It is hard to imagine that Australia has ever had a more amiable politician than Steve Bracks. But amiable politicians are notorious for ducking hard issues. And so it was under premier Bracks.
Under his government, there was a continued deferment of the decision to dredge Port Phillip Bay, which would have reduced Melbourne to a second-class port. There was the ban on genetically modified food, denying Victorian farmers the productivity benefits of a proven technology. And there was dithering over developing water sources, which has led to the restrictions and price increases we are suffering.
With this background, his appointment to chair the review into the car industry is worrisome. When in opposition, Prime Minister Kevin Rudd and his Industry Minister, Kim Carr, had stated a determination to protect the car industry. Influential new MP Bill Shorten had said the industry's future was in making hybrid cars. The closure of Mitsubishi's factory in Adelaide has given fresh impetus to fears about the industry's long-term prospects.
Normally, industry reviews would be given to the Productivity Commission, but the Rudd Government clearly did not want to hear a report reflecting the commission's tradition of opposing sector-specific policies.
Instead, it wanted to hear proposals embodying a bit more protection and some subsidies. Bracks is likely to deliver recommendations along these lines.
While useful as staging posts to wind down industry protection, such plans -- when their focus is on help -- are retrograde steps.
All of Australia's trade-exposed industry sectors are more vulnerable to overseas competition than they have been for many years. But offering them support sector by sector will undermine the productivity gains that have underwritten Australian economic performance. Support for a particular sector places a greater burden on others. And the potential availability of such support refocuses businesses away from customers and costs and towards seeking government favours.
The vulnerability of our export and import competing industries results from the high value of the Australian dollar. This is having an impact on competitiveness.
And the excessive strength of the dollar is not caused by the mining boom. Australian imports more than make up for that, resulting in us running a massive deficit in our payments for goods and services. The cause is capital inflow attracted by high interest rates and inadequate local savings.
The inadequate level of local savings reflects a tax system that favours spending rather than saving. Money saved is taxed when it is earned and on the interest it earns. Added to this, household savings are cannibalised by investment into homes. Government planning has created a shortage of land for houses and has fuelled inflation in house prices. Capital gains on these are mainly tax free.
The inflation of house prices has started making major contributions to prices in general, causing the Reserve Bank to raise interest rates in an attempt to cool demand. The higher rates further lift the value of the dollar, compounding the problems of industries such as the car industry.
The solution does not involve papering over the cracks with sector-specific industry policies. Instead, it requires rooting out the causes.
This involves two key changes. The first is removal of the tax-based disincentives to save. This must be accompanied by eradicating the conditions under which savings are diverted into inflated house prices. The artificial shortage of houses resulting from planning restraints is offering people a one-way bet in protecting and enhancing apparent wealth.
But the wealth from higher house prices is artificial and the diversion of funds into speculation on house prices is depriving the economy of productive investment.
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