Let me reiterate from the outset that I do not believe that the closure of Holden by 2017 is beneficial for the Australian economy. While I don’t dispute that there would likely be long-run allocative efficiency benefits from the car industry shuttering, the costs in the short to medium-term – given that Australia is also likely to face strong headwinds to jobs and growth as the once-in-a-century mining boom unwinds – could simply be too great.
The fact of the matter is that the time to pull back taxpayer assistance to the car industry was in the early-to-mid 2000s, when Australia was facing labour shortages as the mining investment boom was commencing. Most of the workers displaced by the car industry’s closure would have been deployed to mining, which would also have reduced the need for Australia to run the population ponzi scheme that it has since the mid-2000s, and would also have reduced inflationary pressures (via lower infrastructure capacity constraints).
The problem is that Federal Government revenues are inherently pro-cyclical. In the early-to-mid 2000s, the Government was awash with cash as the private debt bubble was in full swing and the epic terms-of-trade boom started. This reduced the need for the Government to seek budgetary savings, including through winding-back subsidies to the car industry.
We face the opposite problem now. Government revenues have shrunk and will only get worse as the terms-of-trade continues to unwind, job losses increase as the mining investment boom fades, and the population ages. Accordingly, taxpayer subsidies, like those to the car industry, will receive more scrutiny, even though the employment market is weakening significantly and it is a less than ideal time for the industry to close.
Regardless, Holden has announced that it will cease local production in 2017, which is very likely to lead to Toyota’s exit and the closure of a large number of component makers as well.
Assuming the car industry’s closure is a fait accompli, and there will no longer be the need to protect the industry, then how should the Government respond to ensure that consumers benefit?
Well, there are a large number of policies in place that are increasing the retail cost of cars.
First there is the 5% tariff on automotive imports, which should be cut as soon as local production ceases.
Second, the luxury car tax, which is set at 33% on the marginal cost of vehicles above $60,316, is a defacto tariff designed to raise the cost of more expensive imports and make local models, such as the Fairmont Ghia, more attractive. It has little policy rationale once the car industry has ceased and should also be abolished.
Third, restrictions on importing secondhand cars should also be abolished. New Zealand did so ofter its car industry was shuttered, which opened the market to a large number of high quality Japanese used cars, lowering costs for consumers.
Finally, unique Australian technical standards should be abolished in favour of global rules. Again, this would open the market to a wider array of foreign cars and reduce overall import costs.
Preferential government procurement rules, which favour locally made cars, would obviously also be made redundant in the event that the local car industry shuttered, which could save government departments money.
Given that the car industry looks poised to close, the least the government could do is soften the blow on consumers and increase their spending power.
