Comments on the Productivity Commission’s Modelling of the Economy-Wide Effects of Future Automotive Assistance* Peter B. Dixon 1 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. Keywords: tariff cuts, Productivity Commission, economic modelling. 1. Introduction The main conclusion in the Productivity Commission’s (2008a) latest report on automotive assis- tance is expressed as follows: Indeed, the modelling consistently indicates that further reductions in automotive assistance, particularly tariffs, could be expected to yield net economy-wide benefits. The larger the reduc- tion, the larger the gain to the wider community and economy. Quantitatively, the Commission claims that: Relative to the economy, the estimated net impacts appear small. For example, the ‘reference case’ scenario R1, which models the scheduled reduction in the tariff to 5 per cent in 2010 and removal of ACIS 2 by 2015, yields a 0.06 per cent gain in annual national output and a 0.06 per cent increase in the community’s ‘economic welfare’ (as measured by real adjusted GNE). Never- theless, these small percentages equate to around $600 million and $500 million respectively. Furthermore, they would accrue each year in perpetuity, and would be sizeable in present value terms. 1 Center of Policy Studies, Monash University 2 Automotive Competitiveness and Investment Scheme. *The author thanks Nicholas Gruen, Maureen Rimmer and Robert Waschik for valuable comments on an earlier draft. JEL classifications: C68, F13 Correspondence: Peter B. Dixon, Center of Policy Studies, Monash University, Clayton, Vic 3800, Australia. Email: peter.dixon@buseco.monash.edu.au ECONOMIC PAPERS, VOL. 28, NO. 1, MARCH, 2009, 11–18 11 Ó 2009 The Economic Society of Australia doi: 10.1111/j.1759-3441.2009.00004.x