End of the road for good money after bad

The $100 million manufacturing-industry package announced by Tony Abbott this week has incited some quite irrational responses.

It has been slammed as inadequate by Bill Shorten, South Australia Premier Jay Weatherill, Greg Combet and union leaders, who have variously described it, among other things, as "laughable," "insulting," "cruel," "too little, too late" and as showing no regard – indeed showing contempt – for the automotive workers who will lose their jobs when General Motors shuts down local manufacturing in 2017.

In announcing the package, Abbott made it clear that the $100 million "growth fund" (financed by the federal and two state governments, and perhaps GM itself) would be dedicated to helping component makers adjust their business models and product ranges, to giving grants to new or existing businesses that establish or expand new manufacturing operations in South Australia or Victoria (with a preference for those employing former auto industry workers) and grants to help the commercialisation of research and development in the component manufacturing sector.

How the fund is actually managed will be determined by the outcomes of reviews of the South Australian and Victorian economies that will be most affected by GMH’s closure but there was nothing in Abbott’s announcement that related directly to the GMH employees who will lose their jobs. Neither should there have been.

GM won’t, on its announced timetable, finally cease manufacturing in Australia until the end of 2017, so the job losses will be phased over the next four years, not weeks or months. Some of the employees will no doubt be looking for, and finding, new jobs long before then.

GM might not be what it once was but it remains a very substantial company. It will fund redundancy payments for the affected employees. It has already foreshadowed a $US100 million charge against its December quarter earnings for cash payments of exit-related costs, including employee severance-related costs and has said it expects more charges to be incurred through to 2017 for further cash severance payments.

So there is no need for the Federal Government to provide cash payments directly to the 2,900 employees – that’s GM’s responsibility.

The Federal Government has, since 2008, given labour market "adjustment support" to auto industry employees affected by the shrinking of the industry after Mitsubishi departed. The "intensive" services are designed to help them find a new job as quickly as possible and offers employment subsidies, equipment and training.

Those services and support are available to the auto industry supply-chain, including the components suppliers who will face significant stresses as Ford and GM cease local manufacturing. The job losses in that sector are unquantifiable in advance but could be multiples of the GM workforce – depending on how the sector responds to the prospect of those exits in 2016 and 2017.

It is really to that sector that the new $100 million fund is directed. Whether that’s enough, or not, won’t be known until after the two reviews and probably not until the impact of the exits really begins to bite and the sector’s response has been observed.

If more funding were needed, it is at that point that the issue of the fund’s size would need to be revisited. The criticisms of the package are premature.

Abbott has made it clear that his government isn’t going to placate "rent seekers" or those chasing corporate welfare. The economy has always evolved – most notably when the tariff walls came down in the 1980s and 1990s – and there have always been winners and losers from that process.

The experience of the tariff reductions is that allowing capital to flow freely to the most productive sectors rather than providing subsidies for it to remain in uncompetitive sectors can be a very positive experience for the economy and the people affected. No-one still laments the effective disappearance of the local clothing, textile and footwear manufacturing sector.

The government was right not to bow to the pressure to throw even more taxpayer funds at GM and, for the moment at least, Abbott’s package appears both reasonable, given the fund’s objectives, and reasonably well-directed towards generating new and competitive activity rather than subsiding the old and increasingly uncompetitive.