ESSA

ESSA

Car Subsidies Delaying the Inevitable


Dean Pagonis

By

February 12th, 2012


The Federal government announced recently that they will continue to support the Australian car industry through ‘co-investment’


The Federal government announced recently that they will continue to support the Australian car industry through ‘co-investment’ – i.e. through tax-payer funded direct subsidies to industry. This is funneling money to multinational co-operations so they can maintain production of Holdens and Fords in Australia. All this is for one reason – to protect Australian car manufacturing jobs.

The government argues that this investment is important to maintain a car manufacturing industry in Australia, and if there no support, they would cease producing locally-made cars. For example, the government granted $34 million in subsidies to the Ford Plant in Melbourne to keep it running until 2016. Decisions such as this have been branded as important to Australia’s ‘national interest’, a clever political line to justify protectionist policy initiatives.

As Chris Berg wrote on The Drum (article here: http://www.abc.net.au/unleashed/3778642.html), this is economic irrationality in its purest form. Berg wrote:

There’s nothing special about automobiles that demands government support. They’re not particularly challenging to make. They’re not particularly central to the economic structure. They’re not particularly hard to buy from overseas. Their manufacturing is not particularly high-tech, at least compared to any other industry. Yet they are particularly well connected (politically). And that’s it. That’s why we support them.

This is the important point. The government is wasting precious taxpayers’ money in a period of apparent ‘fiscal consolidation’ to prop up an uncompetitive industry that will (eventually) cease to exist in Australia. Further, this industry is not especially important; it only employs 0.5% of Australian jobs in a 11million strong labour force.

Politicians supporting these initiatives are using economically incoherent arguments to back the government’s policy. South Australia Labour Premier, Jay Weatherhill said this week that, “the heart of advanced manufacturing in Australia was a viable car manufacturing industry.” What absolute garbage. The heart of the dwindling manufacturing base in Australia is parts of the industry which have a comparative advantage in producing those goods, and hence have a long-term future in our 21st century economy.

Julia Gillard said that, “support was essential to keep the economy diverse and to secure jobs” and “the coalition is endangering the economy by talking it down”. These comments are politically potent, but show little understanding for economics. The economy will remain diverse regardless if it has a car manufacturing industry, because Australians have particular skills in many economic activities that will continue to yield viable, competitive industries. Further, the policies may secure jobs in the short term, but in the long run these policies are “perpetuating unsustainable industries that rob a generation of workers of an economically sustainable future” (Tim Wilson, Institute of Public Affairs). Finally, the coalition is hardly endangering the economy by cutting $500million in handouts to the car industry. They are taking the wise step of shifting these resources into more efficient uses – either for investment now in important infrastructure (eg. supply bottlenecks at coal-exporting ports), or savings that help fiscal consolidation and build Australian fiscal credibility in world markets.

In political terms, this is a win for the Labour government. They are pushing the simple argument of protecting jobs in a period of labour market instability, and letting the Coalition fight internally on their position. I am glad to see Joe Hockey remain an advocate for removing the $500mill subsidies, and Tony Abbott remain consistent of his position of removing this industry assistance. Political infighting, especially through the media, always hurts a political party. Gillard knows this, and is all too happy to let it continue as she tries to recover from a disastrous first 18 months in office.

Ultimately, the economics is really what matters. Subsidies are good short-term measures to ease an industry that is just being opened up to global competition. However, when an industry has had these ‘support measures’ totalling $12bn over the last decade, a line has to be drawn somewhere. Industry must take ultimate responsibility to ensure it remains productive and competitive in the long run. This should include the Australian car manufacturing industry.

Follow me on twitter @dean_pagonis.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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