Comments on the Productivity Commission's Modelling of the Economy-Wide Effects of Future Automotive Assistance

The Productivity Commission claims on the basis of computable general equilibrium modelling that a seemingly small reduction in assistance to the Australian Automotive industry (a cut in tariffs from 10 per cent to 5 per cent and elimination of the ACIS scheme) would generate an annual welfare benefit of about $500 million. I explain that this implausible result rests on an implicit manna-from-heaven assumption. Using results published by the Commission, I rework their welfare calculations. With parameter values favoured by them, the corrected annual welfare gain is $66 million. With what I consider more realistic parameter values, the welfare effect is negative. Copyright (c) 2009 The Economic Society of Australia.