Qantas call for state gov’t incentives highlights the prisoners’ dilemma of interstate bidding wars

Queensland Government agencies such as Treasury and State Development will be busy developing an incentive package, no doubt containing payroll tax concessions and possibly a grant, to attract Qantas’s HQ. As the Australian reported yesterday:

Qantas is asking state governments what they are prepared to offer to accommodate the airline, as it considers pulling up stumps on its Sydney headquarters to save money.

In the short-term, Queensland could benefit from attracting Qantas’s HQ, so long as the incentive package doesn’t give too much away, but in the long-term we are worse off by participating in interstate bidding wars for footloose companies. Former Productivity Commission Chair Gary Banks explained why in an excellent speech Inter-state bidding wars: Calling a truce he gave to CEDA in Brisbane in 2002. It’s worthwhile reading the whole speech, but here’s a sample:

…the situation represents a classic prisoners’ dilemma, because while all States would be better off by cooperating, in some cases individual States will see benefits in defecting.

The need to avoid mutually impoverishing ‘beggar-thy-neighbour’ policies was an important reason for the formation of Australia’s Federation in the first place. Elimination of tariffs at State borders was critical in enabling a national economy to develop from early last century. Over time, regulatory and other impediments were also gradually removed or reduced, including through cooperative agreements on Mutual Recognition, National Competition Policy and Government procurement over the past decade or so. But selective assistance remains a growing threat to the realisation of this nationally beneficial goal…

…If governments can agree to a truce on inter-State bidding wars and other selective corporate support, they can then concentrate their forces on a much more worthy and productive battle: improving further their economic governance, tax regimes, infrastructure and other service delivery. These are the real mainstays of the contribution of State and Territory Governments to economic performance in the long term.

That 2002 speech is still highly relevant, and I’ve used the above quote before on this blog (see Qld Gov’t needs to avoid costly inter-state bidding wars). As is the Queensland Competition Authority’s 2015 report on Industry Assistance in Queensland, which was also critical of inter-state bidding wars (see my post Sweetheart deal to lure Land 400 “war machine” contract winner to Qld undesirable).

Our state and territory governments should reach an agreement not to engage in costly inter-state bidding wars. Of course, the COVID-crisis has revealed that some state governments, including Queensland’s, don’t care much for inter-state cooperation or the national interest, or even what’s in their own state’s interest beyond the current election cycle. So, it’s probably too much to expect we’ll see a truce on inter-state bidding wars in the future.

Source: Qantas.

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