Dris proposal for national licensing of the plumbing and gasfitting occupations

1.13Wider economic impacts on the Australian economy

Computable general equilibrium (CGE) modelling was undertaken to quantify potential economy-wide (or flow-on) effects of an increase in competition and efficiency that is predicted to result from the introduction of national licensing for the plumbing and gasfitting occupations. This includes the potential impact of improvements in labour mobility, which allows resources to be more efficiently allocated across the economy. ²⁰

The purpose of using CGE in this analysis is to demonstrate the potential economy-wide impacts of the national reform to the regulation of plumbers and gasfitters. CGE 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 policy²¹

climate change policies, including emissions trading and a carbon pricing²²

the COAG national reform agenda²³

tariff reforms.

CGE modelling can provide insights into the impact of reforms that an analysis of the direct costs and benefits cannot. Direct measures are valuable in being able to 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 bigger picture of how reforms have impacts right across the economy, including for those sectors not directly impacted 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.

The shock to the model – the scenario modelled for this Regulatory Impact Statement

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

an increase in efficiency of labour in plumbing and gasfitting services

an increase in efficiency of capital in plumbing and gasfitting services

fees for multiple licences plumbers and gasfitters no longer pay to government.

Additionally, the reform will impact on 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. Each option for the plumbing and gasfitting occupations was modelled separately. The assumptions outlined in section 4.1.7 are the same for each option. Only the ongoing costs and benefits from the cost–benefit analysis were modelled.

Key results

Key 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 as providing insights into the mechanisms by which the direct impacts flow through the economy and lead to benefits in those areas of the economy that are not directly impacted by the change in licensing arrangements.

The 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 plumbing and gasfitting services component of the construction 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 increase in productivity of labour in the plumbing and gasfitting services sector decreases the cost for users of these services, particularly in the construction industry. In the CGE framework, this is passed on to users of construction 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-through 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 industry. In the CGE framework, this is passed on to users of construction services in the form of decreased prices.

This mechanism is illustrated in Figure 4.1. Note that given the relative inflexibility of wages in a downwards direction, nominal wages may be unlikely to decrease, but real wages may be lower in the longer term.

The impacts of fees no longer paid by licensees

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

Macroeconomic 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 side of GDP

National licensing for the plumbing and gasfitting occupations for each of the options results in an expected increase in GDP. Table 4.34 presents the approximate increase in GDP expected for a typical year for each of the options.²⁴

Table 4.34: Impact on GDP caused by national licensing of plumbing and gasfitting for each option ($ million)

GDP	Two tier	Three tier, sub-option 1	Three tier, sub-option 2
Typical year	45	5	18

Source: Monash Multi-Region Forecasting Model and PricewaterhouseCoopers.

The rise in income drives an increase in consumption. Table 4.35 shows the typical year increase in household and government consumption. The consumption of the Australian Government increases, while at the state level, consumption shrinks due to the ongoing licensing authority operating costs being more than offset by the reduced administration requirements by state governments. Government consumption is linked to household consumption; therefore, as households consume more so too does government. The harmonisation of licences induces an increase in investment in Australia, which causes an increase in capital stock.

Table 4.35: Impact on household and government consumption and investment caused by national licensing of plumbing and gasfitting for each option ($ million)

	Two tier	Three tier, sub-option 1	Three tier, sub-option 2
Household consumption	14	1	5
Government consumption	5	0.4	2
Investment	18	2	6

Source: Monash Multi-Region Forecasting Model and PricewaterhouseCoopers.

The harmonisation of the plumbing and gasfitting 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. While imports become relatively more expensive than domestically produced goods and services, as incomes rise and household consumption increases, the demand for imports also increases. Table 4.36 shows the impact of the national licensing of plumbing and gasfitting on exports and imports in a typical year.

Table 4.36: Impact on exports and imports caused by national licensing of plumbing and gasfitting for each option ($ million)

	Two tier	Three tier, sub-option 1	Three tier, sub-option 2
Exports	33	5	10
Imports	7	0	2

Source: Monash Multi-Region Forecasting Model and PricewaterhouseCoopers.

Industry results

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

Figure 4.3 illustrates the impact on key sectors in the economy for each option.²⁵ The mining sector benefits the most from the national licensing options. This is driven by the change in the terms of trade and the fact that the mining sector is a large consumer of goods and services from the construction industry, where the prices have fallen.

Figure 4.3: Key industry results, percentage increase