A consulting company has a difficult balancing act. On the one hand it needs to earn money. Saying what the client doesn’t want to hear is often not helpful.
On the other hand the value of a consulting company is its credibility and name. So a report, say, on the automotive industry from Craig Emerson Economics would be ignored.
ACIL Allen seems to have crossed the river Styx to join Craig Emerson Economics.
Automotive manufacturing in Australia receives around $500 million in Government funding each year. For this investment, the Australian economy is $21.5 billion larger (based on an economic welfare net present value calculation) for having an automotive manufacturing industry.
On a per person basis, Government assistance to automotive manufacturing is around $18 per person — a very low figure by international standards. The $21.5 billion return equates to $934 per person.
On any analysis, Australia would be a very different place without automotive manufacturing. If we lost this important capability:
– Australia’s GDP would be $7.3 billion smaller (in today’s dollars) by 2018.
– Billions in foreign direct investment would cease. The automotive industry is foreign-owned and if their Australian manufacturing arms close, head offices will direct investment to other automotive manufacturing countries, not to other industries in Australia.
– The economies of Adelaide and Melbourne would be devastated with GRP contracted by up to 1.4 per cent and it is likely GRP will be lower than current levels until the end of 2031, while employment could to fall by around 1.5 per cent.
• These impacts do not include the spill-over effects, including to advanced manufacturing and R&D, which can’t be modelled, but are recognised by chief executives of companies like Boeing, Rio Tinto and Coca-Cola Amatil. These include:
– technology transfers through R&D, and innovation;
– lean management techniques and applications; and
– advanced labour skills and manufacturing techniques.
• Economic modelling in this report considered a pick-up in exports back to 2008 levels if barriers to export are lowered. It found that under this scenario there would be a considerable uplift in Australian consumer welfare of around $7.1
As Peter Costello once said, if the rate of return is so certain and so large, why don’t we spend the entire Australian GDP on the automotive industries?
The report continues
The modelling in this report shows that, because the assumptions of elementary economic analysis do not apply in the case of the Australian automotive manufacturing industry, a shutdown of the industry will not only lead to a permanent loss of GDP, but a loss of economic welfare (measured as a loss of consumption expenditure) as well. This loss of welfare, in net present value terms, amounts to $21.5 billion, or $934 per person.
That’s code for: ignore standard economics (eg from the Productivity Commission) and trust us.
What the authors of the report have assumed is that the companies and labour employed in the automotive manufacturing industry in Australia have no value outside of that industry. They have neglected opportunity cost and the alternative opportunities that would open up if the automotive manufacturing industry in Australia shut down. They have used facetious comparisons of government support by other countries.
This analysis is a classic weakness in many so-called economic studies. Opportunity cost and counterfactuals cannot be just ignored.
This report was produced with our money – the FCAI is using taxpayers’ to buy a paper that argues for more taxpayers money.
It also contradicts a previous ACIL Allen report – this time for the Property Council – which recommended cutting subsidies for weak industries. I haven’t found a copy of that report (April 2013), but here are some of the reported findings from that report:
Subsidies to particular industries are a tax on the remainder of the economy. They have become more significant in the last decade, totally nearly $9 billion annually. The more successful industries, those that do not need subsidies, prop up the less successful ones.
While the latest ACIL Allen report claims that Australian Government support for the Australian automotive manufacturing industry is modest both internationally and domestically, let’s not forget the most recent Productivity Commission report (from 2012) which estimated that the effective rate of assistance was 11.1 per cent - three times the manufacturing average of 4.4 per cent and equivalent to an annual net subsidy of $1.6 billion.
That’s way above the ACIL Allen estimate of $500 million because it includes the subsidies received from consumers (who pay higher prices for domestically produced vehicles) as well as direct grants and other subsidies from the taxpayer.
ACIL Allen is wrong. Protection and subsidies have been the death knell of the automotive industry in Australia. They have prevented resources from moving to more valued uses. They have encouraged workers to stay put in a declining industry rather than retrain and move to better and higher paying jobs.
ACIL Allen should be treated like Craig Emerson Economics. A joke. An expensive joke.