It was revealed that Holden had received over $2billion in subsidies in the last 12 years, far more than previously thought.
The Australian government has long argued that subsidising industries is good for jobs in Australia. But most economists would disagree with this as both shortsighted and damaging to the economy.
The argument for subsidy relies on the idea that if it was absent then all the jobs in the industry would be lost, leading to higher unemployment and a lower standard of living in Australia.
The argument against this was first put forward by Adam Smith a then David Ricardo and has been backed up by a further 200 years of economics research. Simon Cowan of The Centre for Independent Studies has argued that if the subsidies were removed then consumers would benefit from lower car prices and the standard of living would rise as resources were redeployed to efficient industries instead.
The argument works like this:
* The car industry in Australia is uncompetitive and inefficient.
* Removing the subsidy means the industry loses money and shuts down.
* Those currently employed in car manufacturing and its supporting industries move to other sectors.
* The resources currently used up by the car industry are released for use by efficient Australian industries.
* All cars sold in Australia are imported from abroad (up from 75%) - these cost less to produce and will become cheaper as firstly the import taxes needed to protect Australian producers are scrapped and foreign producers gain economies of scale.
* Therefore consumers gain by getting their cars more cheaply (approx 1.1 million new cars are sold each year)
* Government can use the money used for subsidies to help reduce taxes or pay for other programmes such as Gonski.
Smith pointed out that competition leads to productive efficiency. Smith and Ricardo showed that with free international trade the most efficient suppliers produce the goods people want with each country specialising in the sectors they are comparatively best at. AS A RESULT EVERYONE IS BETTER OFF.
Australia has never been keen on this argument and despite reforms going back to Hawke/Keating Australia remains the most protectionist country in the G20.
