Ideas@TheCentre – The Centre for Independent Studies

Ideas@TheCentre

Ideas@TheCentre brings you ammunition for conversations around the table.  3 short articles from CIS researchers emailed every Friday on the issues of the week.

Who needs a car industry anyway?

17 February 2012

On Monday, The Australian reported that struggling car manufacturer GM Holden had agreed to give its employees a substantial pay rise of up to 22% over the next three years. This was surprising coming from a company that depends on ongoing taxpayer support for its survival. However, after decades of car industry subsidies, the public has almost become used to such scandalous behaviour.

It is easy to criticise Holden’s pay deal for the obvious prevalence of lobbying over rational economic policy. It shows the power of unions to extract subsidies from their mates in government. And we could also wonder why ordinary Australian taxpayers should have to pay for the production of cars they are shunning as consumers.

However, the fundamental question is much simpler: Should Australia have a car industry at all?

Supporters of an industry – any industry – always come up with the same arguments: it is a major employer; it generates technological spill-over effects; and it is ‘strategic’ (though the term is seldom defined).

The closer you are to an industry, the more such arguments seem to make sense. After all, nobody likes to see a big employer disappear from one’s city or state. And of course there will always be a few successful or innovative parts of the sector. But do they justify keeping the whole industry alive at enormous costs?

A dispassionate look from the outside may aid a more balanced view. The same arguments being made for keeping Australia’s car manufacturers alive have been made for Germany’s coal industry for decades.

Since the late 1950s, German black coal could no longer compete with imported coal – much of which came from Australia and cost between a third and half the price compared to domestic deep-mined coal. For employment, technological and strategic reasons, German governments continued to subsidise mining for decades at a total cost of about $430 billion with no success in making the industry competitive with countries like Australia; subsidies are scheduled to be phased out by 2018.

From an Australian perspective, it is obvious that Germany’s coal subsidies were a complete waste of money. All these years, Germany could have imported cheaper energy from Australia while saving enormous amounts of money – money it could have spent regenerating former coal towns.

It’s the other way around for Australia: Instead of pumping in billions of dollars into the car industry, Australia could have imported vehicles from countries that are simply better placed to produce them on a large scale. Countries like Germany, for example. The money saved could help find a new raison d’être for places like Elizabeth, South Australia.

Holden’s outrageous pay deal is just the tip of an iceberg of wasted subsidies. Australia needs a car industry as much as Germany needs its own black coal mines.

Dr Oliver Marc Hartwich is a Research Fellow at The Centre for Independent Studies.

New report, old story

17 February 2012

When it comes to controlling ferry costs, monopolies (private or public) cannot hold a candle to the cost pressure created by a competitive market.

Earlier this week, IPART released a report examining the cost structure of Sydney Ferries and highlighting several areas of possible improvement.

The report included findings from consulting company L.E.K., which estimated that despite some cost savings, yearly costs could be further reduced by 24% from $125 million to $95 million.

These findings are refreshing to hear; however, the story is not new. My report last year about the disappointing performance of Sydney Ferries found that the aged vessels were amplifying maintenance costs, while above-market remuneration and poor workplace culture were straining labour costs.

Interestingly, IPART’s report raised an important but often overlooked question: Over 25% of ferry users earn salaries exceeding $75,000 compared to 11% of bus users and 14% of train users. Given the relatively high proportion of well-to-do individuals using the ferries, the IPART report questioned the basis for subsidising ferries.

I think that to ask this question is to answer it. Throwing large subsidies at an industry that disproportionately services Sydney’s wealthier regions is neither an effective nor responsible use of tax funds. Most of these commuters could and should foot the full cost of their journey rather than be subsidised by the majority of Sydneysiders who do not use the ferries. The government can still use concession fares to subsidise those on low incomes.

But to provide a quality service at the lowest possible cost, government needs to open up the market to competition. A simple analysis of private companies on the Manly route shows costs can be reduced and the industry profitable without subsidising the entire sector.

Two private ferry operators run completely unsubsidised services on the Manly route in competition with the government’s ferry service. The price of a regular adult ticket stands at between $8 and $9.

Contrast this to the government’s service which, after accounting for subsidy (to the tune of 50%–60%), costs as much as $14.

Without the pressure of losing business, Sydney Ferries lacks sufficient incentive to reduce costs and maintain quality service. This is why ferry reform must introduce competition.

Alexander Philipatos is a Policy Analyst at The Centre for Independent Studies, and author of Free-Trade Ferries: A Case for Competition.

The taxman cometh

Robert Carling

17 February 2012

The Gillard government insists it will put the federal budget back in the black in 2012–13.

So it should, subject to one major qualification: If Australia goes into recession for whatever reason, the hit to federal revenue would keep the budget in deficit in 2012–13. That’s how the budget’s automatic stabilisers work, and few economists would argue against a deficit in those circumstances. It would make no economic sense for the government to fight against the automatic fiscal stabilisers to avoid a deficit. So the government’s plan for a surplus, no matter how tiny, can’t be set in stone regardless of what it says.

Leaving that important qualification aside, the worry is whether and how it will avoid another deficit even in the absence of a recession. The latest estimate for this year is a deficit of

$37 billion. Going from there to the surplus of $1.5 billion projected for next year represents a huge turnaround – as a percentage of GDP, that kind of turnaround has been seen only twice in the last 40 years, and on each of those occasions it was not from deficit to surplus but from surplus to deficit, which is a lot easier to accomplish.

The mid-year review of the budget shows the government expects to accomplish this feat partly through large increases in revenue that far outstrip the growth in the economy. While such a large increase in revenue is possible, it is subject to many uncertainties. But in addition, the 2012–13 balancing act depends on a degree of expenditure restraint that has been matched only once in the last 40 years – a 3% real cut in Commonwealth spending. In fact, for the first time in recorded history, spending will not increase at all in nominal dollar terms. Given this track record, there is a good chance that spending won’t be held down to this extent, even though it should be.

For these reasons, the projected surplus is a dubious proposition. The government will have to do more in the May budget to make a surplus in 2012–13 believable. If history is any guide, the government will not find sufficient spending cuts to meet its targets, and will then resort to tax increases. So watch out for more tax hikes. The Rudd and Gillard governments have proven to be tax happy. Think of the increase in the luxury car tax, the alcopops duty increase, the huge increase in tobacco excise, the flood levy, assorted cuts in superannuation tax concessions, and of course the mining and carbon taxes.

Wayne Swan probably has a list of possible tax increases in his top drawer, and if he doesn’t, his department could quickly supply one. A tax increase to watch out for in the May budget will be a 12-month extension of the flood levy, which is supposed to expire on 30 June. (After all, there have been more floods since then.) A 12-month extension would help balance the books in 2012–13 but still allow the levy to expire before the federal election due in 2013. It would of course be extremely cynical, but that wouldn’t stop the government from concluding that it is politically easier than other options.

Politics is one thing, but there is plenty of international evidence that deficit reduction works best when achieved through spending cuts rather than tax increases. Spending cuts generate more lasting results, while tax increases do more economic harm. It would make a welcome change this year for the government to rule out tax increases at the outset and determine to balance the budget entirely through spending cuts.

Robert Carling is a Senior Fellow at The Centre for Independent Studies.