$8.7 billion? Let's pay down our cards

The mystery of what happened to the government's $8.7 billion in December stimulus payments is becoming clearer.

Australians spent at least $3 billion of them making extra payments on their credit cards.

Credit card repayments reached an all-time high in December, topping $21 billion - some $3 billion more than is typical.

At the same time Australians took their credit cards shopping more than ever before, pulling them out an extraordinary 145 million times during the month - 12 million more than in the previous December.

The Reserve Bank figures provide evidence for both sides in the stimulus payments debate...

Supporters can argue that the payments had us spending big in December, putting a record $20 billion on plastic. Opponents can argue that we used a big chunk of the payments to pay the plastic off.

Nomura Australia chief economist Stephen Roberts said it wasn't surprising that Australians used the handouts to pay down credit card balances.

"Clearly nobody has any incentive to pay 20 per cent interest. With rising unemployment, paying exorbitantly high real interest rates makes no sense," he said.

The $8.7 billion in December bonus payments will be followed from April by the $10.5 in payments approved by the Senate this month.

Available to Australians earning up to $100,000 a year and worth up $900 each, most will be made automatically through the Tax Office. Some Australians will be entitled to more than one payment.

New car sales continued to climb in January after surging as the bonus payments hit wallets in December. But sales of non-passenger vehicles such as utilities, vans, trucks and buses slid 7.5 per cent.

"This looks like businesses cutting investment plans, particularly in the resources sector, said Commonwealth Securities economist Savanth Sebastian.

Australia-wide, vehicle sales are down 17 per cent over the year.

Sales in Victoria are down a more modest 11 per cent, and jumped 2 per cent in January, twice the national average.

Read more >>

The strange case of the tax hike that exists, but doesn't

Curious, and arguably extra-legal

Intending buyers of luxury cars hoping to escape the tax hike will have to cool their heels.

Although the Senate rejected the budget measure yesterday, the government's decision to reintroduce it when the Senate next meets means that car dealers are under notice that the extra tax may still have to be paid.

The Age understands that the Tax Office will write to the dealers warning them that should the bill eventually pass they will be liable to pay the increased tax on every luxury car sold since July 1...

They will get no respite in the period between the Senate rejecting the bill and it eventually passing.

The Tax Office wrote to dealers in June warning them to prepare to pay the increased tax on every car sold from July 1 even though the measure's progress through the Senate was not assured.

Its follow-up letter will reiterate that advice.

Some dealers have been collecting the increased tax from their customers on the understanding that they will refund it when the Tax Office advises them that it is safe to do so.

Other dealers have been entering into sale contracts that allow them to collect the extra tax later should the bill be passed.

A third group of dealers has been absorbing the potential tax increase and will pay it out of their own resources if they are eventually required to.

So far none of the extra tax collected by the dealers has been paid to the Tax Office.

Industry estimates suggest that $15 million to $20 million would have been owing had the legislation been passed by the Senate.

The total is growing at the rate of $2 million a week.

Read more >>

Victoria - where jobs are vanishing

The 40 jobs to be lost from the Melbourne plant of car axle manufacturer Unidrive next month and the 80 jobs to be lost at Bosch's PBR are part of something much bigger.

A count by The Age of announced job cuts in Victoria so far this year has topped 4,500 – almost 2,000 of them in the motor vehicle industry.

Holden and Ford combined are cutting 880 jobs and their suppliers including South Pacific Tyres and Unidrive are cutting jobs partly as a result.

While most of the jobs to be lost are in manufacturing, around 900 are in the service sector, including 30 at Melbourne University, 70 in the state Department of Primary Industries, and 360 at Bendigo’s Excelcior Call Centre.

Victoria’s announced job losses dwarf those of every other state and are consistent with official employment figures showing that Victoria is the only state to have lost full-time jobs over the last six months, losing 16,200 full-time jobs at a time when the rest of the nation gained 90,500...

At least two of the announced job cuts in Victoria will directly benefit other states. Boeing and Diners Club are moving their operations out of Victoria to Sydney.

The Opposition Leader Ted Baillieu says they are voting with their feet.

“Victoria is losing its competitive edge and companies clearly believe they can do better for themselves in other states,” he said yesterday.

“Labor has made Victoria a bad place to do business and it will only become more expensive in the future.”

Employment forecasts put Victoria and Tasmania at the bottom of the heap in the year ahead.

Access Economics has Victoria’s employment growth eclipsed by South Australia and NSW as well as the two resource-rich states of Queensland and Western Australia.

But crucially, Access – like most other private forecasters – still expects Victoria’s employment to grow. Access has it growing by an extra 34,300 in the year ahead. The ANZ Bank has it growing by 47,500.

It’s growth, but it won’t be enough to cover the 48,000 newly-minted job seekers who are expected to need work in the year ahead.

Victoria’s unemployment rate is bound to rise, and at 4.6% is already well above the national average of 4.1%.

The ANZ’s Mark Rodrigues says the relatively poor outlook isn’t surprising.

Victoria has little direct exposure to the mining boom, it is relatively highly reliant on manufacturing which is suffering at the hands of the high dollar, and along with NSW it is heavily exposed to the finance sector which has been hit by the worldwide credit crunch.


Here's how it was:

Read more >>

More money for carmakers

Pressure on the Federal Government to boost taxpayer support for the car industry has intensified, with Ford yesterday declaring it would need additional aid to remain competitive beyond 2010.

Days after The Age revealed that Ford would cut hundreds of jobs in Victoria due to falling sales of locally built cars, the company's international chief executive and president, Alan Mulally, has met Prime Minister Kevin Rudd and Industry Minister Kim Carr to press his case for more government support.

In a 45-minute meeting later described by a Ford spokesman as "very positive", Mr Mulally is believed to have told Mr Rudd that any move to halve the tariff on imported cars, as recommended by the Bracks review of the car industry, would present difficulties for Ford and necessitate additional "transitional assistance"...

"There was discussion about the fact that the market has become increasingly competitive and that for us to be able to continue to maintain our level of competitiveness in Australia we need to work with the Government on future transitional assistance programs," the spokesman said.

Ford made no explicit threat to further wind down its Australian operations during the talks, instead stressing the commitment it had already made.

"Mr Mulally reiterated the significant investment that Ford has made in Australia over the past 82-plus years, including recent significant investment such as the development of the all-new Falcon and the fact that Australia is the global engineering lead of the corporation's next global light pick-up truck," the spokesman said.

"That re-emphasised our commitment to Australia and that it is an ongoing commitment," he said.

Neither Mr Rudd nor Mr Carr made any comment after the talks, and the Government has yet to endorse the Bracks Committee's recommendations.

Ford's push for more assistance comes after it confirmed on Friday that it would cut 350 jobs at its Geelong and Broadmeadows plants, due to sluggish sales of its locally built six-cylinder models.

The proposed cut in the car tariff came under attack last week from two economists, who argued that the Productivity Commission had made a mistake in claiming that the cuts would boost Australia's economic welfare by $500 million.

The creator of the economic model used by the commission, Professor Peter Dixon of Monash University, said the mistake had "created $400 million out of thin air".

"This isn't a debate about interpretation. It's an error by the Productivity Commission," Professor Dixon said.

The vehicle secretary of the Australian Manufacturing Workers Union, Ian Jones, said that regardless of the debate about tariffs, car makers such as Ford needed help over the next 18 months as they moved to shift production to newer, smaller cars. Ford will start local production of the smaller Focus in 2011.

"They need that assistance to get them through," Mr Jones said. That help could come through measures such as cash incentives or interest-free loans.

The next year-and-a-half would be about "managing decline" as the large car market suffers from higher fuel prices and a sluggish economy.

Mr Mulally will visit Ford's Geelong and Broadmeadows factories today.

KEY POINTS

· Car maker seeks taxpayer help to cope with tariff cuts.
· Chief executive meets Prime Minister Rudd in Canberra.
· Union chief backs push for more assistance.

Read more >>

"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.

Read more >>

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.”

Read more >>

Tuesday Column: Is it time to turn off life-support for Australia's car industry?

Politicians love Australian carmakers. What they can’t understand is that Australians don’t.

On Thursday Labor’s Ken Rudd promised another handout of another half a billion dollars to Australian carmakers, this time to encourage them to build ‘greener’ cars.

We already hand Australia’s big four car manufacturers assistance worth more than $1 billion a year – and that’s just from the Commonwealth government. No one knows quite how much South Australia and Victoria chip in as well.

Yet the sad truth that for all the repeated talk about how important it is to have Holden, Ford, Toyota and Mitsubishi here in Australia making new cars - ordinary Australians won’t buy them.

What if it was another industry – with four manufacturers were there probably should be two, production in some plants slowed to a trickle and buyers turning away at the rate of 20 per cent in the last year - would politicians be standing in front of its factories offering even more support?

But then the Australian car industry is unlike any other industry, both in the strange way it operates and in the rate at which Australians are shunning its products...

Australians bought just short of 1 million new cars last year. Back a decade ago half of all of the new cars sold were made in Australia. But last year out of the 1 million total only 201,623 were Australian-made.

We are moving en masse to buying foreign-made cars because they are cheaper, smaller and use less petrol.

And that sales figure of 201,623 hugely overstates our interest in buying Australian-made cars.

One of the oddities of car sales in Australia is that even where new Australian cars are sold, for the most part ordinary Australians don’t buy them.

When the Productivity Commission examined the issue 10 years ago half of all new Australian cars sold went to government and private fleets. Telstra was the country’s biggest car buyer.

Jump forward a decade and 88 per cent of Ford Falcons, 87 per cent of new Mitsubishi’s and 81 per cent of Holden Commodore’s go to fleets.

Only new Toyota Corolla’s are bought in any numbers by ordinary Australians. They are 60 per cent sold to fleets.

Companies, governments and charities buy at these sorts of levels for tax reasons - they can help with salary packaging – and then offload them for a good price while they are still nearly new.

Very few individual Australians buy new Australian cars from the showroom. They buy them “near-new” from corporations, or more likely buy cars made overseas.

When he came to office in 1996 the Treasurer Peter Costello tried to crack down on the bizarre tax-driven ritual of corporate car trading. He asked Australia’s state and local governments to pay sales tax on the cars they bought. He was overruled by his Prime Minister.

Since then the rituals seem to be getting stranger.

If you see more traffic on the road between Sydney and Melbourne this month you could well be watching the drivers of salary-packaged cars trying to get their miles up before March 31.

That’s the cut-off date for calculating their rate of fringe benefits tax. The more kilometers they drive the lower their fringe benefits tax rate.

The accounting firm Deloitte has even sent out a note to clients advising them to “Drive your benefits further – before it’s too late!”

It reads: “Many employees may be on the cusp of the next kilometre threshold used to calculate FBT.... Where this is the case, increasing the kilometres driven can also significantly increase your savings.”

It says an employee who drove 24,000km during the FBT year would owe $6,720 in FBT. Increasing the number of kilometres to more than 25,000km would cut the bill to $3,696 – “a saving of more than $3,000”.

Removing all of the convoluted, expensive and environmentally stupid hidden supports for the Australian car industry would force the manufactures to face up to the reality that Australians don’t want to buy their products at the price they are charging.

It would doubtless force at least one of them to close, most probably Mitsubishi whose daily output is now embarrassingly low. But if that is going to happen, from an economic point of view now is probably a good time. There is a skills shortage in many parts of the country (if not in Adelaide) and it should be as easy as it will ever be for retrenched workers to get new jobs.

Mitsubishi itself is reported to have drawn up plans to close its Australian car manufacturing operations after this year’s election under the code-name “Project Phoenix”. After the ABC quoted from the document Mitsubishi denied that it represented its official position.

Officially the industry wants a freeze on the next round of tariff cuts due in 2010 – perhaps indefinitely. The Labor Party says it is prepared to consider the idea and it gone further and held out the prospect of an extra half a billion for research into ‘green’ vehicles, to be matched by manufactures three dollars to one.

Holden has already done that research. With the CSIRO in the late 1990’s it developed what it called its ECOmmodore. Powered by both a conventional and an electric motor it was said to have twice the fuel economy and half the emissions of a conventional Commodore. It drove the Olympic flag on the first leg of its journey from Uluru in 2000.

Little has been heard of it since.

With continuing tariff, taxation and direct government financial support for the Australian car industry (if not consumer support) Holden might have seen only risks in bringing to market a product Australians might want.

Kevin Rudd is to be commended for attempting to get the Australian car industry to do the sort of thing it should be doing anyway.

But I can’t help thinking that away from an election a forward thinking political leader would tell this sickest, most unloved and perpetually needy of Australian industries to stand or fall on its merits.

Read more >>