Low productivity, meat pies, kangaroos, not Holden cars

The decision by General Motors to retire the Holden name from sales is a sad occasion. With its roots in an 1850s Adelaide saddlery, then production of carriages, motorcycle sidecars and, eventually, a Port Melbourne factory turning out “Australia’s own car”, Holden will perhaps be the most iconic local brand to disappear. Our vehicle industry was sheltered behind the tariff wall for decades. Once Bob Hawke and Paul Keating started dismantling industry protection in the 1980s, the writing was on the proverbial wall for Holden, Ford, Toyota and Mitsubishi. The adjustment was not easy for the manufacturers or workers, especially out of the early 90s recession. But taxpayers softened the blow, funding assistance packages worth $30bn in the 15 years to the time Canberra blew the whistle. In 2017 Holden’s last vehicle factory, in Elizabeth, South Australia, was closed, leaving behind a design and engineering centre at Fishermans Bend in Melbourne that will close next year.

It was money down the drain. As taxpayers have come to learn the hard way, industry assistance delays the day of reckoning. Handouts stop capital and labour going to their most productive uses, which holds back GDP, wages growth and profits. As the Productivity Commission found in its sharp 2014 review of the automotive manufacturing industry, protection “dulls the incentives for firms to improve productivity, seek export opportunities, cease unsuccessful investments and diversify into other industries”. The economy-wide costs do not justify the benefits, it concluded.

We can trace today’s weak growth in wages and slowdown in productivity back to failures of policy to make our economy more flexible. There has been a lack of urgency to improve the economy’s supply side. But it is now catching up with us. Wage growth has stalled since 2012. According to the commission, weak productivity is the main driver, as well as the falling labour share of income. The commission looked at the contribution different industries in the market sector made to the labour productivity slowdown — comparing the 30 years before 2005 and the 14 years after — and found manufacturing alone was responsible for half of the slide. Rather than workers getting skills in sectors that pay better (such as in mining) or companies moving into new areas that produce higher returns for shareholders, industry assistance locked in workers and investment to failing car factories.

It’s unsettling to admit, but low productivity has become a part of our national brand, now replacing Holden cars at the end of the jingle “football, meat pies, kangaroos”. Over 20 years, the strong terms of trade — the world giving us a pay rise simply because we’re Aussies — allowed us to sustain solid income growth despite weak productivity. But that model of sky-high export prices is broken. Labour productivity fell by 0.2 per cent last financial year, the first lapse since the peak of the mining boom. Commission chairman Michael Brennan has called for a new national focus from business and political leaders to combat this underperformance. Ideally, it could lead to a new wave of micro-economic reform and innovation.

The productivity debacle has not escaped the preternaturally optimistic Reserve Bank governor Philip Lowe, who habitually talks up the nation’s “fantastic” economic fundamentals. We have “significant issues” over the longer term, Dr Lowe told the House of Representatives economics committee earlier this month. “The one that worries me most is weak productivity growth,” he said. “I fear that our economy is becoming less dynamic. We have lower rates of investment, lower rates of business formation and lower rate of people switching jobs.” The good doctor reminded MPs that productivity growth was the fountain of sustainable increases in “living standards, real wages, and real asset prices”.

One voice we should listen to is NSW Treasurer Dominic Perrottet, who on Monday called on Canberra to get on the “tax reform bus” and fix the federation. In a speech at a forum examining the Federal Financial Relations Review — a high-powered independent panel announced last August to help NSW reach financial autonomy — Mr Perrottet put pressure on his federal counterpart to help abolish annoying, counter-productive state taxes. Yet if NSW got rid of property stamp duty and opted for a more efficient land tax, the state would lose $1bn in federal GST revenue.

A “grand bargain” among states and the commonwealth that shifts the tax burden towards a broader-based GST or land tax would boost economic growth. But neither Josh Frydenberg nor Labor’s leadership has shown the slightest interest. Better housekeeping on federal-state agreements, increasing states’ incentives to manage funds efficiently and take responsibility for their own policies, would yield huge dividends. As Mr Perrottet argues, we need a national reform agenda. The structural changes of the 80s and 90s have worked their magic, to a point. Getting there required bold policies and strong leadership. As Mr Frydenberg shapes the May budget, we’d like to see more than one-off tax breaks and extra spending on infrastructure. The nation needs business investment, better ideas, skilled workers, less red tape and new icons to replace those on the exit ramp.