Every Tuesday afternoon we publish a collection of topics and give our expert opinion about the Equity Markets.

Last month, Prime Minister Albanese announced the consolidation of domestic manufacturing policies under the “Future Made in Australia Act” to be legislated later in the year. This has culminated in the first big bet announced last week, an A$940 million investment into quantum computing start-up PsiQuantum. ABSI this week will take a closer look at this new policy and the debate raging over the government's policy to bring manufacturing back to Australian shores.

It's early days for the Future Made in Australia Act (FMAA) but it is essentially Australia’s answer to policies from other internationally developed governments to encourage domestic manufacturing in response to supply chain flaws from Covid. The most notable example is the US Inflation Reduction Act. The FMAA will consolidate existing policies, such as the A$15 billion National Reconstruction Fund, but will also include future policies designed to lure investment into Australia. 

Drawing attention to the new policy last week was an A$940 million investment into Aussie-founded quantum computing start-up PsiQuantum. The deal, executed in conjunction with the Queensland government, will see the funds invested across a range of equity investments, grants, and loans (the breakdown wasn’t explicit). For its investment, PsiQuantum will headquarter itself in Queensland and operate its computers here. 

The announcement has sparked debate on whether the FMAA will be good for Australia. In my opinion, it’s a little of both.

It is important to appreciate the role that government plays in assisting private domestic enterprises. Through a range of levers such as tax incentives, grants, subsidies, etc. a government can stimulate private investment and jobs resulting in higher tax revenues. The multiplier effect is an economic concept that quantifies the impact of every dollar of government spending on wider GDP. The actual figure is fluid and depends on a variety of factors but a 2018 publication from the RBA noted that public infrastructure investment had a multiplier of between 1.1 and 1.3, meaning for every $1 invested, increased GDP by up to $1.3.

Source:  Faster Capital

Government support, particularly for new industries, is vital and, when executed correctly, provides enormous benefits to all stakeholders. Without support, new industries would take longer to develop or potentially not at all. Businesses in new industries will make mistakes and will be initially inefficient, the support from government can help navigate this tricky period. 

Where these well-meaning policies can go wrong is building industries that become reliant on subsidies and are uneconomical without them. Any new policy needs an exit strategy to ensure that taxpayers are not supporting Australian-made products that are inferior in quality and price to imported alternatives. The Alabanese government has identified solar manufacturing as a strategically important industry to support, and given modern manufacturing techniques and Australia’s ability to mine the raw materials, it makes sense. However, if not executed correctly it could end up being like the Australian car manufacturing industry. To manufacture in Australia means it won’t be the lowest cost product so in order for it to be successful, Australian manufacturers will need to produce a higher quality product with better efficiency.

Source:  Freeing Energy

As mentioned previously the factor of the multiplier effect is influenced by numerous factors, one of those being spare capacity in the economy. When capacity is low it results in the crowding out effect. The crowding-out effect explains how government spending competes with private sector resources. Given finite resources, if there is little spare capacity in the economy, government spending will just result in inflation as they compete for labour and other forms of capital.

Therein lies the problem for the federal government, capacity in the economy is currently low. Unemployment is under 4% and there is a persistence in inflation so while the FMAA may add to GDP, it will likely also add to inflation unless it accompanies policy change to enable better productivity. The biggest impact can come from cutting bureaucracy and red tape, which governments traditionally haven’t been strong in achieving. 

Coming back to the PsiQuantum deal, I think it's a very risky strategy that could go either way for the government. The Company is still in an early phase and is competing against giants of the industry such as Google and Microsoft. The probability of success is low, just look at the failed Australian EV-charging company Tritium. FMAA shouldn’t be about venture capital into individual bets but ways to incentivise the industry in other ways.

A quick detour to announce the BPC NRL Tipping Competition! 

We offer value-rich content to our BPC community of subscribers. If you're interested in the stock market, you will enjoy our exclusive mailing lists focused on all aspects of the market.

To receive our exclusive E-Newsletter, subscribe to 'As Barclay Sees It' now.