Tuesday, 17 January 2012

Stuck in reverse: Labor and the auto industry

Protectionism through subsidies and tariffs has been a vexed issue for well over a hundred years in Australian politics.

Under Whitlam in the mid-70s Labor slashed textile tariffs, one of Bob Hawke's better reforms was to cut tariffs and open the economy, John Hewson and the Coalition from 1990 to 1993 advocated zero tariffs, Paul Keating then ran the rather absurd claim that his 5 per cent minimum tariff was somehow different and Howard cut many tariffs further. In contrast, Gillard looks like she has little interest in the policy but is prepared to fund the motor vehicle industry with even more money and with no strings attached.

It is no wonder that Joe Hockey, the Coalition's shadow treasurer is reported to have drawn a line in the sand. As Labor lurches backwards, the Coalition needs to protect its reputation as good economic managers.

A string of budget surpluses from the Howard years saved Australia from the impact of the financial crisis and, politically, Labor's unprecedented waste of billions of dollars in the stimulus program is reason enough for voters to support the Coalition. Likewise, Australia's economy is stronger for the reductions in tariffs and subsidies by both political parties over the last 25 years and the signs of Gillard backtracking is a threat to good economic management and ultimately a blow to jobs and living standards.

The days of subsidising the car industry should be coming to an end in 2015 as proposed by John Howard. Demand for locally-made cars has been falling and all the excuses for more taxpayer funds become thinner every year.

The issue for the Coalition is how to handle the politics. When Labor was in office, the Coalition supported Labor's tariff cuts so Hawke had a relatively easy run. Howard indemnified him against the political fallout. Unfortunately, Gillard is playing the populist card although pro-free trade ministers like Craig Emerson must be aghast at her approach.

Once again, union politics is a big factor; the subsidies are worth up to $100,000 per annum per worker (for details see here). The AMWU is a powerful union and not only supports Gillard but also numerous Labor MPs who are in Parliament as a result of its patronage. So these MPs are more worried about their own jobs than anybody else.

Bob Hawke can at least see the problem which is why he said the unions were "suffocating" Labor. Julia Gillard took only a nanosecond to dismiss Bob's comments. Gillard will basically hand out any amount jointly requested by the AMWU and the car companies.

The first point to note for the Coalition is that Gillard's biggest weakness is economic management. To win, the public need to expect that the Coalition will be better. So the Coalition has to nurture its credentials as a responsible economic manager. If people think the Coalition is just as likely to waste money as Gillard then the Coalition's re-election prospects are weakened.

Secondly, the Coalition advocated zero tariffs in 1990 but the policy that was its undoing was the GST not tariffs. It's a big issue but it should not be inflated. State Labor did not lose office in South Australia when Mitsubishi closed nor was there political fallout from the Nissan closure in Melbourne.

Thirdly, the car industry is not just in trouble by virtue of its own failures but also because economic policy is not as good as it could be and Gillard is about to make it even worse. So before signalling the demise of vehicle manufacture in Australia, either party could adopt policies that might actually give the industry a chance to survive, albeit under a different economic regime and without tariffs or subsidies.

The carbon tax will be a burden on the industry so it needs to be repealed.

Industry is weighed down by payroll taxes so they should be abolished.

The unions have had far too much say in running our car factories and a more flexible workplace relations system would be a big boost for the manufacturers. Labor has just done a special deal for the blue water shipping industry by exempting them from the Fair Work Act, and whilst obviously the car industry is very different, where there is a will there can be a way forward. Of course, none of these ideas will ever be agreed by the ALP or the unions so they will not happen but no-one should be under the illusion that the only help available is unlimited cash.

The most comprehensive policy to support manufacturing was Fightback! in 1991. When that policy was lost in the 1993 election, the Coalition remained pro-free trade but with less enthusiasm. When the Howard government was elected, we did a deal with the car industry and John Howard said at the time it was one of the best decisions he had made.

I was dismayed by the cabinet decision and I was not alone amongst senior colleagues. Despite misgivings, the Coalition party room endorsed the deal. The party room today is probably not quite as submissive as it was then but it will have no urge to challenge more handouts for seats like Corangamite, in the Geelong area, where we have a good chance of picking up a Labor seat.

So, the Liberals will not split on the issue but when senior party and business figures like Ron Walker, former Victorian premier Jeff Kennett, Don McGauchie and MPs such as Don Randall and Mal Washer speak out publicly, then you can be certain there will be a lot more agreeing with them in private.

The best result for Australia would be if the Government consulted with the industry and agreed a staged transition timetable for the end of subsidies and the abolition of the 5 per cent tariff. The current rules for the import of second hand cars should also be wound back as has happened in New Zealand. Second hand cars are much cheaper in NZ. In this scenario, the Coalition could support Labor and Australia would benefit. If this does not happen, then the Coalition needs to formulate a policy that is consistent with good economic management and that includes a comprehensive and integrated approach with fiscal and labour market policies.

1 comment:

  1. I don't think I could disagree with anything you've written in this post Peter. The greatest hurdle though (and I'm sure you already aware) is that most are not completely across how inextricably linked are social freedom, economic freedom and the resulting financial prosperity. To impinge on one is to hamper the others. I think both sides of the house (and the population in general) would benefit from adding Hazlitt's "Economics In One Lesson" to their respective reading lists.