Bad Questions and Better Questions for the Australian Economy

BAD QUESTION: What will be the future industry mix of the economy?

This question, seemingly most regularly posed on breakfast television, is a superficial glance at a better question. It doesn’t ask why profitable industries exist, and why future industries will be profitable.

BETTER QUESTION: What is the benefit of government support for industries?

Industry support can take many forms. Most common today are tax breaks and concessions, subsidies for infrastructure and training, and procurement preferences. Trade interventions have largely become redundant with trade liberalisation. All are designed to affect the allocation of resources.

Government supported industries are typically those ‘in the national interest’ or are believed to require protection in international markets. ‘National interest’ arguments are often social, not economic, relating to national defence preparedness, employment, or the value of self-sufficiency. The economic arguments are more interesting.

One supporting economic argument is the ‘infant industry’ argument. It suggests that industries, too small to compete with producers who have some competitive advantage, should be supported while they gain knowledge to expand. The Australian film industry is small. It released 237 films between 2005 and 2011, compared to Hollywood’s 5,296 films, Bollywood’s 8,320 films, and Nollywood’s (the Nigerian film industry) 5,800 films. Figure 1. The industry receives support from programs like Screen Australia, and has done for many years. But this begs the question, how does one know when one’s infant industry is all grown up?

Figure 1 Number of films produced (2005-2011)

Data source: Number of films produced (2005-2011) by country. Source: UNESCO

This is an issue that many governments wrangle with. It requires politicians to have an ‘all knowing’ understanding of their country’s economy in order to pick winners. A task any economist will tell you is impossible. The Australian cotton industry is commonly lauded as an infant industry that ‘grew up’. It now has shed almost all assistance (except for R&D support) and is one of the largest, most innovative exporters globally. However, success stories are rare. Reviewing the global evidence, few infant industries ever reach maturity. Those that do are often in an economy that is experiencing some other type of shift in export orientation. The Australian film industry has been receiving support in some form since the 1930s, and shows no signs of moving out of home.

Regardless of the argument, supporting industries with an existing competitive advantage merely results in the misallocation of resources. This skews national industry mix.

BAD QUESTION: Why isn’t the government spending more on infrastructure?

A better question stems from a better understanding of infrastructure spending. Building new infrastructure is an expensive process. Maintaining the existing stock of infrastructure is a cheaper alternative.

In Australia all major public utilities – rail, gas, electricity, broadband – are subject to some form of a ‘user pays’ system as a maintenance contribution. All major infrastructure that is, except for roads. Road infrastructure spending is higher than any other point in Australian history, and significantly higher than the OECD average. Figure 2. Clearly, throwing money at road infrastructure is not improving it. But better management might.

Figure 2 Annual Road Infrastructure Spending (€’m)

Data source: Annual road infrastructure spending (€’m). Source: OECD

BETTER QUESTION: How can the government better manage road infrastructure?

Toll roads.

There have been a number of inquiries into public infrastructure pricing: Planning, Procurement and Funding for Australia’s Future Infrastructure in 2014, Public Infrastructure: Productivity Commission Inquiry Report in 2014, the Henry Tax Review in 2009, and Road and Rail Freight Infrastructure Pricing in 2006. Each has recommended pricing road infrastructure.

Governments may be more than happy price roads (it removes large expenditures from their balance sheets); but constituents haven’t been so keen to shift gears. In fact, toll roads have been so unpopular in Brisbane that users (or, lack thereof) sent RiverCity Motorway Corporation into receivership in 2011. Drivers will almost always choose to use a “free” road over a priced one. However, rather than abandon road pricing altogether, the alternative is to price all roads. The gains on offer from changing approach are large, and without exaggeration, critical when all pundits predict future prosperity tied to productivity.

Singapore was one of the earliest cities to implement road pricing, and after many iterations encouraged other cities to price their own roads. Most famous is London’s “Ring of Steel”, which inspired a “Great Wall of Pricing” for transport economists. They have devised opportunity cost pricing systems in San Diego ($USD8 for fast lane privileges), a simple vehicle emissions price system in Milan, and many more throughout Europe.

In Australia, discussions are gridlocked. Road users are charged $34 billion per year to use the roads but only see $24.5 billion in road spending. For years the accepted pricing practice has been a combination of fuel excises and registration fees. However, as cars become more fuel efficient, fuel excise revenues will fall and governments will be forced to jumpstart discussions.

The Australian Automobile Association has indicated a preference to move towards a ‘per kilometre’ pricing system and a reduction in registration fees and fuel excise charges. ‘Per kilometre’ pricing and congestion tolls would price inner city and congested roads higher the suburban, regional, rural and remote roads. Congestion would ease on our busiest roads, and funding could be better targeted to ailing roads.

Roads are the only major public utility in Australia not subjected to some form of peak pricing. It’s time to take one for the road.

Luttrell, T. Foreign Affairs, Defence and Trade Group. (1997) Background Paper 16 1996-97 Free Trade or Protectionism?: Australia’ History and the Arguments For and Against. [Accessed 15/07/15]

Tucker, I (2008), Macroeconomics for Today, p466.

Infrastructure Australia (2014), Spend more, waste more. Australia’s roads in 2014: moving beyond gambling, p20

Brown, T. (2011). Five Cities with Congestion Pricing. Available from: thisbigcity.net. [Accessed 10/07/15]