JON STANFORD. Business welfare under the Coalition: two case studies (1)

 

The Abbott government came to power with a Treasurer who announced that the “age of entitlement” was dead and that he had no time for “business welfare”. In these two articles, Jon Stanford examines how this philosophy has been applied since 2013 to two manufacturing industries, passenger motor vehicles (PMV) and naval shipbuilding.

  1. Motor cars

Since 1948, when Ben Chifley launched the first locally built Holden, the PMV industry has been the jewel in the crown of the Australian manufacturing sector.

Under pressure from import competition, the industry performed increasingly badly in the 1970s and early 1980s. Government addressed this by gradually increasing protection. By the early 1980s, imports were limited by quotas to 20 per cent of the domestic market and in 1984-85 the effective rate of assistance (ERA, or assistance to value added) to the industry had reached 140 per cent.

As is well known, the Hawke government took a radical approach to opening up the Australian economy by floating the dollar and drastically reducing protection. The Industry Minister, John Button, developed a series of strategies to transform manufacturing industry. Innovation was promoted, mainly through assistance to R&D. While a few industries, including PMV, had special plans developed for them, tariff protection for all other industries was reduced to five per cent by 1996.

PMV was still regarded as a vital industry for Australia. Ahead of the information industries, aerospace and pharmaceuticals, a major report on the future of manufacturing in Australia in 1990 singled it out as the key industry for the future: “The car industry is the one that has major linkages to other industries. It is the major ‘original equipment manufacture’ (OEM) network in Australia. It warrants top priority.”

The Button plan for the PMV industry had several strings to its bow. First was export facilitation, so that in return for increased exports the manufacturers could import cars or parts duty free. Second was funding for innovation and support for new investment. Third, protection was substantially reduced, but gradually and at a pace the industry could accommodate.

This process continued under the Howard, Rudd and Gillard governments. Budgetary assistance to the industry continued and the tariff on vehicles continued to be reduced, reaching 15 per cent in 2000 and finally five per cent in 2012. Industry Ministers, particularly Ian Macfarlane and Kim Carr, continued to pay particular attention to the industry, acknowledging its particular importance both to the manufacturing sector and the economy more generally.

The industry responded well to this approach. Holden and Toyota became major exporters. The quality, technology and price competitiveness of Australian-made cars improved significantly.

Admittedly, by the end of the Noughties the industry faced major challenges. Australian tastes were changing in favour of smaller cars and SUVs, whereas the local industry’s advantage lay in making larger vehicles. In addition, the upward pressure on the exchange rate that accompanied the resources boom had a substantial negative impact on competitiveness and exports. By 2013, when the Coalition came to power, sales of Australian-built cars stood at around 120,000, less than half the level in 2005. In May 2013, four months before the election, Ford, which had been manufacturing Falcons locally since 1960 but had never been granted significant export mandates by head office in Dearborn, announced it would exit local manufacturing.

This then was the situation with the car industry when the Abbott government came to power. With only two producers remaining, Toyota and Holden, the industry was clearly tottering, its future in the balance. As vehicle production declined, critical mass in components manufacturing was under threat.

Yet although Industry Minister Ian Macfarlane understood the situation, the Abbott government’s approach more generally was far from being sensitive or strategic. The Prime Minister suggested that he was disinclined to renew budgetary assistance to the industry when the current round expired. In December 2013, when Macfarlane was in the middle of negotiations with the industry, both Acting Prime Minister Warren Truss and Treasurer Joe Hockey attacked Holden in the House of Representatives. Hockey told the company to “come clean” about its intentions and, almost gleefully, challenged the company to stay or leave: “Either you’re here or you’re not!”

That challenge was answered very quickly. Within a few days, General Motors announced the closure of its Australian manufacturing operations. This created an impossible situation for Toyota, which within six weeks announced that it too would cease local manufacturing in 2017.

While some economists would praise the Abbott government for terminating government support for the car industry, in my view they would be wrong.

First of all, the industry was now lowly assisted – the ERA was under eight per cent in 2014, a phenomenally low figure by previous standards. It was well known that other countries, even those with highly competitive car industries, provided significant assistance to vehicle manufacturing. In the EU, for example, car producers enjoyed a tariff of 10 per cent – twice the Australian figure – and were often provided with government support for innovation and new investments. Governments supported the industry because of the benefits it provided. Countries without a car industry would go to great lengths to attract investment from companies like General Motors or Toyota. Once they had secured such investment, they would not lightly let it go, let alone challenge major companies to pack up and go home.

Secondly, the resources boom was coming to an end and the exchange rate was depreciating. While car manufacturing was severely challenged when the exchange rate with the US dollar was at parity, it would be far more competitive at 75 cents. And with jobs being lost in the resources sector, manufacturing needed to take up some of the slack.

Thirdly, when the level of assistance to an industry is low, the theoretical benefits of reducing it further or eliminating it are significantly reduced. The theoretical gains of improved resource allocation need to be balanced against the disruptive effects, and the immediate damage to economic welfare, of job losses (in this case, according to University of Adelaide researchers, likely to amount to nearly 200,000 people). In net present value terms, the impact on the community’s welfare from getting rid of the industry may well be significantly negative.

When John Howard was Prime Minister he ran into John Button at a business event. With his customary social grace, Howard told Button how much he admired the work he had done in encouraging innovation and R&D. Button failed to reciprocate the bonhomie. “Thank you, Prime Minister,” he said. “And then you came in and f..d it all up.”

I tremble to think what he would have said to Tony Abbott and Joe Hockey.

The second part of this article (on shipbuilding and submarines) will be posted late next week.

Jon Stanford worked in government for 25 years, being a division head in the Industry Department and latterly in the Department of the Prime Minister and Cabinet.

 

 

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