Mrs GALLUS(9.37 p.m.) —I am glad to see that neoclassical economics is not dead in this place. We have certainly had some keen defenders of that position tonight. I would like to take a position slightly different from that taken by the member for Curtin (Mr Rocher) and the member for Corangamite (Mr McArthur). I say to the member for Corangamite: I think you have misunderstood where we are coming from. I think you see people who are arguing against what the Productivity Commission is currently doing as some sort of new-fashioned Luddites who are buried back in the past and are seeking a world of the 1950s, the 1960s, the 1970s. I suggest to the member for Corangamite that perhaps the reverse is the truth and that he is in a world that has already passed.

The war against tariffs has been won. Nobody in Australia—least of all, I suspect, our very parochial state Premiers—is arguing that we should go back to protecting our industries with high tariffs. High tariffs were one of the bad things that happened to the car industry. They put up prices and they protected an expensive, low quality car. By bringing down those tariffs we got a much more efficient industry.

I would like the member for Curtin and the member for Corangamite to stop taking a position because it is a position and to actually think through some of the issues. I ask them to have a look at the recent report of the Productivity Commission not with a point of view that all tariffs are bad but by putting the question: what is the standard of this intellectual analysis? I say to the member for Corangamite that the intellectual analysis of the report of the Productivity Commission is one of the poorest examples of intellectual thought that I have ever seen in a report. I would like to address this.

In doing so I am very much aware of the nature of the bill we are discussing tonight, which provides for the formation of the Productivity Commission by merging EPAC, the BIE and the Industry Commission. I will refer later, if I have time, to some of the policy guidelines the commission has been given by the Treasurer (Mr Costello). I would like to point out where—if we take as an example the Productivity Commission report into the automotive industry—they have failed to follow the guidelines given by the Treasurer.

Let's address this report which has been the source of controversy and contention, the report which recommends that we continue to reduce tariffs after the year 2000 by 2½ per cent per year. That got a very strong reaction from the automotive industry and from the state premiers who knew what it would do to their areas.

Mr McArthur —What's new about that?

Mrs GALLUS —Nothing is new about that. But let us look at the argument that got them there. There are three arguments put up by the Productivity Commission for that continual high reduction of tariffs—2½ per cent per year after the year 2000, when we will already be down to 15 per cent. Their economic model—the Monash model created by Professor Peter Dixon—shows that there will be an increase in GDP of 1.6 per cent. There are a few interesting assumptions in that model. First of all, they gave us the wrong year. The comparison they made was not with the year 2000, when tariffs are going to be down to 15 per cent, with a five per cent tariff; they used the 25 per cent tariffs, the level at which they are now. What sort of comparison was this? They were going back into a past, to an unreal world that does not exist, instead of looking to the future. So that great big increase in GDP was predicated on a 10 per cent higher tariff than would be the case. That I find somewhat intellectually dishonest. I have pointed it out to the commission. I have even done the calculation in their appendix. If you do a mathematical calculation on the information they have applied in the appendix, you get the figure down to 0.9 per cent. That is fine. I will now dispute that that 0.9 per cent is a relevant figure at all.

Models have to have assumptions in them. One of the things that Peter Dixon will admit is wrong with his model is that it does not have the capacity to take in regional effects. So regional effects are out of this model. Quite interestingly, Chris Murphy has a model—the MM2—in which he did manage to look at regional effects. According to Mr Murphy's model we get a 1.2 per cent drop in South Australian state product as a result of the change in tariff. That is somewhat different from what we got from the Monash model and also different from the national model. So we have got my model against your model.

Let's go back to the Monash model. The Monash model does not include in it at present an adjustment for the money that the government loses from losing the income from tariffs. We have to make up that money somehow, but it is not predicated into the model at all. There is no doubt—I have discussed this with Peter Dixon—that that will change the end result prediction on GDP and bring it downwards. So they are three reasons not to take it.

Let me now go deeper into that model and talk about the assumptions it makes, which are absolutely key to the model, about the CPI. It says that as imported cars come in at that lower price with the lower tariffs, overall CPI will drop and we will get better consumer purchasing power. But there are some fundamental problems with that. First of all, there is an assumption within the model that domestic car prices will also come down under pressure from imported cars. This ignores the fact that when domestic car sales drop their unit price goes up, and there will be a limit to how much the car manufacturers can do that, because the higher unit cost forces up their prices.

Secondly, what will happen as more imports come in? The dollar will fall. As the dollar falls, those imports will become relatively more expensive and we will undo some of those gains in the CPI. As the dollar falls, the CPI will go up as those imports become more expensive.

Thirdly, let us look at the current account deficit. With the importation of cars, there will be pressure on the current account deficit. It will get into a bigger deficit situation. When it does that, there will be pressure on long-term interest rates, and that pressure will again put up the CPI. So all of those factors undo the major assumption in that report that the GDP is going to increase as a result of the reduction in tariffs. It is not so.

I now move on to the second argument that is put forward by the Productivity Commission—that is, the cost to consumers, which is quoted at $1.9 billion. The report states:

The Commission estimates that in 1995 purchasers of new motor vehicles paid $1.9 billion extra for their vehicles because of the tariff.

Again, the report is intellectually dishonest. Why are we talking about 1995? Tariffs in 1995 were 27.5 per cent. The comparison should be made with what they will be in the year 2000, which is 15 per cent. It is intellectually dishonest. But it is not only that. There is another problem with that cost to consumers. It does not take into account the fact that the industry itself will be losing income; therefore, the cost to consumers overall will go up.

There is another argument that the commission failed to put in relation to the cost to consumers, and this is something we have mentioned before. The commission forgot to put in the added cost of the taxes the government is going to impose because of the loss of income from tariffs. If you do the sums—and I address this to the member for Corangamite as well—the loss to consumers is not $1.9 billion. Do you know what that loss is? It is $40 million. That is the extent of not only the false calculations but also the intellectual dishonesty, because the major fault in there was taking the 1995 figures instead of the year 2000 figures.

Let us get to the third argument that the Productivity Commission puts forward. The report states:

A halt to assistance reform would remove the most effective incentive the industry has had to improve its performance. It would put at risk the gains made so far and jeopardise the industry's chance of ever catching up to its international competitors.

There are a number of assumptions in this. The first assumption is causality—the tariffs came down and the industry made the gains it did in efficiency and all other aspects. You cannot claim causality because two things happened at the same time—that is an elementary logical statement. There were many pressures on the industry at that time to get more efficient—to survive being one of them. Survival, I have to say, is a great incentive. That is one of the great incentives the industry has at the moment. I tell you what, it does not need any incentives such as tariff reduction to try to survive.

Second, let us accept the assumption of the commission that causality is there. It then assumes that, because it has worked in the past, it is going to work in the future. That is equivalent to saying, `It's all right. Here's the medicine. One sleeping pill was really good for you, so why don't you take the whole bottle?' A little bit of medicine may be good, so let's give you a whole lot because that has got to be a whole lot better. It is a false argument.

In doing this, the Productivity Commission has committed a logical sin that I do not think would be accepted by a year nine high school student. This is what worries me. It is not so much that we have had this recommendation of cuts and tariffs per se, but how the Productivity Commission got there—and it got there by dishonesty.

These arguments the commission has used can all be blown away. They are mistakes that children would not be expected to make, yet here we have a $26 million a year commission making these elementary mistakes. I would refer the commission back to the guidelines given to it by the Treasurer, one of which was to:

. . . improve the overall economic performance of the economy through higher productivity in the public and private sectors in order to achieve higher living standards for all members of the Australian community . . .

This brings us back to the regional effect of tariff reduction on the South Australian economy. South Australia is dependent on its automotive industry. It is not a happy fact; it is a sad one. But it is true. Pressure on that industry has the chance of driving Mitsubishi or the other manufacturer overseas. Mitsubishi is my interest; it is in the electorate where I live.

That brings me back to another question. Just where is the Productivity Commission coming from? There is a subtle message in this report. We all know the conclusion is the same premise the commission started with, but there is also another message if you read the report—that is, the Productivity Commission already thinks one of the manufacturers in Australia is doomed. Read the report. It does not say it in so many words, but there is an assumption that four car manufacturers is one too many. I suspect we might see this come up in the revised model that will appear in the full report. I do not believe that the commission in its final report can use the same assumptions that are in the Monash model. I think we might see an assumption that looks at one car manufacturer leaving Australia.

But what would happen to South Australia if that occurred? You would immediately lose 3,000 to 4,000 jobs. And what about the component manufacturers that are there to support South Australia? They would go. An assumption common in economic models is that labour migrates to where the jobs are—but there are no other jobs in South Australia for labour to migrate to. The people who have been working in that industry are not going to pick up their caboodle over their heads and walk to Melbourne with their families looking for jobs because they know the jobs are not there either. We are going to have increased unemployment, and that is something else that we have not put into the model.

What about the increased DSS payments to those people who lose their jobs, not to mention the loss in payroll tax to South Australia? Once that happens and you get that emigration out of South Australia you get an increased loss of confidence, with more businesses closing up and leaving the state. This is why Premier Olsen is there at the door of the Prime Minister saying, `Don't listen to the Productivity Commission because it is giving you bad advice. It is giving you dangerous advice.'

Finally, in the couple of minutes that are left to me, I would like to look at just one other aspect of the report: the international trade issues section. I have never in my whole life seen anything so trite and trivial as the section that this report has devoted to international trade issues. We have not heard any mention of Indonesia and the Indonesian car. What chances are there for Australia if Indonesia is putting out its own car? We have all the component manufacturers here. What sort of advantage can we have with that? What sort of bilateral relations? Could we help with the car industry? The report does not look at that. It does not look at the after-parts industry and the agreement with Japan. Where are the possibilities for the industry there? And there are possibilities. But this report ignores them.

Let us just have a look at the stunning recommendations that come out of the section on international trade issues:

The commission recommends that the government continue to aggressively pursue trade liberalisation both unilaterally and through multinational negotiations.

Wow! What a stunning recommendation! Can we imagine it recommending anything else? What would happen if it put in a recommendation to not pursue trade liberalisation? It is not that the recommendation is wrong, but it is so trivial. Of course that is what governments are going to do. Why would you bother to make a recommendation? It is an empty motherhood statement. That brings us to its only other recommendation under international trade issues:

The commission recommends that the government consult with industry when establishing priority areas for trade negotiations.

What a stunning intellectual recommendation that is! Would it like to suggest that we don't consult with industry, that government goes ahead and ignores industry altogether? What I am trying to get at tonight is that the quality of the work that the Productivity Commission put out in the automotive report was not of a sufficiently high standard and we—the country, the parliament and the government—deserve a much higher standard from this commission.