Wednesday, August 20, 2008

"Tell the truth about tariffs"

Peter Dixon and Nicholas Gruen's challenge to Productivity Commission.

The Commission's reply will appear here.

Australia’s motor vehicle industry is asking the government to reconsider the tariff cuts recommended in the Bracks Report saying the evidence put forward to support them is built on a mistake.

The Bracks Review recommended cutting the tariff on imported motor vehicles from 10% to 5% in one hit on January 1, 2010.

It quoted the Productivity Commission as finding the cut would boost Australia’s economic welfare by $500 million.

But the creator of the economic model used by the Commission in its analysis claimed yesterday that it had misinterpreted its results.

Professor Peter Dixon of Monash University built the Monash Multi-Regional Forecasting Model used by the Productivity Commission for its economic analysis.

In a ten-page analysis of its results commissioned by the Federation of Automotive Products Manufacturers he claims that while they were right to conclude that cheaper imported motor vehicles would boost the amount of capital goods used in business, they were wrong to describe that as a boost to economic welfare.

“Capital goods have to be paid for,” he said...

“Either by Australians or more likely by foreign investors who capture the economic benefit. The only real boost to Australian economic welfare comes from the tax collected – and that’s much less.”

“This isn’t a debate about interpretation. It’s an error by the Productivity Commission. It created four hundred million dollars out of thin air.”

The Commission was tight-lipped yesterday about the analysis. It said it was reviewing it and might put a response on its website in due course.

The $400 million hole claimed by Professor Dixon is in addition to earlier quibbles with the Commission’s work which he presented to the Bracks Review as it was compiling its report.

Taken together Professor Dixon’s adjustments to the Commission’s modelling suggest that the net economic gain from cutting tariffs to five percent would be close to zero rather than the $500 million claimed by the Commission.

“I actually get negative benefits – a cost to the economy ranging from $14 million per year to $92 million, but these are tiny numbers in the context of the economy so its best to conclude that the net welfare effect is roughly zero.”

Professor Dixon was keen to point out that he wasn’t accusing the Commission of misusing his economic model, merely of misinterpreting its conclusions.

“This has happened before. In 1997 the Commission as desperately keen to show that cuts in car tariffs would boost economic welfare, and it also misinterpreted the model’s results.”

“I don’t mind people making mistakes. But if they don’t want acknowledge that, or if they say it doesn’t matter, they are abandoning an evidence-base.”

A spokesman for the Industry Minister Kim Carr said he had made no decision on cutting tariffs and would consider Professor Dixon’s report in deciding how to respond to the Bracks Review’s recommendations.