The Hard Truth About Our Clapped-Out Economy

Should the federal government "save" Holden? What about Qantas? Hell, what about the entire local car industry?

This is the conundrum that now confronts the Abbott government, as rumours swirl that General Motors has decided to kill off Holden’s car making in Australia.

Economic nationalism is never easy, and it certainly isn't cheap. The current cost of subsidising Australia’s dwindling group of car manufacturers is around $415 million a year.

Some, like Labor’s Kim Carr, say this is a worthwhile investment, keeping tens of thousands of jobs here and retaining a crucial industry that feeds into Australia’s broader manufacturing capability. Others point out we don’t really need a car industry: we can simply import our cars from overseas, like the New Zealanders do.

Textbook economics says we should let them go. Voters may tell opinion pollsters they want Holden to keep making cars here, but we don’t seem to want to buy them. Expensive to make and unloved by consumers, Australian cars are not a very economic proposition.

The problem with that argument is that auto manufacturing is a significant local industry. If Holden pulled out, Toyota would likely follow; a network of suppliers would then collapse. 50,000 well-paid jobs might be lost. Manufacturing states like Victoria and South Australia would be hit hard: academic studies show that after such closures, perhaps a third of the workforce never finds another job.

Flagship airline Qantas faces similar problems. The airline carries nearly two-thirds of domestic air travellers, but it is losing money hand over fist, especially on international routes. Poor management, high costs, the high Australian dollar and the hyper-competitive nature of its industry are all factors hobbling the flying kangaroo. It doesn’t help that Australian legislation blocks Qantas from accessing more foreign capital, for instance from a big Asian or Middle Eastern carrier.

Qantas’ Alan Joyce wants the Qantas Sale Act abolished, so the airline can access cheaper capital from abroad. Airlines are capital-intensive businesses, and newer planes are cheaper to fly and operate. Qantas still runs a ramshackle fleet of legacy planes, staffed by a high-cost, unionised workforce. Joyce says it can’t compete; Qantas’ $300 million half-yearly loss suggests he might be right. 1,000 jobs will go as a result.

Agricultural company GrainCorp also needed the federal government’s help. It has a profitable monopoly on grain handling and transport throughout much of Australia, making it a critical player in Australia’s farm sector. US food giant Archer Daniels Midland wanted to buy it, promising to inject fresh capital into GrainCorp’s rail network. To do this, it needed takeover approval from Treasurer Joe Hockey.

Hockey blocked the sale, after a sustained campaign against it by Australian farmers and the National Party. GrainCorp will stay in majority Australian share ownership. But farmers will miss out on the extra infrastructure investment.

Such are the dilemmas confronting a government in that most vexed of issues, “industry policy”.

Industries are inconstant beasts: when times are good, they can be heard complaining about government red tape that stops them from making more money. When times are bad, worries about level playing fields are forgotten, and executives can be seen going cap-in-hand to governments, begging for subsidies.

Neoliberal economic policy of the sort practised by the Productivity Commission generally counsels caution when businesses ask for taxpayer money. In the long run, the argument goes, the subsidies will merely distort the market, making goods and services more expensive for everyone.

For a generation now, Australia has thrown open our economy, letting our local industries take their chances on the high seas of global markets. This has made us all much richer. It has also hollowed out many local industries.

The hard truth is that Australia’s economy is starting to look distinctly unbalanced, with an anaemic manufacturing sector, an underperforming services sector, and a resources boom that will eventually bust.

One cause underlies many of these ailments: the high Aussie dollar. Australia’s resources boom has been a spectacular boon to mining executives and the lucky few, like Gina Rinehart, to have inherited vast mining leases from their father. But it has not been an unalloyed success story. By pushing up the price of the dollar on international markets, Australia’s huge commodity boom has made all sorts of local goods and services more expensive.

That includes labour. Australian jobs, priced in Australian dollars, are now expensive for global manufacturers and airlines, who long to employ lower-cost auto workers and cabin attendants. In a rich example of unintended irony, even the resources sector is now complaining about the high cost of Australian labour (conveniently forgetting that it is the vast spree of resource development competing for the same labour pool that is driving up labour costs in the first place).

Manufacturing has been hit particularly hard by the high dollar. In an incendiary column today over at the ABC, MacroBusiness’ David Llewellyn-Smith points out that Australian manufacturing is now at only 5 per cent of our GDP – “by far the lowest in the OECD (making Luxembourg look like an industrial powerhouse).”

In fact, the composition of Australia’s economy, with its vestigial manufacturing sector and hypertrophied commodities exports, is far closer to an oil-rich Gulf state than a modern industrialised economy.

The dirty little secret of all of this is that it is the official economy policy of the nation. For years, the Treasury has blithely observed the decline in local manufacturing as an unavoidable consequence of the resources boom, rehashed with little variation each May in successive budget papers.

Indeed, the main economic justification for Labor’s mining tax was to take some heat out of the resources boom, and spread some more of that wealth around to the rest of the economy via tax cuts and superannuation increases. The Abbott government won’t offer us even that, but is instead attempting to cut away at so-called “green tape” for the mining sector, even as the boom starts to cool off.

While cooling commodities prices may eventually lead to a lower Aussie dollar, the long-term requirement for a more specialised, highly skilled and knowledge-intensive Australian manufacturing sector is clear. The only way out for Australian manufacturing is up.

Joe Hockey and Tony Abbott didn’t create these problems: like any new government, they’ve largely inherited the mess from the predecessors, and their predecessors before them. But it’s their turn to respond to the challenges.

It’s not clear that the Coalition understands what the challenges are. Labor’s key industry minister was Kim Carr, who, for all his love of subsidies for car makers, at least had a vision for the manufacturing sector driven by high skills, knowledge-led innovation. The Coalition’s Industry Minister is Ian Macfarlane, who seems mainly interested in scoring irrelevant points about the minor impact of the carbon tax.

Nor does the Abbott government seem interested in the most important long-term investment Australia requires, if we are to retain our key competitive advantage: a highly skilled workforce. Christopher Pyne’s dismal efforts in education policy suggest he has no real concern about Australia’s sliding international school benchmarks. Meanwhile the higher education sector is bracing for a reintroduction of enrolment caps – which would directly prevent more Australians from entering universities.

But there is one sector where the Coalition has a very robust industry policy: fossil fuels. In this sector, at least, the new government has no qualms about taxpayer subsidies. It has just announced a $1.45 billion “emissions reduction fund”, which will pay big carbon emitters for reducing their pollution.

Those likely to benefit from the taxpayer largesse include brown coal power plants; Environment Minister Greg Hunt has just hired a brown coal lobbyist as a key advisor. The government is also handing the fossil fuel sector a huge fillip by abolishing the carbon tax, reviewing the Renewable Energy Target and axing the Clean Energy Finance Corporation, a renewables-friendly investment body.

Green industries like the clean technology sector are a huge and growing part of the economies of our competitors and trade partners. In fact, the world leaders in green industries are in Europe and China. Australia lags well behind in these industries of the future. But the Abbott government will only make matters worse.

In recent Senate Estimates’ testimony, the CEFC told the government it is on track to finance growth in clean tech and renewables, while reducing emissions, all while returning a profit to the taxpayer. That’s the sort of industry policy anyone could support.

Well, anyone but the Coalition, that is…