“If we are supporting industries that don’t have a long-term competitive advantage, that can be an ongoing cost. It diverts resources – that’s workers and capital – away from other parts of the economy where they might generate high-value uses,” she said.

Former Productivity Commission chairman Michael Brennan said Ms Wood’s comments were “a really important intervention on the policy issue itself, and also a big positive statement about her independence and that of the institution.

“We all accept that the world has changed significantly; the question is what should Australia’s optimal response to that be? Australia’s traditional economic success has come from finding the complementarities with other economies, not replicating them.”

‘History of failure’

China produces about 90 per cent of the world’s solar panels, due to its huge state-backed enterprises, economies of scale and cheaper labour.

The global price of solar panels has crashed from above $US1 per watt a decade ago to US11¢, BloombergNEF data shows, due to China flooding the world market.

Peter Harris, who Mr Swan appointed in 2012 to lead the Productivity Commission, said Ms Wood was right that “this is a slippery slope and most times the investment fails”.

“It reminds governments of the risks they run and the history of failure they need to acknowledge and learn from, before they try their hand, again, at funding individual firms,” Mr Harris said.

“It’s hardly any more than common sense to say ‘work out your limits, stick to them, tie your obligations explicitly to your public interest objective and be very clear about those with people who are going to be spending someone else’s money’.

“Credible governments appreciate commonsense advice, even if they don’t always adopt it.”

Bill Scales, who led the PC’s predecessor agency the Industry Commission from 1992 to 1998, said Ms Wood’s comments were “clearly appropriate”. He warned the act would lead to lower productivity and living standards.

“It will do so because it will reallocate resources … to the most inefficient sectors and the most immature sectors [of the economy],” he said.

“It has an element of infant industry policy about it. Most people, whether you’re an economist or not, have come to understand that those so-called infant industries never grow up. They are always subject to being sustained by relatively high levels of government assistance.”

Problem unclear

Dr Scales said the policy was a modern remake of the federation-era industrial policies that were dismantled by the Hawke and Keating governments.

“It seems to contravene what most of us think is the first principle of good public policy, which is to clearly articulate the problem that you’re trying to solve. And it’s not exactly clear what the problem is that the government is trying to solve,” he said.

“It’s also not clear whether the government actually understands the nature of modern manufacturing. Because, quite frankly, when one looks at almost any industry in the country right now, there’s an element of manufacturing to it.”

Dr Scales agreed that “if we hadn’t abolished the carbon price a decade ago, we’d be a lot further down the road and producing much more cheaper, renewable energy from the abundant supply of solar and wind in our country”.

Former chairman Gary Banks said late on Friday he agreed with the thrust of Ms Wood’s comments and would have more to say soon.

The act, which will try to mimic America’s Inflation Reduction Act and similar schemes adopted by other nations, will be a key pillar of the May budget and the government’s re-election strategy.

Warning Australia needed to safeguard its sovereign manufacturing capacity after the pandemic exposed supply chain risks and deficiencies, Mr Albanese said the free market alone was no longer adequate.

Investment incentives

The act will have in its remit already announced schemes such the $15 billion National Reconstruction Fund, and initiatives to encourage the domestic manufacture of batteries.

It will also include investment incentives to be announced in the budget to either lure capital to Australia or prevent it leaving. This will include streamlining the Foreign Investment Review Board rules to remove impediments for established and safe investors.

Mr Albanese rejected assertions by Ms Wood and Dr Scales about the act diverting resources away from other parts of the economy.

“What this is doing is attracting global capital, attracting investment here, including from superannuation funds, and it’s producing a return,” he said. “We don’t want to compete on everything. Where we want to compete, though, is where we have a competitive advantage and where Australia’s national sovereignty is at stake.”

Mr Albanese reiterated that in the case of solar panels, automation and the advantage of being able to mine the raw products locally would help make it cost competitive.

“That’s the point. We can be competitive because of the way that production has changed,” he said. “It used to be that we lost jobs in Australia because of the variant labour costs, because labour was cheaper in our north, in particular in China and Taiwan and those countries.

“Now, because of increased mechanisation, new technology, the truth is that these days, for every unit of output, there’s far less labour involved.”

Former PC deputy chairman Karen Chester said Ms Wood’s comments were considered, contemporary and constructive.

“She was doing exactly what a good Productivity Commission chair ought to do, inform the making of an important public policy,” she said.

“Implementing a significant program of government support where [net] comparative advantage and public benefits co-exist is no mean feat. And doing it in a cost-effective way has historically proven elusive more often than not.”

Mr Swan said there was an international race between governments to develop green energy and Australia must “be in it to win it”.

“What we don’t do is make some of the things we need so we can be independent and stand on our own two feet.”