This article was originally published in The Age on 7 September 2015. Read original here.
The aims behind forcing car makers to close were superficial, and the ramifications will be dreadful.
Don’t waste any time worrying about it: Australia is heading into a recession. There are several indicators pointing in this direction, but what will guarantee the slide into the economic doldrums will be the fallout from the Abbott government’s first policy “initiative”.
The current bleak backdrop has set the scene. The number of negative economic indicators seems to grow every time a new set of statistics is released.
Real average wages are falling, unemployment is up, the quality of work is declining (fewer full-time jobs), the terms of trade have moved adversely, manufacturing is so parlous we may soon even lose our ability to make steel, capital investment has slumped, and the banks are forced to invest in a wildly overheated property market because there’s no industrial expansion to speak of.
Some of these indicators are heading south thanks to international factors, but several are distinctly the result of partisan policy-making and blind-eye turning, such as the deliberate under-manning of inspectors to supervise the Section 457 foreign employee program.
But the coup de grace that will deliver Australia into recession is the shabby deal by Treasurer Joe Hockey and then-Acting Prime Minister Warren Truss to force the carmakers to shut down their manufacturing operations.
The aims were superficial. The ramifications will be dreadful.
The Government would save a few dollars by cancelling the Automotive Transformation Scheme, and the Nationals would get a few cents to distribute to rural voters on marginal farming land. That was, apparently, as far as the economic planning went in their little plan. No attention seems to have been paid to the fallout, which would only affect automotive workers / Labor voters anyway.
Even though Ford is not scheduled to close its operation until 2016 and General Motors and Toyota in 2017, the chickens have started to come home to roost already.
The normal cycle in the car industry is three years for upgrades and six years for a complete new model. As neither of these are happening at the three local factories, designers and engineers are already being laid off.
Even taking into account the continuing design and development operations at GM and Ford, hundreds of engine designers and production engineers have been let go, weakening current employment numbers.
But that’s the tip. The iceberg is still to come.
When all the car factories close, that will add about 12,500 people to the dole queue. Most of the parts suppliers will also close their plants, adding a further 33,000 people.
However, when you apply the six-to-one multiplier effect endorsed by the 2008 Bracks report on the car industry and the assistance provided, Senator Nick Xenophon reckons there will be between 150,000 and 200,000 people out of an automotive-related job.
The Department of Industry reckons there are around 930,000 people employed in manufacturing around the country. So if 200,000 automotive workers lose their jobs, that will represent more than 21 per cent of the entire manufacturing workforce.
Yet no one in the Abbott government seems to be aware of the calamity that is quickly approaching. It is going to be a body blow, not just to unemployment levels and welfare payments, but also to manufacturing output due to the loss of $29 billion in local value-adding. In addition, the trade deficit will expand because a further 150,000 vehicles will have to be imported to meet demand – and Australia will also lose the benefit of Toyota’s annual export of 90,000 vehicles to the Middle East.
Add to that the elimination of the car industry’s capital expenditures, which were running at a reduced $1 billion a year after the Global Financial Crisis.
Contrary to popular belief, GM and Toyota were well advanced on planning for new models that would have been exportable. Hockey’s 2014-15 budget papers showed the car industry was proposing to invest $3.8 billion in new models over the four-year cycle.
That total might not look grand in comparison to what the mining industry was investing when commodity prices were at historic highs, but it would probably be gratefully received now.
The simple sums on the car industry make the Hockey-Truss decision look suspect at best, and bloody-minded at worst.
Assuming those 45,500 full-time automotive workers in the carmakers and the Tier One companies earn the average manufacturing wage of $69,000, they would pay $642 million a year in tax. If the 200,000 indirect employees in Tiers Two and Three were used, say, 25 per cent of the time on automotive projects, they would pay $705 million in tax, making a total of $1.35 billion in tax receipts from automotive manufacturing workers in a single year.
Given that the maximum assistance available under the ATS was $6.6 billion over 10 years to 2020, or $660 million each year, it is clear the car industry repays the government’s investment each year, twofold. That’s a pretty good return on any investment, and one unlikely to be emulated by Truss’s agricultural sector.
Some of Hockey’s calculations have proved wide of the mark in the past two years, where his performance as a predictor of national debt has made former treasurer Wayne Swan look like Nostradamus. But even Hockey should be able to see that the automotive sector was a net contributor to the economy, even on the most superficial level.
When you add in the intangibles such as balance of trade, export income, rapid technology adoption by the carmakers and technology spin-off to smaller, Australian suppliers, the car industry’s absence will be felt long after 2017.
But it’s the 200,000 people that will hit the dole queue soon after next year’s federal election that will seal Australia’s fate. When those people lose their spending power and start drawing on the public purse, there will be a recession all right. It’s just a question of how deep, and for how long.
Ian Porter is a manufacturing analyst and a former business editor of The Age.