The price of protectionism

by Stubborn Mule on 24 August 2013 · 6 comments

An  article in Friday’s Australian began

Ford has blamed Kevin Rudd’s $1.8 billion fringe benefits tax overhaul for halting production, forcing at least 750 workers to be stood down in rolling stoppages that will further imperil Labor’s chances of retaining the nation’s most marginal seat.

and goes on to report that the Federal Chamber of Automotive Industries has called on Labor to reverse its changes to the application of fringe benefits tax (FBT) to cars.

So what exactly has Labor done to put these jobs at risk?

The previous regime provided two mechanisms to determine tax benefits for expenses incurred for cars used for work purposes:

  1. the “log book” method, whereby the driver maintained records to show what proportion of their use of the car was for work rather than personal use, or
  2. an assumed flat rate of 20% work use of the car (regardless of how often the car is actually used for work purposes).

The government has eliminated the second option. So, the estimated $1.8 billion saving is due to the fact that a significant number of drivers using the 20% method could never come close to a 20% proportion of work use if they took the trouble to maintain a log book. Either that or they don’t think it is worth the effort to maintain the log book records.

While the elimination of this tax-payer largesse for drivers may come at a cost to workers in the car industry, does it really make sense to reverse the changes to save 750 jobs? These jobs would be saved at a cost to the tax payer of $2.4 million per job. Now these are just the jobs at Ford and (for now at least) we should acknowledge that some Holden jobs may also be saved, bringing the cost closer to $1 million per job.

The car industry in Australia has long benefited from government support, but surely there are better ways of saving these jobs. A job guarantee springs to mind.

Of course, industry protectionism is far from unique to Australia and this week I had my attention drawn to an extreme example in the small central American nation of Belize.

On 7 August, the parliament of Belize met for the first time since April. With so long between sittings, there were many bills for parliament to pass that day. Included among these was one which increased the already high import tariff on flour from 25% to 100%.

Wheat

Why such a dramatic increase? For some time, local bakers had been buying their flour from Mexico for 69 Belize dollars per sack (approximately A$38). It was hard to justify buying the more expensive local flour at BZ$81 per sack (A$45). The new tariff will push the price of Mexican flour up to around BZ$110 (A$61), which is good news for the domestic flour mill and its employees.

That domestic flour mill is operated by Archer Daniels Midland (ADM), one of the top 10 global commodity firms. This is the same ADM which is in the process of trying to buy GrainCorp, Australia’s largest agricultural business.

But back to Belize. ADM’s website proudly declares that it “employs more than 40 people” in its Belize mill. Presumably, parliament had an eye to saving these jobs from the threat of cheap Mexican flour when it hiked the import tariff. With a population of only 335,000, Belize is 1/70th the size of Australia. You could argue that saving 40 jobs in Belize is the equivalent of saving 2,800 in Australia and that this is a far more effective form of protectionism than reversing FBT reforms.

But protectionism always has consequences and in Belize these are easier to see than is often the case.

Bread in Belize is subject to price control, along with rice, beans and even local beer. By law, bakers must sell “standard loaves” of bread for BZ$1.75. The August sitting of parliament may have increased flour tariffs, but it did not increase the price bakers could charge for bread.

Bakers in Belize will see their profits squeezed, job losses may follow and there are more bakers in Belize than workers at the ADM mill. Needless to say, the Belize Baker’s Association is lobbying for an increase in the controlled price of bread.

Perhaps it is time for the Belize government to consider abandoning the flour tariff and trying a job guarantee instead.

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{ 6 comments… read them below or add one }

1 Mark August 25, 2013 at 6:41 am

Mule,

Great piece, but you have understated the number of job losses. The leasing industry has already seen 300 jobs go as a result of this policy change. These jobs are already gone.

To the extent that car production is effected you can see more jobs go in related industries such as car parts. I guess a lot more companies are hanging onto staff thinking that a change of government in 2 weeks will see this policy repealed.

2 Stubborn Mule August 25, 2013 at 9:05 am

@Mark the article referred to a potential job losses at Ford. I take your point that I did not factor in leasing industry jobs, although I did more than double the figure to loosely account for Holden and others. Let’s say that the job losses are as high as 1,800. The cost of saving those jobs would still be $1 million per job. We could be more conservative and double the number again (although 3,600 across leasing, manufacturing and related industries simply as a result of this change strikes me as wildly exaggerated) and it would be $0.5 million per job. Why pay $0.5 million per job when, instead, these people could be employed directly through a job guarantee at the minimum wage?

3 Baumie August 25, 2013 at 3:51 pm

@mark the next question for you is how many Australians are paying over the odds for a car. The money that goes as subsidy is eventually represented by inflated car costs for every Australian not just those in car related industry. @mule you have not included the cost in the broader community of car users in your revised number. It would be comfortably in the millions per job given we sell 1.112million per year (2012 numbers).

4 Tom Davies August 25, 2013 at 5:58 pm

Given that many of the employees who lose these jobs will soon find others, and that they are not a perfect substitute for people currently looking for work, isn’t the cost per “long term unemployed person prevented” far higher than the figure you give? Not to mention that a $1.8B income tax cut would stimulate spending, creating more jobs.

5 dan August 26, 2013 at 1:49 pm

Here’s the definition of Chutzpah: the bloke who cried loudest is the head of Hyundai Australia http://www.news.com.au/business/hyundai-australia-says-fbt-changes-are-a-8216hand-grenade8217/story-e6frfm1i-1226700204636 which as far as I know manufactures zip in this country.

Clearly the loophole had less to do with protecting local manufacturing jobs than the industry liked us to believe…

6 zebra September 5, 2013 at 11:18 am

I’ve noticed that the egregious radio ads pointing out the damage to the lives of nurses and fireman have stopped a week ago so the Salary Packaging Industry: (motto: because we can, I mean because we care) is obviously convinced LNP will win and saving their money to help prevent further job layoffs at Toyot or whatever the logic is.

BTW “send him to Belize” is a euphimism used in Breaking Bad for whacking someone.

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