Saving the salary packaging industry

The Abbott government is faced with its first big economic policy decision, a bit sooner than I expected. Going into the election Abbott promised to reverse the Rudd government’s tightening of FBT rules for motor vehicles, at a cost of $1.2 billion over the forward estimates period of 4 years. This was to be funded in part by scrapping $500 million of assistance to the domestic car industry.

Since the great majority of cars in Australia are imported, and since much of the benefit of FBT rorts is dissipated through the inefficiency of the required structuring of salary packages, the reversal of the FBT decision yields only a minimal benefit to the domestic industry. It’s unsurprising therefore, that Holden has announced that, unless the government restores Labor’s assistance policy by Christmas, the company will close down. The general assumption is that the resulting contraction of the supply chain would force Toyota out of domestic production as well, so that the entire industry would shut down.

All of this would be comprehensible if the government was pursuing a consistent free-market line. But no one has tried to pretend that the FBT treatment of cars is anything other than a rort. LNP advertising during the election was all about the damage removing the rort would do to jobs in the salary packaging industry and to employers who depended on the rort to reduce their wage bills. Those employers notably include charities and NGOs which could be aided more efficiently with grants – of course, the LNP is going to cut those grants.

Assuming the government is unwilling to see the car industry close down within its first year of office, the sensible thing would be a double backflip, restoring Labor’s policy. That seems highly unlikely. I’ll also be surprised if the government holds its nerve and lets Holden close. So, I suspect we are going to see a half-baked partial solution which will increase the structural budget deficit relative to any consistent policy, and still only defer the end by a few years.

But, even if we don’t make cars any more, we will, at least, have a salary packaging industry that is the envy of the world.

42 thoughts on “Saving the salary packaging industry

  1. I am surprised that you formulate views on the label you choose to put on yourself.

    If you think that is what just happened then you’re a little slow on the uptake. JQ took my position on the FBT concession and the Holden subsidy, brought into focis the fact that I regard myself to be a libertarian, and then attempted to put a wedge between the two. I merely explained that the wedge wouldn’t fit given the angle he was using. That is quite different to saying I’m a libertarian therefor I must think X.

    Further, it is not obvious to me that a libertarian would automatically object to the FBT.

    I agree. And in fact I myself would prefer to lower other taxes before I’d lower FBT. And I’d prefer a general lowering of FBT over selected concessions like doctors grocery bills and employees cars.

  2. There is very little to be said in favour of the position that the appropriate level for the total tax burden is ‘I don’t know what, but anyhow something lower than it is now’.

    But there is even less to be said in favour of the position that any decrease in any tax must be a good thing, and any increase in any tax must be a bad thing, regardless of the circumstances.

  3. @TerjeP
    If I have understood correctly what John Quiggin is saying, the point is that the FBT concessions do favour one set of producers (specifically, the salary packaging industry) and do prop up inefficient work practices (specifically, salary packaging). I guess what you mean is that they don’t favour one producer over another within the same industry, but if so I’m not sure why you would think that an important criterion.

  4. J-D – I will happily concede that the tax system is a mess. I would much prefer a saner system with a lower level of tax and less distortions. However I would not want to remove the distortions if it simple meant more money for Canberra to spend meddling in our lives. I will vote for and support the white acting of the tax system until such time as genuine tax reduction and reform is an alternate option.

  5. Why can’t I package a good bicycle? I can pay $15K for one, and I can guarantee it won’t need petrol in the tank. Perhaps food eaten to provide the fuel for transport by bike should be treated beneficially?

    Personally, I think the whole notion of salary packaging is nothing but a distortion. Without it, life would go on, and tax time would be simpler for the ATO. Perhaps some accountants would lose out, but hey, their skills are readily transferable to more productive pursuits.

    As for Abbott’s self-wedgie, I particularly enjoyed your final sentence in the post. Any chance of an examination of WA’s Liberal government economic and financial skills, in a future post?

  6. @TerjeP
    So you’re endorsing both the position that has very little to be said in its favour and the position that has even less to be said in its favour.

  7. Scrapping the salary packaging rort – now that would be a useful item on the “productivity” agenda.

  8. A different question. Holden builds conventional cars with internalcombustion engines. These are on the way out and in 10 or 15 or 20 years, depending on the learning curve, all new cars will be electric. GM makes some electric models already so it will almost certainly continue to be a very large player in the car market, as wil Toyota. Now will the production economics of EVs be the same as that of ICVs, or different? Assembly plants will I guess look much the same as now, only even more automated. The drive train – battery, wheel motors, and controls – is entirely different and will probably be imported into Australia. It´s hard to see any compelling national interest in maintaining one or two automated car assembly plants in anticipation.

  9. James – I don’t think the shift from ICT to batteries and motors will alter the production economics radically. In any case hybrid electrics are likely to remain more competitive than full electric for some time and they offer a gateway transition in manufacturing skills moving to full electric cars. However changes in other areas such as material science may be quite disruptive. 3D printing of components may alter things substantially also. IMHO.

  10. One point worth mentioning is that if you have no heavy industry capacity you cannot fight even a defensive war. If we are attacked and if the USA does not or cannot supply us for one reason or another then we will rapidly collapse militarily. Our national strategic forward planning ought to include this consideration. You have to maintian domestic heavy industry capacity if you are serious about self defence.

    In the future, large scale regional and proxy conflicts are very likely all over the globe (but probably short of nuclear war). Resource scarcity will give rise to these conflicts. Of course, they will be a negative sum game but that’s not stopped wars before. A realist would support heavy industry support in this country. It would not have to be the making of internal combustion engine cars. Probably a rail and train building industry would be better.

    China wants nothing better than for the rest of the world to ship it raw materials and for China to be the only country making stuff. That would suit their 100 year plan nicely. Of course, the Chinese are in for as much trouble as the rest of us from global warming, so their 100 year plan is rather doubtful in any case.

  11. @Ikonoclast
    The only country with the logistical capacity to sustain an invasion of the Australian continent is the United States. There’s no point in planning for the capacity for military resistance to a land invasion by the USA because there’s no way we could achieve that capacity (if for some reason the USA wanted to mount a land invasion); and there’s no point in planning for the capacity for military resistance to a land invasion by any other country, because no other country could pose such a threat even if it wanted to.

  12. We have decided over the last thirty years that we do not need a textile industry, a food-processing industry, a steel industry, a furniture industry. Now we do not need a car industry. Then we will not need a machining industry (kept in being largely by the car industry). Then we will wonder why so many of us are poor, and no doubt some smart person will explain to us that if only we get rid of the remaining industries we will all be much richer.

  13. Holden need to look seriously at the Aussie version of a Tata people car concept.
    Cleraly it is not going to be sustainable for the car indutry to continue as it is. Given the way the future looks to a lot of people, there could well be a good market for Aussies cheapest car, electric, city bound, 2 seater.

    My understanding of the tightening up of the FBT for car salary packaging was nothing more than asking everyone to justify and evidence the use. Cant see how asking for some evidence of honesty can be an issue. Then again i guess I am kind of naive and old fashioned.

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