consumers were denied cheaper alternatives.

When tariffs were dismantled during the reform era of the 1980s and 1990s, many protected industries shrank or disappeared. In reality it was structural adjustment. Labour and capital moved into sectors where Australia could compete globally: mining, services, agriculture, education, finance.

The nostalgia surrounding mid-century manufacturing overlooks a basic fact: those industries struggled because Australia’s cost structure made them uncompetitive. High wages, distance from major markets, and relatively small industrial supply chains made large-scale manufacturing difficult to sustain without protection. These structural realities have not disappeared.

None of this means governments should ignore strategic capability entirely. There are legitimate cases for domestic capacity in defence production, energy security based on Australia’s fossil fuel comparative advantage, and fertiliser supply.

These sectors involve national resilience rather than nostalgia. But strategic capability requires disciplined policy choices, not broad subsidy programs with diffuse objectives.

The difference between serious industrial policy and the approach currently fashionable in Canberra is the difference between protecting national capability and pursuing political symbolism.

One demands careful prioritisation and a willingness to say no to attractive projects. The other produces press releases, ribbon cuttings, and a steady transfer of taxpayer funds to industries fortunate enough to attract ministerial attention.

Wealth is not created by governments deciding what an economy should produce. It is created by allowing markets to discover where resources are most productively employed. Australia learned that lesson once before. It would be painful to need to learn it again.

Dimitri Burshtein is a senior director at Eminence Advisory.

Peter Swan is professor of finance at the UNSW-Sydney Business School