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Why the Government's car plan is a scandal

By Henry Ergas - posted Friday, 5 December 2008

At the G20 meeting, Prime Minister Kevin Rudd committed Australia not to introduce any trade-distorting measures “within the next twelve months”.

Well, here is a dirty secret: should the government’s new car plan go ahead, the effective rate of protection to the Australian car industry will rise for the first time since the ill-conceived Whitlam plan of 1974.

Is this something the government, which claims to be committed to transparency and to free trade, has disclosed? No, it isn’t. And is an increase in effective assistance consistent with our new G20 obligations? Plainly not.


The facts are these. Starting from levels that were already irrationally high, Gough Whitlam raised effective rates of assistance to the car industry into the stratosphere, reaching more than 250 per cent by the end of the 1970s. Each $1 of value added in the industry therefore attracted (or rather, extracted) a further $2.50 in public support. Malcolm Fraser, as was his wont, fiddled at the edges, but failed to tackle the distortions head-on. That was left to Bob Hawke and John Button, whose plan may have been imperfect but, to their ever-lasting credit, set a path for reducing assistance over time.

Consistent with that plan, the effective rate of assistance to the industry halved by 1990; it halved again by 1995, and then reduced further, to less than a tenth of its 1985 level, by 2006-07.

Reductions in aggregate assistance were not achieved without new costs for consumers and taxpayers. From the first Button plan on, the subsidy packages successive governments provided to the industry squandered millions of dollars. But those governments, no matter how weak their political will, held one principle firm: that the direction of movement towards steadily lower total levels of assistance should be maintained.

It is that principle the Rudd Government has now jettisoned as its plan provides the industry with far more compensation than the producers are losing from lower tariffs.

The Rudd plan is therefore not merely one more episode in Australia’s long battle to rid itself of the protectionist ghost. Rather, it throws in the towel, and under the cover of cutting the tariff, slugs taxpayers and consumers.

The economic costs this involves are far larger than the $6.2 billion the government has committed to spend. Because each dollar raised in taxes distorts economic activity, likely costing the economy between $1-20 and $1-80, merely funding those outlays involves a burden that could reach some $2,000 per household.


To make matters even worse, the subsidies will be provided to bring new capital and labour into the industry. It is our most efficient industries, starting with the primary exporters, that will be worst hit, as resources, including badly needed skilled labour, are diverted from firms that pay their way to those that ride on the public purse. As efficient industries contract, national income will fall.

Moreover, as new labour is attracted to the industry, future adjustment problems are compounded. Today’s economic folly creates tomorrow’s social costs, leaving a poison pill for future governments.

Internationally, the credibility of our commitment to open markets, undistorted by the types of subsidies that so damage Australia’s agricultural exports, will get a battering - as well it should. To do this just as the world economy enters into recession, with a global trade round in tatters and the threat of protectionism in the air, reeks of recklessness.

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About the Author

Henry Ergas is chairman of Concept Economics. His new book is Wrong Number: Resolving Australia's Telecommunications Impasse (Allen & Unwin).

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