Tuesday, August 19, 2008

Cars and the cold shower

Australia’s motor vehicle industry will today unveil what is says it’s a “major technical error” in the economic modelling used by the Bracks Review to justify halving the tariff applying to imported cars.

The Bracks Report recommended cutting the tariff from 10% to 5% in one hit on January 1, 2010 in accordance with the previous government’s timetable.

It acknowledged that the move would cost jobs and economic growth in the “more automotive-intensive” states of Victoria and South Australia, but quoted the Productivity Commission as finding that it would boost overall GDP by up to 0.06 per cent...

The Federation of Automotive Products Manufactures will today challenge that finding, using the work of two of Australia’s leading economic consultants.

Professor Peter Dixon of Monash University is the author of the Monash Multi-Regional Forecasting model that the Productivity Commission relied on to arrachieve its results.

Dr Nicholas Gruen is a former Presiding Commissioner at the Productivity Commission and as an advisor to the then Industry Minister John Button helped draw up the Button Car plan in the 1980s.

They will argue that in order to find a net benefit from the tariff cut the Commission had to assume that the tariff cuts created an implausibly large “investment effect,” sometimes also known as the “cold shower” effect.

Whereas it is clear that cuts in very big tariffs have positive economic effects, when tariffs get low the benefits of further cuts will be offset by the costs that will result from lower export prices.

The Productivity Commission countered this effect by assuming the “cold shower” of further tariff cuts would unleash extra productivity gains, something that Dixon and Gruen dispute, arguing that most of the productivity gains have already taken place.

In a paper presented to the Bracks Review in June they argued that “making the shower colder” would be just as likely to starve the industry of investment, slowing rather than boosting productivity growth.

The head of the Bracks Review, former Victorian Premier Steve Bracks said last night that he was familiar with the arguments and did not expect them to seriously challenge his inquiry’s findings.

“We took evidence from Nick Gruen, we took evidence from the Productivity Commission, we sought information widely and we came up with a set of recommendations that we believe is appropriate for the industry and also for the Australian economy more broadly.”

“This is all about different interpretations of economic models. Now that we are at a low tariff level, the impact of further tariff reductions is almost negligible, either way,” he said.

“Tariffs are actually less important to the motor vehicle industry than they have ever been. Other issues such as worldwide competition, fuel prices and carbon emissions are much more important. Tariffs are one of the least important factors.”