Productivity Commission chair Danielle Wood says she welcomes concessions made by the Albanese government to put clearer scrutiny of proposals for industry assistance into its Future Made in Australia legislation.

Ms Wood also acknowledged that both migration and tax treatment of investment housing — capital gains discounts and negative gearing — have some impact on the housing market, but she said these demand-side concerns are minor compared to the many structural problems now facing the sector on the supply side.

She also told 7.30 that the huge taxpayer outlay on defence industry capability should be subjected to as much scrutiny as possible.

Ms Wood's criticisms of Future Made in Australia, made earlier in the year, have been regularly used by critics of the plan — which seeks to assist industries that will help in Australia's transition to a net zero economy, or which will improve Australia's economic sovereignty.

In comments to the Australian Financial Review in April, Ms Wood outlined potential concerns with the policy.

"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," Ms Wood said.

"We risk creating a class of businesses that is reliant on government subsidies and that can be very effective in coming back for more."

Additional scrutiny

The legislation faces an uncertain path through the Senate, where it is scheduled to be debated this week, with both the Greens and the Coalition expressing concerns with the bill.

But the government last week made a number of concessions to the bill, including measures to increase transparency around investments and strengthening consultation requirements, including a requirement to consult with the Productivity Commission as part of the sector assessment process before an investment can be made.

Ms Wood was asked on 7.30 about the changes the government had made, including ones that would ensure projects were scrutinised by the Productivity Commission, and whether that had eased her earlier concerns.

"Yes, so certainly we've welcomed that additional scrutiny built in, and we think it's just really important that every decision that is made under this program be put through that framework, because it does provide the rigour and the confidence I think people need that we're getting good value for taxpayers money," she said.

That scrutiny would include two specific projects that have been criticised by the opposition: the $1 billion Solar SunShot package of production subsidies and grants to increase Australia's domestic solar manufacturing capacity, and the almost $1 billion deal with PsiQuantum to build a "world-first" commercial quantum computer in Queensland.

"We've certainly said that we think that all the spending under that program, including those pieces, should go through the sectoral plans and the national interest framework," Ms Wood said.

No housing 'quick-fix'

Asked if there was a clear short-term remedy to the housing crisis available to policy makers, Ms Wood said she "would like to say there is a clear short-term remedy".

"But I think unfortunately a lot of the problems have been slow burn and have been building over a long period. 

"That's going to be critically important for bringing prices down and for bringing broader productivity and social benefits.

"I think what we're seeing is that planning, though, isn't the only challenge.

"We are now seeing challenges in the market, around finance, obviously, around input costs in the wake of COVID, and also, frankly, a productivity challenge for the sector, which is something that we're looking in at the moment.

"We've seen residential construction productivity decline over the last 20 or 30 years. It's a sector that hasn't been good at building in innovation. So new digital technologies, new building techniques like prefabrication.

"It's got workforce challenges, and some of that is around competition with the State governments as they've significantly ramped up their local infrastructure spend, some of that workforce has been pulled from residential construction, and also issues around the kind of regulatory burden. 

"It is an area where you have local, state, federal government regulation overlapping.

"It can be very costly and long process to comply with those regulatory requirements. So frankly, we think governments need to move on all of those fronts. 

"It's not going to be a quick fix, unfortunately, but we didn't get into this problem quickly, so we're not going to get out of it quickly."

Asked how heavily she weighted negative gearing and capital gains tax in the mix of solutions, Ms Wood said it was "not something that we have looked at at the Productivity Commission".

"What I have said in the past is that, clearly, there are some challenges on the demand side, but it's probably not the big issue. 

Migration "clearly does contribute on the demand side", she said. But "we're coming out of a very unusual period where we had borders closed and then reopened, so we had a sort of catch up in migration levels".

"What the government and others are forecasting is something, you know, returning more to the levels of the pre-COVID era. And so we need to make sure that our housing supply keeps up," she said.

"I think we can do that through those levers that I've just mentioned. You can have a healthy migration program and have housing supply that meets the needs of those people to find housing, but you need to make sure that you're looking at all the barriers to producing that supply."

'Strong framework' vital for green transition

Asked whether the Future Made in Australia proposal would help the transition to a net zero economy, Ms Wood said, "I think the Albanese government would say that this is only one part of the arsenal that we have."

"We absolutely need to transform our economy to meet the net zero goals, to do our part in the global move to try and combat climate change," she said.

"The Future Made in Australia [proposal] is around supporting local industries, some of which may help with the green transition.

"What we know historically is that without that, you can end up imposing high costs on taxpayers in the broader economy.

"I think a really important development is the government has introduced that framework and the national interest framework that sits around these policies.

"We've proposed some changes, including making sure that all of the sector assessments go through this framework to make sure that they're subject to that kind of rigour and making sure that those assessments are transparent, so that the public can see what is going on. 

"But certainly we think that's a really important step in securing the grounds for that program."

Scrutiny of defence spending

Ms Wood said it was important there be as much public scrutiny as possible on defence spending.

"What we have said is that governments are responsible for very large amounts of public spending, and in areas like infrastructure and defence, where that is big procurements, we really need to make sure that, that is done using rigorous cost benefit frameworks to make sure we're getting bang for buck for taxpayers," she said.

"I would like to see as much scrutiny and robustness as possible in the defence side of that.

"I understand there are some things that can't go into the public domain for good reason, but making sure that as far as possible those projects are subject to the kind of rigour that we put around other areas of government spending is incredibly important."

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