By Ian Verrender, ABC Business Editor.
What a spectacle: The self-righteous fury and finger pointing on both sides of the political spectrum that has greeted the long, slow and ultimately unavoidable death of the domestic auto industry.
Who is to blame? Who cares?
The simple fact is that the hollowing out of the Australian economy is gathering pace while our bickering leaders thrash about with no plan on how to arrest the decline of manufacturing and precious little understanding of why it has occurred.
Of even more concern, neither side will acknowledge the direct role they have played in the demise of Australian industry. Nor will they admit to squandering the proceeds of the resources boom, cynically opting to enhance their electoral prospects by delivering instant gratification to taxpayers rather than formulate any long-term plan to enrich the nation.
Economists often refer to the forces wreaking havoc across our economy as Dutch Disease, a term coined by The Economist newspaper back in the late 1970s when North Sea oil discoveries radically transformed the Netherlands economy, squeezing out manufacturing.
In fact, an Australian economist, former Reserve Bank board member and Australian National University academic, Bob Gregory, pioneered the theory years earlier in a seminal work that became known as the Gregory Thesis.
It is no longer a theory as thousands of Australians are discovering to their horror. Our manufacturing industries now contribute just 7 per cent to our economic output, the lowest in the developed world, and falling. In 2004, it stood at 12.5 per cent.
How did we get to this, and how could it have been avoided? It is certainly true the strength of the Australian dollar has been the blunt weapon that has laid waste to vast swathes of Australian industry, rendering it uncompetitive.
But government policy failures throughout the first decade of the new millennium have been a major contributing factor.
Rather than quarantine the windfall gains generated during the early years of the resources boom, the Howard government, swamped by a huge and unexpected lift in company tax, instead chose to lower personal tax rates. The Kevin 07 juggernaut not only endorsed the policy, it went one further.
Returning that cash to taxpayers boosted consumption, fuelled a borrowing binge, lifted inflation and elevated interest rates, making Australia a very expensive country in which to do business.
That was exacerbated by a currency surging on the back of the vast capital inflows required for new mine construction and expansion.
The first public recognition that this was less than ideal came from Ken Henry’s review of the tax system, which, as its centrepiece, advocated the introduction of a resources rent tax.
Under Henry’s model, the resources tax would have funded a cut to company tax, an idea that was broadly embraced by big business but viewed with alarm by a heavily armed mining industry that broke out the big guns on the issue.
What followed was one of the greatest triumphs of vested interest over public policy.
Having botched the introduction of the tax, the Labor government’s response to the industry’s $28 million media blitz was to dump a sitting prime minister and capitulate to the miners’ demands, introducing a neutered tax regime that barely raised a cent.
So toxic was the tax concept to the electorate, the Coalition elevated its removal as a major plank in its stunning election win despite holding no real ideological objection to an extra tax on non-renewable resources.
State governments for generations have been collecting mining royalties and Coalition-led states in Western Australia, Queensland and NSW raised their royalties during the Labor years. The Abbott government, meanwhile, since has applied a new resources tax to onshore oil and gas.
But the tax alone was not a panacea. The more important issue, and a possible solution to the grave situation now emerging in the economy, was what the revenue could have delivered.
Resource rich nations from the Middle East for decades have squirreled petrodollars into sovereign wealth funds that have invested across the globe, preparing themselves for the day when the wells finally run dry.
Norway has stashed $800 billion of oil proceeds into its fund while provincial Canadian governments now are scrambling to build their own funds.
How could such a fund have helped us? By investing offshore, it could have helped stabilise the currency, partially offsetting the dollar-boosting effect of a resources boom, thereby easing pressure on our manufacturing and services industries.
The investment phase of the resources boom rapidly is coming to an end. As mining construction winds down, employment prospects are dwindling. Modern mining is a highly mechanised endeavour.
We now are entering the production phase of the boom as all those new mines begin exporting iron ore. Ordinarily, that should benefit the nation.
The problem is, a large proportion of the proceeds will end up flowing offshore given all our big miners – BHP and Rio Tinto included – mostly are owned by foreign investors.
So here we sit, largely reliant on one market for the export of an unprocessed raw material, a yawning federal budget deficit, an ageing population and a conga line of distressed manufacturers crying out for assistance that in most cases will never arrive.
Republished from ABC’s The Drum with permission.
