Driven to budget distraction

| March 13, 2015

The Australian government has pulled back on planned funding cuts to the automotive industry. Simon Cowan says this is just another capitulation to vested interests two months before a crucial budget.

Given the growing list of budget blunders (for example Medicare reforms), in one sense it should hardly be surprising that the government’s announcement to ‘restore’ funding to a derelict industry with one foot out the door has managed to anger pretty much everyone.

Those with a modicum of knowledge of how comprehensively broken protectionism is are angered at the decision to scrap legislation removing $500 million from the Automotive Transformation Scheme.

The incorrigible rent seekers in favour of handouts are angered because ‘only’ $100 million will actually flow to the industry. Mostly because after 2017 there won’t be a car industry to waste taxpayers’ money on.

The story of the failure of the car industry is well known. The local car markers continued making large family cars as that segment of the market collapsed and small and medium cars took over. The cost of manufacturing in Australia is much higher than in nearby competing countries, with power costs high and wage costs higher still.

Beyond this the single biggest factor in the demise of car making is that there simply isn’t the scale in the local market to achieve cost competitiveness. There are individual plants in the US and China turning out more cars each year than the entire Australian industry was capable of producing.

None of these factors were the fault of either the state or federal government. Yet governments of both persuasions continued to throw taxpayers’ money at the car makers to get them to stay here.

The Productivity Commission estimated that, between 1997 and 2012, $30 billion was given to the automotive manufacturing industry. Their conclusion was that the rationale for this assistance was weak and the costs outweighed the benefits. They also found that there are strong arguments against extending assistance to component manufacturers in light of the closure of the industry.

This should have been the end of it. Indeed, common sense would dictate that the absence of the industry is a good reason to end handouts or, say, remove tariff barriers or punitive restrictions on the importation of second-hand cars. Yet politics is barely acquainted with common sense at times.

Having bungled the Future Submarine announcement, the government clearly thinks there are more important things at stake than the increased costs borne by consumers and taxpayers – like votes in South Australia.

The actual cost of this reversal of policy is almost irrelevant in the broader scheme of a $40 billion budget deficit. Of much greater concern is that it signals another capitulation to squealing vested interests. By surrendering to an already retreating enemy, the government has again signalled it may have lost the stomach for the budget fight.

As disappointing as it was that sections of the Intergenerational Report were manipulated to imply that the budget heavy lifting has already been done (which it most assuredly has not), the credibility of the government’s forecasted return to surplus relies on limiting growth in Commonwealth spending in real terms for hospitals, education and pensions.

We have already seen the Australian Medical Association win the battle with the government over the Medicare co-payment and changes to rebates, while pensioner organisations are lining up to smack down any hint of changes to pensions or superannuation.

No doubt the spendthrift governments of mendicant states like South Australia are also licking their lips at the prospect of pressuring the government to reinstate huge swathes of previously ‘cut’ spending in health and education.

A withdrawal of those policies could have an enormous negative impact on the budget over the next decade.

Two months out from a crucial budget and less than a week after the release of the Intergenerational Report that was supposed to reset the budget debate is a terrible time to lose your free market principles.