Run car subsidies out of town

Bookmark and Share Economics & Deregulation | Tim Wilson
The Australian 18th January, 2012

Continuing subsidies to car companies isn't just bad economics. It's also bad for communities and workers as well. Perpetuating unsustainable industries through subsidies robs a generation of workers of an economically sustainable future.

Manufacturing Minister Kim Carr's announcement gifting another $100 million into the bottomless pockets of multinational car companies has rightly drawn fire.

For more than 30 years the local car industry has enjoyed taxpayer-funded support to wean it off high tariffs that stopped it being internationally competitive.

Some progress was made initially as the industry became outward-focused and grew its export markets, particularly in the Middle East. But those days are now over.

Last week the Prime Minister argued that her $5.4 billion New Car Plan showed those "sceptics (who) said Australia could not emerge with its car industry still viable" were wrong.

The evidence shows otherwise, Prime Minister.

According to the government's own Innovation Department statistics the total number of new passenger vehicles sold in Australia plateaued at about 600,000 between 2003 and 2010.

But imports have increased their market share from slightly fewer than 60 per cent of sales to nearly 85 per cent in the same time frame.

And the consistent decline started well before the global financial crisis and the risks from the dollar's high exchange rate; though exports have taken a hit in the past few years.

If the flood of cheap imports was temporary the government could apply a short-term tariff to help the domestic industry while being consistent with international trade rules.

That's not the problem. Instead it's part of a long-term structural trend of the domestic industry being unresponsive to consumers.

Unsurprisingly, businesses that extract cash from politically sensitive governments have little incentive to respond to what consumers want.

If the subsidies were designed to transition the industry into a situation of competitiveness there would at least be a date when the industry had to focus on being competitive and deliver real benefits to the economy.

Previously Carr has argued his industry support would "facilitate a transition to a more sustainable, competitive industry and provide economic, social and environmental benefits for the country".

That's not the point of these subsidies. Instead there has been a structural shift in the handouts Canberra is prepared to pay from transition assistance toward government-industry co-investment.

Co-investment is essentially about making government a key stakeholder in the industry and putting it back into the heart of the economy.

As a co-investor it won't be long before political priorities start influencing car companies' business decisions. The result is the industry is likely to be even less responsive.

Recognising that doling out money to multinational car companies isn't an easy political sale, advocates for perpetuating subsidy-based protectionism focus on the 60,000 people employed in the industry.

The geographic concentration of the industry in places such as Victoria's Geelong and South Australia's Elizabeth aids that argument because of the impact it will have on communities.

If the subsidies were designed to help communities and workers transition toward a sustainable economic future there would be few critics of the government's plans.

After all, government-sponsored protectionism got workers and communities into this mess. It's a reasonable justification that governments have a role in fixing it.

Instead the subsidies are designed to perpetuate the status quo until the car companies rattle their tin cans looking for another handout.

But it's too often ignored that subsidies are also environmentally and socially unsustainable as well.

They're environmentally damaging because the industry is being shielded from the simple message that consumers don't want the larger cars they're producing.

Socially they're damaging because new workers are being provided with a career pathway in an unsustainable industry. When a future government stops these subsidies those same workers will lose their career.

The same workers are also being misled into starting an alternative economically unsustainable career path to support them and their families.

Considering the demographic transition with baby boomers exiting the workforce and generation Y entering the workforce, now is the time to stop subsidies so the social costs aren't passed on to another generation.

Considering the Rudd government's initial car plan subsidised workers by nearly $100,000 per head it meant that one job in the car manufacturing industry cost around two average-income jobs in the rest of the economy.

That's not fair to those currently locked out of work.

The absurdity of the government's ongoing support isn't just irresponsible. It's immoral.

What's depressing is that continuing subsidies is even a point of debate. If the Gillard government really wanted to claim the Hawke-Keating mantle of reform it would actively reject co-investment subsidies.

For a Liberal-led opposition opposing industry welfare should be a no-brainer if it wants to avoid charges of economic vandalism. The case is even stronger since they're looking for expenditure savings.

But in developing policy both sides of politics shouldn't just consider the economic case; they should also consider the damage subsidies make to creating unsustainable paths for workers and the communities that rely on them.


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