Report on Holden subsidy case
According to media reports which have revealed issues that are happening in Holden unlike it aims and objectives of its establishment. Holden is a known global manufacturer and distributor of motor vehicles, engines and parts and components. Despite Australian market triumphs, Holden recognized that they needed to be funded by the government at least to sustain its local operations. The report indicates that the company wanted an extra $265 million on top of $275 million and this has led to major issues.
Majority are saying let Holden go since domestic car making in Australia is a dead end industry. This is a ridiculous and bad economic program to carry on discharging taxpayers' funds into sustaining a cost-inefficient local car manufacturer like Holden (Kriesler, 2012). The main reason for the issue being raised is to support the government to remove these car manufacturer subsidies entirely. Since this kind of fund cannot fix the problem, however it is being wasted since it delays the inevitable closure of such business (Schreiner & Yaron, 2001). In a developed country with worthy economic policies, subsidies saved should be diverted into more economically beneficial civic infrastructure projects.
Such a subsidy may be reasonable given the cost, return and includes higher tariffs on companies who decide it’s cheaper to exploit third world labor rather than employ people in the markets that make them rich. The higher tariffs favor local productions (Schreiner & Yaron, 2001). The possible impacts that can be brought by this change are first; consumers would benefits by having available a wide range of imported vehicles made overseas at much cheaper prices. The Australian would find other means of transports as they replace vehicles. All this is as a result of wonders of globalization.
Major stakeholders affected
The first key stakeholder that is impacted by this issue is the Government. The Australian reported that through the government which is presented by Prime Minister and Minister for Industry and Innovation. The Government has failed in its ruling and governing its economic policies (Kriesler, 2012). The Government should look at a long term investment in partnership with some trusted business partners to produce a product in which only we have expertise and to sell it to the world market. The only solution that the government has is to place tariffs and Labor which would risk the wrath of the unions and workers for reducing the subsidies.
The second key stakeholder that is impacted by this issue is Holden Management Led by their Chairman and Managing Director, Mike Devereux. The management should move hand on hand with the current economy of the country, however Holden instead threaten to shut down its local operations if the government won’t help. The only solution for the Holden is to invest in the little they have to reach for their aims and objectives. The Holden should also introduce work choices program which is more labor competitive. Holden is a major employer hence government assistance means more in securing jobs. By Holden shutting down, unemployment will increase in Australia followed by poverty and this will be heard by the government.so there is a need of negotiation between the government and the Holden for the way forward (Kriesler, 2012).
Economic theories in the case
Supply and Demand
Keynesian Economics
Supply and Demand theory
The law of supply and demand is considered one of the ultimate ideologies overriding an economy. According to the law, as demand increases, the price falls and when the supply increases price tends to drop and vice versa. Subsidies have an effect of increasing supply thus prices falls and the demand rises. Asunder from helping Holden GM stay in the market, the government also intended to increase the demand of cars by providing subsidies to Holden. Holden intended to use the provided financial assistance to manufacture more cars that will meet the rising demand for its cars. Being among the best car manufacturing companies in Australia, the government was determined to ensure that such a company does not vacate the market as this would have led to reduced supply thus increase in prices. It would then have been difficult for Australians to consume the locally manufactured cars and would have opted for the cheap imported cars.
(Becker, 1991)
When the demand and supply are equal, the market is said to be at equilibrium. Government’s intervention can determine the market equilibrium (Young, 2009). However, the forces of demand and supply majorly control it. Any shift in supply beyond or below the equilibrium will result to a proportionate shift in demand. The subsidies helped Holden to reduce its production costs and increase its imports.
Keynesian Economic theory
Keynes created the theory in an attempt to understand the great depression. Keynes supported lower taxes and increased government expenditures to kindle demand and pull the global economy out of economic depression. Subsidy is a form of government expenditure. The Australian government offered subsidies to Holden in an effort to stimulate economic activities prevent Australian economy from going into a nosedive and achieve an optimal economic performance.
(Becker, 1991)
Issues that may arise
Providing the $275 million co-investment package from the Australian government and the $260 million is a lot of money to a company such as Holden because it has of late been underperforming. This money will have to be raised from the taxpayers. The tax burden will adversely affect the lives of Australians making life very intolerable (Kriesler, 2012). The government will no doubt have to increase taxes so as to raise the extra monies. Such a move will scare away investors who might opt to invest in other countries where taxes are reasonable. Stagnation and shrinking of the economy are therefore bound to occur (Becker, 1991).
The government decision to finance Holden could lead to an inflation in the country since there will be a lot of money in circulation. The inflation will lead to a rising cost of living. Holden may also use the money to produce large number of cars which may lead to a severe reduction in the value of the cars. The market may also flood and the company will have to sale its cars at the prevailing market prices.
Alternative solutions
Holden is a company with the potential to record an exemplary performance in the Australian as well as global market. The government should stop offering subsidies to the company and instead reduce the amount of taxes that it charges the company (Young, 2009). In such a way the taxpayers will not be suffering for the sake of Holden and Holden will strive to remain in the competitive market. The government should also come up with a strategy to help more people consume Holden’s products. It should bar all vehicle import into the country so that Holden becomes a major player.
The government should formulate and implement policies to control the price of the fundamental inputs in the car manufacturing industry. This will enable Holden to operative at low costs thus increase its potential to expand and increase its profit margin. Withdrawal of the government intervention will allow market forces to determine market conditions and this may act to the advantage of the Australian economy (Young, 2009). The subsidies encourage the Holden not to perform as they are assured of assistance from the government. Holden should also be privatized so that it be sourcing for its own funds rather than waiting for government subsidies.
Bibliography
Becker, G. S. (1991). Economic theory. New York: Knopf.
Kriesler, P. (2012). The Australian economy. St Leonards, N.S.W: Allen & Unwin.
Schreiner, M., & Yaron, J. (2001). Development Finance Institutions: Measuring their Subsidy. Washington, D.C: World Bank.
Young, M. (2009). Government spending. Detroit: Greenhaven Press.
