FORD will cease producing vehicles in Australia from October 2016, in a move that will cost 1200 jobs.

Ford Australia boss Bob Graziano announced the closure of the car-maker’s Broadmeadows and Geelong plants in Victoria while unveiling a $141 million after-tax loss for 2012-13 year, making losses of $600 million over the last five years.

He said the company had come to the conclusion that it was no longer viable to produce vehicles in Australia.

I have written on this topic several times in the last five years.

Industry Policy Madness June 2008

The Productivity Commission estimates that the car industry received $1.1 billion of support in 2006-07 alone. That money is ultimately paid by the taxpayer.

Of course, it isn’t just the taxpayer who loses out. Workers are huge losers too. Inefficient industries continue to attract employees who often develop specific skills that are not easily transferable. When those jobs are lost, some employees lose their invested human capital and, while they often get other jobs, their market value is diminished. Not to mention the emotional costs and stress of having lost their jobs.

Bracks Report Doesn’t Stray Far From Script August 2008

This document, at heart, is an old-style “winner-picking” industry policy. The most important point to note is that industry profitability is falling, and component manufacturers have reduced profit margins. Meanwhile, productions costs are rising. The market is sending a clear signal that motor vehicle manufacturing is something that should happen overseas.

Making ‘Stuff’ Doesn’t Cut It: Why Australia Shouldn’t Have A Motor Industry July 2012

Australia shouldn’t have a motor car industry – well not an industry dependent on corporate welfare. Many Australians struggle with that idea – after all shouldn’t we be “making stuff”? When former prime minister Kevin Rudd said he didn’t want to be prime minister of a country that didn’t make stuff, he struck a chord with many Australians.
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A dynamic growing economy creates new jobs and new job opportunities all the time.

The economy has not been generating net new manufacturing jobs. The question we need to ask is: do Australians have the right to a manufacturing job? A moment’s reflection indicates the answer must be “no”.

Certainly, I can’t see an argument for government propping up large-scale production line jobs that have little value-add and can be undertaken in any number of low-cost economies. Given the time, effort, and money lavished on our education system, we shouldn’t have low-skill manufacturing at all.

The bottom line is that we should concentrate of doing the things we do well – that are profitable – and trade for the things we don’t do well (or are unprofitable). Specialisation and trade is the key to future prosperity. Propping up dying industries will not add to our wellbeing.

The key for China watchers will be how the new leadership, led by Premier Li Keqiang, plans to allow private enterprise to play a greater role in the economy. In a speech last week Li indicated this would begin by reducing red tape, which he labelled “informal barriers” and “glass doors”.

Li described how one company needed 50 separate administrative approvals across 27 different government departments before being able to begin a project.

“We need to get rid of the controls which are not needed,” he said.

Speculation is mounting that China will abolish one of its five layers of government to help achieve this.

But the market won’t be satisfied with cutting red tape. Economists are looking for reforms that will drive productivity gains over the next decade and allow China to keep growing at elevated levels.

That means the pressure is on the leadership to articulate how it will reduce the role of state-owned enterprises, which control more than one-third of the economy and are given preferential access to the most lucrative areas, such as energy and financial services.

“Private capital has money but nowhere to invest, it can’t invest,” Li said in his speech last week.

This was interpreted as strong support for markets, which the Premier said had a “self-adjusting mechanism”.

“The market is the creator of social wealth, it’s the internal source of economic development,” he said.

While Li’s comments were likened to Adam Smith, they are also perhaps an acknowledgement that China’s system of state-sponsored capitalism has run its course. This can be seen in how the government has been unable to significantly boost the economy in recent months, despite directing state-owned banks to massively increase new loans.

At the end of last year China’s credit to GDP ratio topped 180 per cent – up 60 percentage points in just four years – but it is having less and less impact.

Fitch Ratings estimates that each new yuan of lending between 2009 and 2012 only generated 0.3 yuan of additional GDP. This is less than half the figure achieved between 2005 and 2008. This supports theories that China is like a junkie that needs increasingly larger hits of credit to have the same impact.

And it’s leading to dire warnings on the state of China’s banking system.

The latest to join to throng was famed short-seller Carson Block of Muddy Waters Research, who says China’s financial institutions hold more toxic assets than Western banks did before the 2008 financial crisis.

Andrew is concerned that the Liberals are not prepared to make the calls that are required to use a big mandate after September. The spectre of Malcolm Fraser is hovering.

One explanation is that Tony Abbott was next to John Hewson through the campaign that ended in losing the unlosable election in 1993. That was the best platform that we will see in our lifetime, it was achieved after a decade of turmoil in the Coalition to get on top of the wets and get real about economic policy, then it went down under a grade 5 tornado of criticism from Keating and the media. That was the first time I realised the full extent of left/ALP media bias and the impossibilty of an adult public debate about major issues.

Andrew probably didn’t need to be told that, and Steve suggested that there is no percentage in putting up a big target to get attacked daily for the remaining months of the campaign.

Andrew wants to see more sense of urgency about the problems. His point, and mine, is that those of us who are not party political hacks need to make the calls as we see them, for the good of the nation, not just for electoral advantage, however important it is to replace the current administration.

With another bite at the cherry I would have suggested that, just maybe, after the election when we get a full accounting of the depth of the hole we are in, then Abbott can say that all bets are off, we just have to do a whole lot more of the things that need to be done. Just hoping.

As for the question, why is Julia hanging out with Kyle? She is courting the kiddie vote, hence the big push to automatically enrol everyone the minute they get to voting age. They have worked out that there are enough votes in that demographic to save a few seats with a massive social media push.

Since I have become a pundit person of influence on the steam radio, not just an intellectual and man about town, the next port of call is the Continuous Call Team to push for a referendum question to get recognition of the Big Marn in the Constitution.

PS. Met some interesting people at lunch in the Australia Club last week but will not emulate the low rent name dropping of that little Greek guy who writes a social column in The Spetator.

The Parliamentary Budget Office (PBO) yesterday released an analysis (found online on this webpage) profiling the federal structural budget balance, stating the budget was in structural balance, or surplus, up to 2007‑08 before falling to a deficit of up to 4.25 per cent of GDP in 2011‑12.

It also estimated that two‑thirds of the decline in structural receipts, from 2002‑03 to 2011‑12, was attributable to successive personal income tax cuts between 2003‑04 to 2008‑09.

In some respects the PBO analysis, and the related media commentary following the release of the report, raises more issues than settles them.

As with many other empirical studies of this nature, the results of this study depend, in large part, upon the assumptions and estimation techniques employed.

These include the calculation of an unobservable ʻpotential outputʼ to separate temporary and permanent shocks to the economy, estimating lower and upper bounds for a structural terms of trade estimated by the PBO to be above long term historical trends, and using arguably outdated income tax elasticities.

It is also puzzling that the PBO backdates their structural budget balance time series only to 2001‑02, replicating an earlier study in 2010 by Treasury officials, but not taking the series further back in time.

The restrictive time coverage of the study means that the important expenditure reductions by, say, the first and second term Howard governments, in their efforts to correct structural budget deficit left behind during the Hawke‑Keating period, has been overlooked.

The argument that the size of the structural budget surplus had been in decline during the Howard years have further fuelled arguments made by the ʻrevenue lobby,ʼ an organisationally loose but intellectually coherent coalition of interests comprising the ATO, Treasury, academics, politicians and some financial commentators, that taxes should not have been cut during that period.

However, criticisms of previous income tax cuts ignore the point that the Labor Party, firstly in opposition and then in government, initially embraced income tax cuts on the basis that it would expand productive capacity, chiefly through an expansion in labour force participation.

According to Swan in mid‑2008, the first tranche of income tax rate reductions, along with other relief measures, alone were estimated to increase aggregate labour supply by 65,000 people in the medium term (though I do vaguely recall Swan referring to an even higher labour supply response in the past).

It follows that the effect of having foregone tax cuts would have been a smaller labour supply, than would otherwise be the case, translating into a slower rate of economic growth, a point absent in the arguments of those critical of income tax reductions.

The recent focus on revenues, including the poorly judged latest round of calls for increasing GST, is another attempt to divert public attention away from the ultimate cause of Australiaʼs fiscal problem, and that is excessive government spending.

Even taking the PBOʼs debateable quantum of identified ʻtemporaryʼ stimulus measures of $67 billion from 2008‑09 to 2011‑12 as a given, this spending, as far as I can tell, contributed a hit to the structural budget of at least two per cent over that period.

To be sure, foregoing the discretionary fiscal stimulus would not have eliminated the structural budget deficit as estimated by the PBO, since other policy decisions to ramp up expenditures, particularly in the social policy sphere, had been effected during the Rudd‑Gillard period.

And as the PBO acknowledges, new expenditure pressures on the federal budget are now being locked in over time, as DisabilityCare and the Gonski school funding package are progressively implemented by the end of this decade and beyond. It is the expenditure bushfire, driven in particular by welfare state spending, that surely needs to be doused in this period of budgetary emergency.

Treasurer Swan may publicly declare a lament that if the tax to GDP ratio were higher his ability to achieve surpluses would have been assured, but it would not surprise if there is now, in perhaps the final months of this government, an emerging sense of regret, in Swanʼs quieter moments, about the highly flawed embrace of runaway spending.

POSTSCRIPT: The Treasury Department has released an update of its 2010 study, which reads as a near‑carbon copy of the PBO study (coincidence much?!). It can be found here.

Meanwhile:

The IRS official in charge of the division accused of improperly targeting conservative groups will invoke her Fifth Amendment rights against compelled self-incrimination at a committee hearing Wednesday, a sign of concern that the political controversy is heading into the criminal arena.

That is, she will refuse to answer questions on the grounds that her answers might tend to incriminate her. A jury is not supposed to take pleading the fifth into account in reaching a verdict during a trial. We, on the other hand, are not on a jury and this is not a trial so we are well within our rights to draw an inference that there is criminality involved. And no doubt there is. The question now is whether the Republicans (and media) will go all out or go quiet.

See longer clip here.

ATO initiatives

The Coalition will also foster a more cooperative relationship between taxpayers and the Australian Taxation Office.

We all have to pay our fair share of tax. But the relationship with the ATO does not have to be adversarial and should be based on mutual respect.

One measure that will help change the culture of the tax office is to appoint people with business experience to senior posts. The new Commissioner, Chris Jordan, is a breath of fresh air in this regard and the Coalition welcomes his appointment.

But for too long the tax office has developed an insular and inward looking culture that has put it at odds with taxpayers, particularly in relation to its overly aggressive interpretations of tax laws.
Taxpayers are not the enemy. They should be respected.

I have previously announced that the Coalition would expand the number of Second Commissioners of Taxation, from three to seven, with appointments of “outsiders” who have market place experience to the executive group, which sets the strategic direction of the tax office.

A second step is to reduce the complexity and increase the certainty of tax law.

In areas like self-assessment and compliance we can do better.

But when dealing with tax payers the ATO has everything in its favour.

When it comes to resources, this year alone, the Government has increased the size of the tax office by over 500 employees to more than 22,000 staff.

And when it comes to its legislated powers it all works in favour of the tax office as well.

For example if a taxpayer is assessed for tax, the only way the amount can be disputed is if the tax is paid in full (with few exceptions).

And when there is a dispute over an audit, the ATO can often seem to go through the motions, rather than objectively reconsidering the taxpayer’s position.

Taxpayers need to know their concerns are heard and they need to be assured that they are being treated fairly.

I announce today that if elected a Coalition government will immediately establish a standing Parliamentary Committee with a singular focus – the oversight of tax administration.

The first task of the Oversight Committee will be to set down dates for regular semi–annual public hearings with the Commissioner of Tax. They will be held in a format similar to the public hearings with the Governor of the Reserve Bank.

The second task will be an enquiry into the most effective organisational structure for independently handling and resolving formal taxation disputes.

As I said last November I have deep reservations about the ATO being both an administrator and a prosecutor.

I recognise that the new Commissioner of Taxation, Chris Jordan, is endeavouring to put in place a more independent dispute resolution process. I welcome this initiative. So our timeframe should allow a proper evaluation of the ATO’s new approach to independent review of disputes.

However, if the Oversight Committee believes it’s necessary, then the Coalition stands ready to break up the tax office, so that its policeman functions are separate to its responsibility for administering the tax system.

Fairer administration of our tax system should have bi-partisan support.

Tax Policy Legislation

In addition, the Coalition believes there is much room for improvement in the process, design and delivery of taxation legislation.

Quality control is crucial and requires accountability.

A Coalition Government will provide greater certainty to taxpayers by requiring the Commissioner to affirm that all new taxation legislation and related explanatory memoranda accurately express the stated policy intent of the Government. The ATO will also have to affirm that it has the administrative and compliance systems in place to give practical effect to the Government’s legislation.

Excellent starting point. The aggressiveness of the ATO is entirely inappropriate. It is not the role of public servants to ‘protect the revenue’ – it is their job to collect the revenue as authorised by the Parliament. Not a penny less; importantly not a penny more. Revenue that is collected in excess of the taxpayer’s liability as established by the law constitutes abuse of office and any public servants who are involved in such activity should be prosecuted. So in addition to actually breaking up the ATO along functional lines Hockey also needs to give a lot more teeth to the Inspector-General of Taxation to investigate whether such abuses are occurring and to prosecute any individuals who exceed their authority.

I’ve had a brief look at that material from the Parliamentary Budget Office and what it shows is that the structural deficit started as far back as 2001-02.

Such a pity that isn’t actually what the PBO report.

Poor Wayne – obviously didn’t understand the graph. It starts in 2001-02 but the structural budget deficits don’t start till much later.

(HT: Noodle)

We wonder what the Irish think of the spectacle of an American Senator expressing outrage that an American company doesn’t pay enough Irish taxes. As Wisconsin Republican Ron Johnson pointed out on Tuesday, Americans are better off when U.S. companies pay less in taxes to foreign governments.

That includes Americans who are invested in Apple through their mutual and pension funds. And it includes Apple’s U.S. workers who benefit when the company is able to sell more iPhones and iPads overseas. Roughly 50,000 of Apple’s 75,000 employees are in the U.S.

It’s also amazing to behold Democrats who routinely claim that high tax rates don’t matter to business behavior denouncing a business for engaging in behavior to avoid paying higher tax rates. Which brings us to the real scandal that Mr. Levin has exposed: the folly of America’s corporate tax code.
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All of which argues for a corporate tax reform that would at the very least cut the combined U.S. state-federal rate to the mid-20s to be comparable with many of our trading partners. We’d suggest something closer to the Irish model—ideally zero but 12.5% also works—to turbo-charge growth and coincidentally generate lots of new revenue for Mr. Levin’s beloved IRS.

Speaking of which, Mr. Levin is one of those Senators who wrote the IRS demanding that it inspect the tax-exempt status of Americans for Tax Reform, the Club for Growth and other groups that are his ideological opponents. “Why does the IRS allow 501(c)(4) organizations to self-declare?” he roared in July 2012. The IRS seems to have followed his orders, so no wonder he is trying to change the subject.

This is from Andrew Bolt and it is a sensation. How is it that the folks over at the ABC are so completely lacking in self-awareness that they happily answer these questions so that the rest of us can know just how politically naive they are. Who would buy a political opinion from such a bunch as this?

I have over the past few weeks been thinking about a solution to the problem caused by the ABC. And while privatisation might be a nice idea I don’t think it would work out very well in practice. But what would in my view be just as good is for the next Coalition government merely to say to the ABC that within five years, 90% of your funding must be raised through advertising revenue. And having grown up in Canada, there is a precedent. I don’t know what the proportion of CBC funding must come from its own revenue sources but whatever it might be could be our own target.

I like it because it will still remain “our ABC”. I like it because we can allow the ABC to help the rest of us finance all of the social programs it believes the government ought to finance. And I like it because it should be more commercially oriented so that it is no longer allowed to compete in the market at a zero price.

And I especially like it because this is not the 1930s. We can get cable across the country. There is no one locked out of reception that only the ABC can reach (and if there are such places, the government can provide the subsidy out of the ABC’s new revenue stream).

And then, of course, there is this from Blazing Cat Fur in Toronto who notes how the CBC audience has diminished almost to the vanishing point:

If the share of CBC TV was just over 5% in prime time, it is below 5% on a 24 hour basis; CBC daytime schedules have traditionally performed poorly compared to CBC’s prime time. Making matters worse is that the audience to about half the U.S. TV stations available in Canada are no longer being measured by the ratings company and neither are services such as Netflix or Apple TV, meaning that CBC’s share of all TV viewing is actually lower than the numbers suggest. This is the lowest audience share in CBC’s history and yet there is no hint of the severity of the TV network’s situation in the quarterly report. CBC TV audiences are sold to advertisers and with less audience to sell, 2012-13 revenues, shown in the table above, are almost $40 million less than at the same point the previous year, creating a revenue shortfall that, when added to federal cuts, may be crippling.

There has been some public debate about whether or not CBC is in crisis. The CBC’s latest report confirms that many programs on the main TV service, despite efforts to be more ‘popular,’ have fallen to audience levels not much greater than many specialty channels. Those who deny the crisis fail to realize that Canadians prefer Duck Dynasty to most CBC shows, including the national news. The most important and costly CBC service has an audience crisis and CBC needs to respond to it. Is it time to rethink the role of CBC TV?

Maybe if the ABC were made to think about advertising revenue it might perhaps end up just a tad more central to community views than it now is.

Quadrant Update: A new fact checker at the ABC. A fact checker is supposed to check facts, eg. what is the second longest river in Australia, not to adjudicate political debates. In that context I wonder how the ABC’s new fact checker sees his role.