Government Services

Econtech Pty Ltd, trading as Independent Economics, is strongly committed to independent economic modelling that provides robust analysis and real solutions for the economic analysis needs of government clients.

Government Services News (November 2012):
Business Tax Working Group and Independent CGE model

The Business Tax Working Group established by the Australian Government has released its final report. The BTWG final report includes analysis of the long-run economic impacts of company tax reform using the Independent CGE model.

Working with Treasury

The report explains how the Independent CGE model was developed for this project.

"Treasury and Independent Economics worked together to extend and calibrate the model to make it suitable for modelling the business tax system. The model has been designed to represent economic effects of the company tax system on:

  • the size of the capital stock in each industry;
  • the mix of capital types;
  • labour force participation;
  • the location of multinational profits; and
  • the location of multinational firm-specific assets, such as intellectual property."

Effects of Cutting Company Tax

The BTWG draft final report describes the Independent CGE model results for a cut in company tax as follows.

"The modelling suggests that a company tax cut from 30 to 29 per cent would increase the level of GDP by 0.2 per cent compared with what would otherwise be the case. This increase in GDP is driven mainly by greater foreign investment flows into Australia to fund additional projects that are made viable by the reduction in the tax rate. Under reasonable assumptions in the model, additional capital investment increases the capital stock by 0.3 per cent.

The modelling also suggests that Australian workers benefit from the company tax cut in the long run. The productivity of labour increases with the increase in the size of the capital stock and this flows through to an increase in after-tax real wages of 0.2 per cent and a small increase in labour supply of around 0.1 per cent. Overall, the modelling shows that cutting the company tax rate can deliver an improvement in consumption by Australian households of around 0.05 per cent."

Key Features of Our Model

The report notes eight key features of the Independent CGE model for modelling these economic effects:

  • an up-to-date database representing the Australian economy in 2011-12;
  • rich industry detail that distinguishes 111 industries;
  • sophisticated modelling of production in each industry incorporating inputs from labour, land, fixed factors and nine types of produced capital;
  • reflection of many features of the company tax system including debt deductibility, dividend imputation, tax depreciation based on historic cost, immediate write-off provisions for some investment, and foreign tax credit arrangements;
  • economic rents for location-specific and firm-specific fixed factors;
  • business investment at the margin is funded by foreigners;
  • shifting of profits between countries for tax purposes; and
  • labour force participation responds to the real after-tax wage.

BTWG draft final report

Access the "BTWG final report" (Treasury web-site).

Government Services News (February 2012):
State Sharing of GST Revenue

Since the seminal article by Buchanan in 1950, it has been generally accepted that equalising transfers between states can help to overcome concerns associated with different state fiscal capacities. In Australia, state fiscal capacities are equalised through the Horizontal Fiscal Equalisation (HFE) system used in distributing GST revenue between the states.

The South Australian Department of Treasury and Finance (SADTF) engaged Independent Economics to undertake economic modelling of the welfare and efficiency impact of Australia’s HFE system. This was in the context of the current Australian Government Review of the Distribution of GST Revenues, which was announced in March 2011.

Independent modelled the effects of moving away from the existing HFE system to a system under which GST revenue is distributed between the States and Territories on an Equal Per Capita (EPC) basis. However, this EPC system was modified to maintain the existing equalisation for indigineity.

The main finding of the modelling was that such a move away from the existing HFE system to a modified EPC system would result in a permanent loss in annual living standards of $295 million (on a 2009/10 basis). This loss occurs because a move away from equalisation sets in train economically inefficient interstate migration that is based on state fiscal advantage, notably from royalties received from mineral deposits, rather than economic opportunity.

Because the free movement of population between states works to close inter-state gaps in living standards, the $295 million loss would be shared across all states. The only apparent benefit to offset against this nationwide loss from moving away from HFE would be a saving in the costs of administering the HFE system. However, the annual cost of running the Commonwealth Grants Commission is only $7 million.

This modelling was undertaken using the Independent HFE model. This multi-regional Computable General Equilibrium (CGE) model is the leading tool for analysing the economic impacts of any proposed changes to Australia's HFE arrangements.

Download the HFE Report

Download "Horizontal Fiscal Equalisation: Modelling the welfare and efficiency effects".

Government Modelling

Our work modelling government policies in Australia often uses our Independent CGE model. Below, a distinction is made between our general government policy modelling services, and our tax modelling services.

Government Policies

  • "Economic Analysis of Building and Construction Industry Productivity", Australian Building and Construction Commission: 2008 Update.
  • "Financial Pressures and Key Cost Drivers in the Defence Budget", Department of Defence, 2008.
  • "Review of Modelling Future Defence Industry Supply and Demand", Defence Materiel Organisation, 2008.
  • "Compensating the Department of Defence for the Effects of Inflation", Defence Materiel Organisation, 2008.
  • "Economic Analysis of Building and Construction Industry Productivity", Australian Building and Construction Commission, 2007.
  • "Modelling trends in Workplace Relations", Department of Employment and Workplace Relations, 2007.
  • "Modelling and Reporting on the Economic and Employment Impacts of Various Scenarios for Increases in Minimum Wages", Department of Employment and Workplace Relations, 2006.
  • "The Economic Impacts of Migration: A Comparison of Two Approaches", Department of Immigration and Multicultural and Indigenous Affairs, 2006.
  • "Modelling the Economic and Social Impacts of Various Scenarios for the RAAF Base Richmond", Department of Defence, 2006.
  • "Telstra Scoping Study - Independent Advisor on Possible Tender/Auction Style Approaches to Selling Financial Securities", Department of Finance and Administration, 2005.
  • "The Economic Impacts of the Migration and Humanitarian Programs on State and Territory Economies", Department of Immigration and Multicultural and Indigenous Affairs, 2004.
  • "The Economy-wide Impacts of Alternative Mandatory Renewable Energy Targets (MRET)", Australian Greenhouse Office (AGO), 2004.
  • "Economic Modelling of the post-2005 Textiles, Clothing and Footwear Assistance Arrangements", Productivity Commission, 2003.
  • "Economic Modelling of the post-2005 Assistance Arrangements for the Automotive Manufacturing Sector", Productivity Commission, 2002.
  • "Modelling the Impact of Defence Spending on the Australian Economy", Department of Defence, 2000.
  • "Taxation and Regulation of the Australian Gambling Industries", Productivity Commission, 1999.
  • "The National Schools Model", NSW Education Department, 1994-95 and updated from time to time.

Tax

  • "Fuel Taxation Inquiry Economic Modelling", Commonwealth Government Fuel Taxation Inquiry, 2002.
  • "Estimating the effects of the New Tax System on agency costs", all state and territory governments, 1999 - 2000.
  • Economic Modelling of the New Tax System, ACCC, 1999 - 2000.
  • "Industry Effects of Tax Reform", the Senate, 1999.
  • "General Effects of RBT", the Senate, 1999.
  • "Modelling Industry Effects", Section 25, The Review of Business Taxation (Ralph Report), 1999.

For more information, email Kelly Neill or phone her on 0429 013 334.

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