Dris proposal for national licensing of the electrical occupations

58.3Wider economic impacts on the Australian economy

For this Decision RIS, computable general equilibrium (CGE) modelling was undertaken to quantify the potential economy-wide (or flow-on) effects of an increase in efficiency that is predicted to result from the introduction of national licensing for electricians in Australia. This includes the potential impact of improvements in labour mobility, which allows resources to be more efficiently allocated across the economy.⁴³

The purpose of using a CGE model for this analysis is to demonstrate the potential economy-wide impacts of the national reform to regulation of electricians. CGE modelling is a highly regarded and widely applied tool to measure the economic impacts of policy and regulatory change. For example, this approach has been used to measure the impacts of key reforms, including:

• 
  national competition policy⁴⁴
  
• 
  climate change policies, including emissions trading and a carbon tax⁴⁵
  
• 
  the COAG national reform agenda⁴⁶
  
• 
  tariff reforms.
  

CGE modelling can provide insights into the economic impacts of reforms that an analysis of the direct costs and benefits cannot. Direct measures are valuable because they can target the specific, immediate impacts of change, focused on particular stakeholders or sectors in the economy. CGE modelling takes the analysis further by acknowledging the interdependence, and interrelationships between sectors in the economy. When done appropriately, it provides a picture of how reforms have impacts right across the economy, including for those sectors not directly affected by the reforms.

It should be noted that the CGE modelling was not updated from the Consultation RIS. The differences in the structure of the proposed model and changes to assumptions underlying the model between the Consultation RIS and Decision RIS would impact these results. Accordingly, the CGE modelling results are only indicative of the type and scale of the overall long-term impacts on the economy if national licensing is adopted.

58.3.1The shock to the model

Under national licensing requirements, barriers to entry for the electrical occupations in each jurisdiction are expected to be reduced through, for example, reduction in costs for licensing and an increase in the readiness to work between jurisdictions. This is translated as:

• 
  an increase in efficiency of labour in electrical services
  
• 
  an increase in efficiency of capital in electrical services
  
• 
  reduction in multiple licences fees electricians pay to government.
  

In addition, the reform will affect the amount of public administration that the state and territory governments ‘consume’, as they will have to process fewer licences.

To model each of these impacts, calculations based on the results of the cost–benefit analysis have been drawn upon. Only the ongoing costs and benefits from the analysis have been modelled.

58.3.2Key results

59Key economic mechanisms in play – moving from the initial shock to the wider economy

It is not appropriate to sum the results of the economy-wide CGE analysis and direct impacts estimated through the cost–benefit analysis. Instead, the economy-wide results should be interpreted in the light of how the direct impacts flow through the economy and lead to broader benefits even in those areas of the economy that are not directly affected by the change in licensing arrangements.

60The impacts of an increase in efficiency

When viewed in the context of the Australian economy, it is to be expected that the economy-wide effects of a labour and capital efficiency shock to the electrical services component of the construction and manufacturing industry will be small. Nevertheless, the results illustrate the economic mechanisms that may be in play as the efficiency gain flows through the wider economy.

The improvement in competitiveness in the labour market for electrical services decreases the cost to production in the construction and manufacturing industry. In the CGE framework, this is passed on to users of construction and manufacturing services in the form of decreased prices.

In turn, other industries in the economy experience positive flow-on effects, resulting from a decrease in the cost of production, and hence prices, across many industries in the Australian economy. This mechanism is illustrated in Figure 4.1.

Figure 4.1: Flow-on effects of an increase in competition in the construction industry

Similarly, an increase in the efficiency of capital draws down the cost of production in the construction and manufacturing industry. In the CGE framework, this is passed on to users of construction and manufacturing services in the form of decreased prices.

In turn, other industries in the economy experience positive flow-on effects, resulting from a decrease in the cost of production, and hence prices, across many industries in the Australian economy.

61The impacts of a decrease in fees paid by licensees

A decrease in the fees that electricians pay to government results in an increase in the post-tax income for the electrical industry. This results in a higher level of income across Australia, leading to a higher level of household consumption.

62Macroeconomic results

At a macroeconomic level, the results may be viewed from both sides of GDP, that is, the income side and the expenditure side. This is illustrated in Figure 4.2.

Figure 4.2: Income and expenditure sides of GDP

The modelling shows that national licensing for electrical occupations is likely to increase GDP in a typical year by approximately $22 million.

The raise in income drives an increase in consumption, which is a proxy of welfare, of $18 million in a typical year. The increase in consumption is driven by an increase in household consumption. Federal government consumption increases; however, this is offset by a decrease in state government consumption. The harmonisation of licences induces an increase in investment in Australia, increasing by $10 million in a typical year. This additional investment leads to an increase in the capital stock in Australia of $12 million.

The harmonisation of the electrical licences causes a real depreciation of the Australian exchange rate, as domestic goods and services become cheaper relative to foreign goods and services. This causes exports to increase by $2 million in a typical year. While imports become relatively more expensive than domestically produced goods and services, increases in investment and household consumption boosts demand for imports, resulting in an increase in imports of $2 million in a typical year.

These key macroeconomic results are summarised in Figure 4.3.

Figure 4.3: Key macroeconomic results, $million for a typical year

Source: Monash Multi-Region Forecasting Model and PricewaterhouseCoopers

63Industry results

The industries that benefit under the modelled scenario are those that face lower costs of production (due to the reduction in prices in the construction and manufacturing industry), together with those that are positively affected by the improvement in the terms of trade (that is, export-intensive industries).

Figure 4.4 illustrates the impact on key sectors in the economy. The manufacturing and construction sector benefits most from the proposed reforms. This is driven by the direct impact the reform has on these industries.

Figure 4.4: Key industry results (percentage increase)