By Leith van Onselen Posted Mon 17 Feb 2014

Photo: Drought assistance appears to have become a permanent feature of the farming sector. (Pool: Fairfax Media)

For all its talk of reducing welfare and entitlements, the Federal Government continues to prop up non-viable businesses while treating politician and executive pay as off limits, writes Leith van Onselen.

While the Abbott Government talks tough on welfare and entitlements, it continues to take contradictory positions that risk undermining its legitimacy.

In addition to providing taxpayer support to Qantas and Tasmanian firms Huon and Cadbury, the Coalition has reportedly ear-marked tens-of-billions of taxpayer dollars to local defence manufacturing, when high quality imports are available at a fraction of the cost:

Tony Abbott's Coalition government is considering a $10 billion to $15 billion-program to help the inefficient local defence industry make 1,000 armoured vehicles and at least $50 billion for naval shipbuilders...

However, if Australia wants to improve its defence capability, it should import high-quality weapons, rather than spending billions extra on trouble-plagued local production. Backed by the Victorian and South Australian governments, the local industry is pressuring Abbott to "create jobs" by building a long list of weapons. Topping the list are uniquely designed submarines for about $40 billion, although proven high-performance subs can be imported for $5 billion to $6 billion.

The Coalition's hard line on industry assistance appears curious when viewed alongside its defence procurement policy. The fact remains that Australia could easily purchase proven, fit-for-purpose military hardware from abroad at a fraction of the cost of developing similar technology locally, saving taxpayers billions in the process. While there's an argument for local jobs, this same argument could equally be applied to manufacturers like Holden, Toyota, or SPC Ardmona where the subsidies were infinitesimal by comparison.

Contradictions are also apparent with the Coalition's proposal to extend aid to farmers hit by drought:

Yesterday in a shearing shed in Bourke, in outback NSW, as rain poured down, Mr Abbott pledged to assembled farmers that his government would do much more to help them cope financially and socially with the current drought...

"This is a government that is determined to stand by the people of Australia in good times and in bad." The Prime Minister promised to take a drought relief package to cabinet "within days", expected to be Monday next week. It is expected to focus on widening the existing $420m cheap farm loan scheme introduced by the Labor government in June by adding an expected $280m to the loan pool; lowering interest rates from 5 per cent to less than 4.5 per cent; repayable to the government over 10 years, rather than five; and allowing farmers to refinance up to $2m of debt instead of the current $650,000.

Drought-stricken farmers are also likely to become eligible for disaster-relief cash payments and ongoing welfare funding...

While it is true that agriculture is different to other industries in that its output and survival depend primarily on the weather, pests and disease - which is not something that most other industries face - drought assistance does appear to have become a permanent feature of the sector, stretching well beyond "exceptional circumstances". Moreover, as noted by Judith Sloan today, a significant proportion of assistance is provided to "failing farm businesses" that never make a profit even during the good times. There is also an argument that continual drought assistance has created moral hazard in farming, whereby some farms spend their profits during the good times, whilst socialising losses during the bad.

In any event, farm assistance is an area where the Government is walking a tight line between ameliorating genuine hardship and propping-up businesses with no viable long-term future, which opens it up to claims of inconsistency on corporate welfare and entitlements.

Finally, as outlined by Lenore Taylor over the weekend, Joe Hockey's claim that "everyone has to live within their means, whether it's a company, whether it's a family, whether it's an individual, whether it's a government" would hold more weight if politicians and executives also agreed to take a haircut, rather than expecting the working-class and disadvantaged to bear the burden of cuts:

There is a group of workers whose conditions far exceed the perks at SPC Ardmona...

Perks available to this lucky group include a round the world first class fare for themselves and their spouse, with accommodation and expenses, every year, as well as allowances to buy any books and publications they want and generous airfares and travel allowances with a very broad definition of the "work" they need to be doing to qualify. And, guess what, they get to determine a lot of the guidelines and rules for the perks themselves.

This group of workers is of course federal politicians...

It would be much easier to win support for a national "heavy lifting" effort, to combat rising unemployment and get the economy through a period of very difficult change, if there was clear evidence that everyone - workers, executives, even politicians - were putting in a bit of the grunt.

Lenore Taylor is spot on. How the Government can beat up on workers, whilst ignoring politicians own perks and the outrageous sums paid to the nation's executives, is staggering [for example, Qantas' Alan Joyce received $3.3 million last financial year].

The above examples highlight why the Government needs to have a consistent and transparent methodology if it is to achieve its goal of "ending the age of entitlement". Slashing benefits to some sections of the economy, whilst allowing egregious lurks to remain in others - including politicians and executives - is less likely to garner community support for reform, and will also ensure that the burden of adjustment is not broad-based, undermining its efficacy.

This piece was originally published at MacroBusiness.

Leith van Onselen writes as the Unconventional Economist at MacroBusiness. View his full profile here.

Abbott talks gruel while lavishing pork - The Drum (Australian Broadcasting Corporation)