Chris Nobbs

ECONOMIC IMPACT OF NORFOLK ISLAND REPORM SCENARIOS REPORT (2014) ... by Centre for International Economics Canberra & Sydney

Assistant Minister for Infrastructure and Regional Development, the Hon. Jamie Briggs MP has asked me to release the independent analysis of the Norfolk Island economy by the Centre for International Economics (CIE).

The executive summary of the CIE report which notes substantial economic improvements from the extension of the Australian taxation and social security systems:

To read this Report in full Click here

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Table of Contents
1. Introduction………………………………………………….……….3
1.1 The brief
1.2 Background information supplied
2. Differences in results between CIE2006 and CIE2014……………….4
2.1 The 2006 report
2.2 The 2014 report
2.3 Comparison - are the differences significant?
3. Explaining the differences……………………………………….……7
3.1 Model structures
3.2 Model parameters and data
3.3 The starting situations
3.4 The baselines
3.5 Reform scenarios
3.6 Tourism
3.7 Norfolk Island Government finances and Commonwealth support
4. Concluding remarks…………………………………………………..11

References / Contacts

Michael Common (BA, BPhil University of Liverpool) is an English economist. Between 1968 and 1988 he held teaching appointments in economics departments at the Universities of Liverpool, Southampton and Stirling. From 1988 to 1998 he was a Senior Fellow at the Centre for Resource and Environmental Studies (now the Fenner School of Environment and Society) at the Australian National University, Canberra. In 1991 he served as an Associate Commissioner for the Industry Commission Inquiry into the costs and benefits for Australia of acting to reduce greenhouse gas emissions. From 1998 to 2003 he was Professor and Deputy Director at the Graduate School of Environmental Studies at the University of Strathclyde, Glasgow. He has held visiting appointments at a number of institutions including Rutgers Graduate Business School, the Open University, the University of York, and the Vienna University of Economics and Business. He is the author of many papers and a number of books, including being co-author of the globally successful textbook Natural Resource and Environmental Economics, now in its fourth edition. Currently retired and living on the Isle of Bute (Scotland), he remains academically active.

1. Introduction
1.1 The brief

The Centre for International Economics, a Canberra and Sydney based consultancy, has provided the Australian Commonwealth Government with two reports, in 2006 and 2014, on the economic implications for Norfolk Island of it becoming, essentially, part of Australia. I have been asked to provide a short, plain language, and comprehensible, account of the important differences between the two reports.

I am a retired Economics Professor, now resident in the UK. I have never visited Norfolk Island, but I have knowledge of Australia, and of the model used in the two reports, based on being a Senior Fellow in the Centre for Resource and Environmental Studies at the Australian National University from 1988 to 1998.

1.2 Background information supplied

Dr Chris Nobbs provided me with copies of the two reports (1)(2), hereafter CIE2006 and CIE2014. Dr Nobbs has also provided me with background information, from which I take the following to be the most salient points for the purposes of this report.

CIE2006 was commissioned by the Department of Transport and Regional Services, which wanted an assessment of the economic impacts that would arise from the extension of Commonwealth legislation to Norfolk Island. The report was delivered in October 2006. In December 2006 the Minister for Local Government, Territories and Roads announced that the plan to restructure the governance of Norfolk Island would not proceed.

In November 2010 in a Memorandum of Understanding between the Commonwealth and Norfolk Island, the latter ‘agreed in broad terms to participate in the Australian taxation and social security systems on the basis that there will be a net benefit for Norfolk Island and its community and there is appropriate consideration of local circumstances’.

In November 2014 CIE2014 was delivered to the Minister for Infrastructure and Regional Development.
The Norfolk Island Legislation Amendment Bill passed the Australian Parliament in May 2015. As a result Norfolk Island will become a regional council in the state of New South Wales.

While there a number of other inquiries and reports over the period 2000-2014, it might be inferred from the timing that CIE2014, which could be read as forecasting substantial ‘net benefit for Norfolk Island and its community’, played an important role in the 2015 outcome.
CIE2006, as discussed below, estimated smaller Norfolk Island net benefit. Whereas CIE2014 was published at the time of its delivery, CIE2006 was not. In July 2011 Mr B. Sanderson applied to the Department of Infrastructure and Regional Development for a copy of CIE2006. The copy supplied was heavily redacted. Mr Sanderson appealed this decision and after a lengthy process the entirety of CIE2006 became publicly available in early 2015.

Reading CIE2006, it is unclear why, other than disappointment with the reported results perhaps, the Australian Government should have sought to keep it out of the public domain.

It is of interest that CIE2014 makes no reference at all to CIE2006.

2. Differences in results as between CIE2006 and CIE2014

The basic structure of the two reports is the same. A model of the Norfolk Island economy is used to establish a ‘baseline’ which is the forecast future path for the economy in the absence of the changes of interest, given various assumptions about the external conditions affecting that economy. Then, the model is re-run after being modified to reflect the changes of interest, and with any necessary changes to the assumed external conditions. The ‘changes of interest’ are often referred to as the economic ‘shock’, and in the two CIE reports are referred to as ‘the reform scenario’, or ‘the extension of Commonwealth legislation’.

2.1 The 2006 report

The results relate to Commonwealth legislation being applied to Norfolk Island on 1 July 2007. Results are reported, in Chart 5.3, for: GDP, Household Consumption, Exports and Imports, Inflation, Capital Stock, Cost of Labour, and Employment. GDP refers to Gross Domestic Product, that is the total income earned by Norfolk Island residents. Results are shown annually out to 2016/17, as per cent differences from the ‘baseline’, which is what the model estimates would happen in the absence of the roll-out of Commonwealth legislation.

In 2007/08 GDP is some 4 per cent below baseline, by 2011/12 it is equal to baseline, and the graph continues upward until, in 2016/17, GDP is 9 per cent above its level in the baseline projection.

Consumption per household also drops initially, to some 4 per cent below baseline. It recovers to the baseline level in 2009/10, and in 2016/17 it is some 4 per cent above baseline.

Labour costs rise above baseline and by the end of the analysis period they are up by about 50 per cent over baseline. Because of the higher cost of labour, Employment drops below the baseline initially, but then recovers, and by 2016/17 it is 15 per cent above the baseline. For the other indicators shown in CIE2006 Chart 5.3, no information is given in CIE2014.
It is estimated that over 2007/08 to 2016/17 the Australian Government would need to provide financial assistance to Norfolk Island amounting to $286 million, $32 million per annum, in addition to the transfers required as a result of the extension of Commonwealth legislation to the island.

2.2 The 2014 report

The results relate to Commonwealth legislation being applied to Norfolk Island in 2016/17. They are reported in the Executive Summary, and in Chapter 5 in several tables. Whereas CIE2006 reports results for a single reform scenario, CIE2014 reports results for four scenarios:

S1: Core Reform – Income Tax, Welfare, Medicare

S2: Other Tax Related – Superannuation, Aus GST, Aus Tariffs, Aus Fuel Excise

S3: No Norfolk Island GST, Customs Duty, Fuel Excise

S4: Other Reforms – Minimum Wage, Government Business Enterprise Reform

Table 5.2 gives results for S1, S2 and S3, where those for S2 and S3 are ‘premised on the Core Reform set having been implemented’ (page 47). These results are ‘broadly additive’, i.e. the impact of all of these reforms applied together would be approximately the sum of the results reported for the separate scenarios. All these 2014 scenarios applied together, along with S4, would be a reform package very similar to that of CIE2006.

In CIE2014 what was referred to as GDP in CIE2006 is called GTP for Gross Territory Product. For S1+S2+S3 there is, adding the entries in Table 5.2, an immediate increase in GTP over baseline of 31.4 per cent. The size of the excess over baseline declines to 28.3 per cent in 2020/21 and remains at that level until the last year for which there is an estimate, 2023/24. The relative contributions of the three scenarios are almost constant over time. For 2023/24 the deviations from the baseline are:

S1 14.1%

S2 5.0%

S3 9.2%

The GTP impact of S4 is relatively minor - of the order of -0.3 per cent over the whole forecast period.

Estimates for Household Consumption are not given for all scenarios. For S1, the Core Reform Scenario, the immediate impact is up 39.8 per cent on baseline, declining to 37.9 per cent in 2019/20, and then remaining at that level until 2023/24 (Table 5.1).
Estimates for Labour Cost and Employment are not given for all scenarios. For S1, there is an immediate and sustained increase in ‘Nominal Wages’ to 21 per cent above baseline. There is an immediate increase in Employment of 8.2 per cent above baseline, which declines to 7.9 per cent in 2019/20, and then remains constant.

Table 5.3 in CIE2014 gives the estimates for the ‘Net financial impost of reforms on the Commonwealth’ for the years 2015/16 to 2023/24. The figures are for increases over the baseline, are net impacts reflecting the new balance of flows in both directions (to and from Norfolk Island), , and are estimates for the impact of S1, S2 and S3. Initially the increase is $6 million and this rises to $7.4 million in 2023/24. The total over the analysis period is approximately $58 million. These estimates do not include any infrastructure costs.

2.3 Comparison – are the differences significant?
Commenting on the problems with data for its modelling, CIE2006 says (page 9) that:
……in the CIE’s view the data issues are not significant enough to change a result from being positive to negative, from being small to large or vice versa. (italics in the original).

At page 12, CIE2014 says that:
…..the modelling results presented in later chapters should only be used to infer the outcome of extending mainland taxation and welfare systems etc to Norfolk Island (positive or negative) and the magnitude of such impacts (small or large). It would be inappropriate to, for example, report modelling results to the 2nd decimal point and claim that as the unambiguous impact of any taxation/welfare reforms. That is, only broad messages and trends should be taken from the modelling results.

These statements reflect the general view of proponents of the kind of modelling used in CIE2006 and CIE2014.

It would be reasonable to apply the same standards to differences between the outputs from two applications of the same modelling technique to the same shock to an economy. Are the two sets of results qualitatively the same, in the same direction of response, positive or negative? Are the two sets of results quantitatively the same, both ‘small’ or both ‘large’?

Comparing CIE2006 and CIE2014 results for GDP/GTP, Household Consumption and Employment, the direction of change from baseline is, leaving aside the initial downward movement in CIE2006, the same in both. However, the numbers are quite different. Consider Household Consumption, which might reasonably be regarded as the best single economic indicator of the impact of the reforms on the welfare of Norfolk Island inhabitants. Whereas CIE2006 has it up by 4 per cent on baseline by the end of the projection period, CIE2014 has it up by 38 per cent for just the Core Reform scenario, and the figure would presumably be higher for the four scenarios together.

Given the inherent limitations of this kind of modelling, I think a practitioner would regard the CIE2006 impacts as generally ‘small’, but the CIE2014 impacts as generally ‘large’. Certainly, the differences between the CIE2006 and the CIE2014 impacts would have to be considered ‘large’.
The question which then arises is whether the differences can be explained in terms of changed circumstances as between 2006 and 2014? If they can, a reader could have some confidence in the usefulness of the modelling exercises. If no such explanation can be provided, the reader could reasonably suspect that one or both modelling exercises were of limited usefulness.

As noted, CIE2014 makes no reference at all to CIE2006. Consequently, the consultancy is offering no explanation for the differences, and, hence, offering no explicit basis for the reader to decide how much confidence to attach to either or both sets of estimated impacts, even in terms of positive/negative and small/large.

In the next section I examine what can be inferred from the two CIE reports about the origins of the differences in the results that they report.

3. Explaining of the differences.

There are several possible explanations for the differences, which are not mutually exclusive.

3.1 Model structures

The models used in CIE2006 and CIE2014 are particular versions of a generic model called ORANI-G. This is what is known as a ‘computable general equilibrium model’. Such models are:

Computable – they can be solved for numerical values of the things, such as GDP, that the model has determined by the functioning of the economy;
General – they include all markets;

Equilibrium – they assume that all markets clear, that is that in each market supply and demand are brought into equality by price movements.
It is not obvious that the market clearing assumption is appropriate for the Norfolk Island economy. Markets work well when there are many buyers and many sellers, whereas for Norfolk Island it is necessarily the case that in many markets there are few actors.

There is an important feature of the generic ORANI-G that is not mentioned in either CIE2006 or CIE2014. It has more variables, things like GDP, to be solved for, than there are equations. This means that the ‘things’ cannot be solved for. To get a particular solvable ORANI-G model it is necessary to include extra relationships – this is called ‘closure’. For proper understanding of the results of a particular version of ORANI-G the reader needs to be told what closure is involved. Different closures provide different, sometimes very different, results from the same model. In neither CIE2006 nor CIE2014 is the closure discussed.
ORANI-G models comprise an input-output table describing numerically the structure of the economy in terms of flows of goods and services between producing sectors, equations describing money flows between government and sectors and households, and equations describing how households respond to changes in their incomes and the prices facing them. For a particular application of ORANI-G it is necessary to define the sectors and put numbers in the input-output table, and to give numerical values to the parameters of the equations.

CIE2006 and CIE2014 both state the sectoral composition that they use. They are different. Whereas the model in CIE2006 has 18 sectors, that in CIE2014 has 25.

In neither of the CIE reports are the equations used listed.

In CIE2006, in a footnote at page 6, a url address is given from which it is stated that the model it uses can be downloaded. Using that address produces a message that the page does not exist. CIE2104 only provides an address for the generic ORANI-G model.

1 A parameter is a constant in an equation. Thus in y = a +bx, a and b are the parameters, numerical values for which determine how the variable y changes with changes in variable x. For a = 0 and b =1, for example, y is always equal to x.

3.2 Model parameters and data
Given a model structure, in terms of sectors and equations, its use requires numbers for the entries in the input-output table, the values for the parameters of the equations, and the initial conditions. Clearly, for meaningful results all of these numbers should be those applicable to the economy for which results are sought. Ideally, the values for the parameters of the equations should be determined statistically from historical data for the economy being modelled.

Both CIE2006 and CIE2014 are explicit about the dearth of useful data for Norfolk Island, which has never had the data collection systems necessary to generate the kind of data that ORANI-G modelling requires. Both reports discuss examples where attempts to derive the necessary data from available information ran into contradictions, and how those contradictions were resolved. Interestingly, the set of contradiction problems described in CIE2006 is completely different from that described in CIE2014.

In neither CIE report is there any discussion of how the numerical values for the parameters of the equations used to describe household behaviour were obtained. It is a reasonable inference that both modelling applications followed what is standard practice when doing computable general equilibrium modelling of small economies with a dearth of actual local data from which to infer numerical parameter values – namely use numbers obtained for economies where the data does permit the necessary inference. Or, use a ‘plausible’ number that seems to produce ‘reasonable’ results.

Obviously this is problematic. In the cases of the CIE2006 and CIE2014 modelling it is clear, for example, that, given that the reforms involve the introduction of income tax and a minimum wage, the number used to describe the response of hours of work offered to changes in the going wage rate will be an important determinant of the model results. It is equally clear that it is questionable whether the number that describes that response in, say, Australia, is going to be the same as the number for Norfolk Island.

3.3 The starting situations
It is conceivable that the same ORANI-G particular model, in terms of input-output structure and numerical values for equation parameters, could produce different results for the same reform scenario when applied in 2006 and 2014. This could arise because of changes in the initial conditions in both Norfolk Island and externally, which affect the impact of the reform package on the Norfolk Island economy. Clearly, the model structures are not the same in CIE2006 and CIE2014, and there is no information on the numerical parameter values used in either. So, it cannot be concluded that the differences are solely due to changed initial conditions, and/or any differences in the reform scenarios.

Nonetheless, the question remains as to whether initial conditions were different in such manner as to provide something toward an explanation of the differences in model results. Given that CIE2014 does not acknowledge the existence of CIE2006, one cannot look there for an explicit answer to this question.

It does appear that the Norfolk Island economy may have shrunk between 2006 and 2014. CIE2014 estimates Norfolk Island GTP in 2013/14 as $68 million. CIE2006 does not report its estimate for GDP in 2005/06 (and does not produce any dollar figures for any variable for the baseline or for the impact of reform). CIE2014 reports, in Table 1.1 page 6, estimates by others as $80.3 million in 1995/96, $62.1 million in 2004/05, $89.5 and $82.0 million in 2009/10, $87.9 million in 2010/11. Using the last of these estimates, it states that its 2013/14 figure ‘suggests that economic activity has fallen by around 22 per cent since 2010-11’.

If, on this not very firm basis, it is accepted that the Norfolk Island economy shrank substantially as between 2006 and 2014, would such a contraction make the impact of the reform package substantially greater? All that can be said is that this is possible.

3.4 The baselines

It is impossible to compare the baselines established by the models in CIE2006 and CIE 2014. In CIE2006 the baseline is reported only in terms of per cent deviations from initial levels. In CIE2014 the baseline is not reported at all.

What is clear is that the two baselines are established from different assumptions about what would happen over the period of analysis in the absence of the extension of Commonwealth legislation to Norfolk Island. For example, there are big differences in what is assumed about infrastructure spending, and the financing of the Norfolk Island Government. Intuition suggests that these differences significantly impact on the two sets of baseline results.

In CIE2006 it is assumed that an Asset Management Plan, AMP, is introduced in 2006/07, with spending initially at $9.9 million per year, rising to $17.4 million in the final year. The Norfolk Sustainability Levy, NSL, was introduced in July 2006, in order to broaden the tax base for the Norfolk Island Government. It is a consumption tax, initially set at the rate of 1 per cent. In constructing its baseline, CIE2006 sets up its particular ORANI-G model so that it is used:
to determine the rate at which the NSL needs to be set so as to balance government expenditure…with government income. That is, revenue raised via the NSL meets any revenue shortfall. (page 15)

The model solution for the baseline has the NSL rate necessary to balance the government books rising from 7 per cent in 2006/07 to 12.3 per cent in 2016/17.
It is unclear what assumptions about infrastructure spending are used to establish the baseline in CIE2014. It is clear that it is not assumed that the NSL raises the money to cover any cash flow shortfall for the Norfolk Island Government:

…for the purpose of the baseline, it has been assumed that Australian funding moves to meet Norfolk Island budget deficits. (page 17)
There is some evidence supporting the intuition about the importance of infrastructure spending and financing in CIE2006. It reports the results of sensitivity analysis of the infrastructure assumptions. The baseline and the reform package impact are re-modelled for infrastructure spending at 75 per cent, 50 per cent and 25 per cent of the levels assumed in the original modelling exercise. The results for GDP and the NSL are shown in Chart 5.2. The NSL rate required to balance the Norfolk Island Government cash budget in the baseline drops with the level of spending. GDP also falls with the level of infrastructure spending – for 75 per cent the effect on the deviation from initial conditions is negligible, for 25 per cent the deviation is reduced from about 6 per cent to about 1 per cent. The results for the reform

package are more striking – for 75 per cent the impact drops from about 8 per cent over baseline to about 1 per cent over baseline, and for 25 per cent to 9 per cent below baseline. The comment in CIE2006 is:

This reflects the fact that under the alternative levels of AMP expenditure, the required rate of NSL is lower, and hence the gains from replacing the Norfolk Island tax regime with Australian taxes (and transfers etc) is not as great. Hence GDP is lower as the Australian taxes (net of transfers, subsidies etc) impose a net cost on the local economy.

3.5 Reform scenarios

In broad terms, the single reform package modelled in CIE2006 is qualitatively the same as the four scenarios together in CIE2014. There may be some numerical differences in, for example, the tax rates or the minimum wage level. It seems unlikely that these play a significant role in explaining differences between the two sets of results.

3.6 Tourism

Both CIE2006 and CIE2014 are clear about the major role of tourism in the Norfolk Island economy.

The importance of tourism is illustrated in Chapter 6 of CIE2006 where the sensitivity of the modelling results to changes in the assumption about tourist numbers is considered. In the standard model run tourist numbers are held constant at 30,000 over the period covered. Chart 6.1 reports results for constant 35,000 and constant 28,000. For the baseline at the end of the period GDP is up by 44 per cent over the initial level for 35,000, and down by 20 per cent for 28,000. For the extension of Commonwealth legislation, the deviation from the baseline for GDP is plus 40 per cent for 35,000, and minus 8 per cent for 28,000.
It appears that there is a change between the model structure used to generate the estimates for the baseline and that used to estimate the impact of the reform package in CIE2006, which is not mentioned in the report. In discussing the baseline estimates, it is stated (page 11) that tourism numbers are held constant at 30,000, and that (page 12) tourist spend per day on the island is held constant at $215. There is no discussion of what is assumed about length of stay, or its determinants. However, when considering the impact of the reform package, there is (page 55) a discussion of the response of ‘tourist exports’ to the changes in Norfolk Island prices due to the opposing effects of replacing the NSL with Australian GST and the higher labour costs consequent on the reform package. Whereas it appears that tourism exports are a constant in generating the baseline, they are a variable for the calculation of the impact of the reforms.
CIE2014 does not report results for the impact on tourism of the extension of Commonwealth legislation to Norfolk Island.

Tourism is an area where the data problems attending this kind of modelling for an economy such as that of Norfolk Island are well illustrated. CIE2006 has (Table 2.4, page 11) spend per tourist at $1638, while CIE2014 has an estimated spend of $980 for each tourist arriving by air (air arrivals are in excess of 97 per cent of all tourist arrivals). Inflation over 2006 to 2014 would, other things equal, see the dollar number increase rather than decrease. In nominal terms the CIE2014 spend per tourist is 60 per cent of the CIE2006 spend. Such a large decrease is implausible. It is also noteworthy that CIE2006 has the average tourist spending $532 on accommodation and sustenance (‘Cafes etc’) and $823 on ‘Retail’.

3.7 Norfolk Island Government finances and Commonwealth support

In CIE2006 the impact of the reform package on the amount of Commonwealth support needed by Norfolk Island is approximately $32 million per year, while in CIE2014 it is approximately $7 million per year. It must be recalled that for both the figures given for necessary Commonwealth support are deviations from the baseline. It appears reasonably clear what is mainly driving the difference here between CIE2006 and CIE2014 in forecast levels of necessary Commonwealth support – assumptions about infrastructure spending and financing.

In CIE2006 the baseline has the NSL meeting the excess of Norfolk Island Government expenditure over receipts, so the baseline figure to which the $32 million relates is zero. With the extension of Commonwealth legislation to Norfolk Island the NSL drops out of the modelling, but the AMP remains. It is the AMP that drives the infrastructure costs which are, in the modelling, the main component of Norfolk Island Government expenditure.

In CIE2014 there is no NSL in the baseline, and the Australian Government is assumed to meet any Norfolk Island Government deficit. It is unclear exactly what is assumed about infrastructure spending in the modelling of the baseline and of the impact of the reform scenarios. The estimates of the required transfers from the Commonwealth to the Norfolk Island Government do not include an infrastructure component.

4. Concluding remarks

It is standard practice in ORANI-G applications to report the results for the economic shock being considered in terms of per cent deviations from the baseline. In the case of CIE2006 the baseline itself was reported in terms of per cent deviations from an initial position which is not clearly set out. In the case of CIE2014 there is no information about the baseline. This makes it more difficult to compare, and attempt to explain differences between, the results from the two modelling exercises.

The particular models used in CIE2006 and CIE2014 are different in structure, and numerically. In both cases the quality of the data used for the initial conditions and putting numbers into the structure is poor.

It is probably safe to say that all of the possible sources considered in section 3 above have some role in explaining the differences in the results presented in CIE2006 and CIE2014. It is impossible say much about their relative importance in regard to the forecasts for the main economic indicators, GDP/GTP and Household Consumption. It appears unlikely that differences in the reform scenarios were a major driver of the differences in these variables. A proper investigation of the roles of the possible explanations would be a major undertaking, requiring access to the data bases and the details and numbers for the particular models used, each of which would need to be run under a range of different assumptions. In regard to this, it is noteworthy that although the same consultancy wrote both reports using the same generic model, CIE2014 does not mention CIE2006 and, consequently, offers no analysis of the differences.

Given the poor quality of the Norfolk Island data available in both cases, and the questionable relevance of computable general equilibrium modelling for short and medium term forecasting of reactions to a major shock to a very small economy, my own view is that neither CIE2006 nor CIE2014 was a useful exercise. The substantially different results may be taken as support for that view. It is probably reasonable to conclude that, in terms of the economic indicators considered in these reports, extending Commonwealth legislation would be broadly, and on balance, beneficial to the Norfolk Island economy, to an extent impossible to quantify with any precision. However, it appears to me that one could have arrived at that conclusion by much simpler and much more transparent means. It should also be noted that there are possible economic impacts, such as on income and wealth inequality, that are not considered in these reports, as well as un-considered social impacts.

(1) Centre for International Economics, Economic Impact Assessment of Extending Commonwealth Legislation to Norfolk Island. Report prepared for the Department of Transport and Regional Services, CIE: Canberra & Sydney (October 2006). Document made publicly available in August 2015 and currently available for download at:
(2) Centre for International Economics, Final Report: Economic Impact of Norfolk Island Reform Scenarios. Report prepared for the Department of Infrastructure and Regional Development, CIE: Canberra & Sydney (November 2014).
Professor Common will be pleased to respond to questions and comments on his report ( More general issues may be addressed to Dr Chris Nobbs (

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THE CENTRE FOR INTERNATIONAL ECONOMICS was commissioned by the Commonwealth Department of Transport and Regional Services to undertake an assessment of the economic impacts arising from extension of Commonwealth legislation to Norfolk Island.

To gain an appreciation of the structure and operation of the Norfolk Islandeconomy, Norfolk Island was visited in early August 2006 for the purpose of undertaking stakeholder consultations. Meetings were held with theNorfolk Island Government and bureaucracy, the Administrator, private sector businesses, government business enterprises, and individuals.

The CIE would like to thank all stakeholders who participated in the consultations,and who provided information/data in response to questions about the operation and performance of the Norfolk Island economy. The CIE is appreciative of the effort numerous people, particularly within the Norfolk Island Government, went to in tracking down and providing data.

Finally, the Norfolk Island Government is proposing, almost on a daily basis, to undertake some significant reforms, especially in the area of taxation. If these proposed reforms go ahead, then there is a chance that some elements of this report or the assumptions made will already be out of date.

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In 2006 the Centre for International Economics (CIE) of Canberra prepared a report for the Commonwealth Department of Transport and Regional Services entitled Economic Impact Assessment of Extending Commonwealth Legislation to Norfolk Island. As is well known, this report was not released by the Commonwealth at the time, and only became available publicly in August 2015 by decision of the Administrative Appeals Tribunal following a four-year-long campaign by Mr Brett Sanderson, opposed by the Commonwealth. According to court documents, the Department,together with the Department of Prime Minister and Cabinet, argued that release of the report would be contrary to the public interest.(1) In 2014 the CIE prepared a second report for the Department of Infrastructure and Regional Development, entitled Final Report: Economic Impact of Norfolk Island Reform Scenarios.

An independent academic expert has now been engaged to compare the contents of, and the differences between, the two reports, and to provide a short report on these matters in plain language.Michael Common is an English economist who spent ten years as a Senior Fellow at the Centre forResource and Environmental Studies (now the Fenner School of Environment and Society) at theAustralian National University in Canberra. He is also thoroughly familiar with the ORANI economicmodel used in the two CIE reports. Professor Common’s report is now to hand.(2) Despite the reportbeing in relatively plain language, it is technical in content, and it will be for experts in economics andeconomic modelling to further explore its conclusions. However the conclusions themselves are clear enough.

In his report, Common notes that the numbers generated by the two model applications (2006 and 2014) are quite different, and the report examines several possible factors that could contribute to this.He concludes that due to the lack of transparency as to the data entered into the model and how it has been treated, it is not possible to discriminate amongst possible causes for this discrepancy.

Furthermore, his judgement is that given the very small size of the Norfolk Island economy, the use of the type of economic model employed by CIE is invalid. Common considers that: “… neitherCIE2006 nor CIE2014 was a useful exercise. The substantially different results may be takenas support for that view.” The usefulness of the CIE 2014 report in particular is further undermined by the fact that it does not make clear what the baseline is against which the economic changes are assessed, nor what infrastructure spending will be made and by whom:issues critical to any coherent assessment of Norfolk Island’s future.

Common concludes: “It is probably reasonable to conclude that, in terms of the economic indicators considered in these reports [italics in the original] extending Commonwealth legislation would be broadly, and on balance, beneficial to the Norfolk Island economy, to an extent impossible to quantify with any precision. However, it appears to me that one couldhave arrived at that conclusion by much simpler and much more transparent means. It shouldalso be noted that there are possible economic impacts, such as on income and wealthinequality, that are not considered in these reports, as well as un-considered social impacts.”According to the evidence, it appears that the two CIE reports are - to use a non-technical term -baloney. Statements by the Minister promoting the CIE2014 report in terms of increasing GrossTerritory Product by around 14 per cent and household consumption by around 38 per cent cannot berelied upon.

And as it happens, there is word abroad of another report comparing the two CIE reports and which will be available shortly. It will be interesting to compare Professor Common’s conclusions with thoseyet to be seen. Next week we will consider the Norfolk Island Economic Development Strategy recently released, and about which some positive statements can be made.

- Chris Nobbs

(1) Belot, H., “Uncensored audit of Norfolk Island’s economy must be released, tribunal”, The Canberra Times, 11 June 2015.
(2) Common, M., A Comparison of Two CIE Reports (2006, 2014) on the Economic Impact of
Norfolk Island Reform Scenarios, 20/11/2015. Available for download from:

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There seems to be an idea current on Norfolk Island that come 1 July 2016, prices of goods sold on the island will fall. This idea has been promoted by DIRD in its Fact Sheet (‘for individuals’) for March 2015 (updated to 13 May 2015) that said: “The cost of goods and services sold on the island may be cheaper as the Norfolk Island Goods and Services Tax (GST) will be abolished and the Australian GST will not apply” (p.1), and the sentiment is reiterated in the Administrator’s Reform Update for October 2015 which noted: “The Tax Office has advised the Australian GST will not be introduced to Norfolk Island” (p.6). Does that sound like a convincing case?  Unfortunately it is not the whole story. First, let us recall the announcement from the Parliament of Australia on 30 March 2015 entitled “Norfolk Island: New Governance Arrangements” where it is stated: “Norfolk Islanders will not be subject to [Australian] GST immediately.”

Even without the imposition of Australian GST, the best Norfolk Island can hope for, in my view, is that prices will remain at roughly their present levels, but it is much more likely that prices will rise, possibly substantially. Here’s why.


With regard to the price of foodstuffs and home products, one of the current benefits enjoyed by Norfolk Island is that it is classified as an export destination for product pricing from Australian suppliers, rather than as a domestic destination. The price differential between export and domestic wholesale pricing on some items can be substantial. A price comparison for a representative basket of 22 goods by the Island’s major food importer has shown: for four goods (18% of the sample) the estimated domestic-sourced retail price was approximately the same as the export-sourced item; for nine goods (41%) the domestic-sourced item was up to 25 percent higher in price; for five goods (23%) the domestic-sourced item was up to 50 per cent higher; and for four goods (18%) domestic-sourced item price was even higher than that. If Norfolk becomes nominally part of Australia, and Australian suppliers decide to classify Norfolk as part of Australia and thus on their domestic register, the ‘export destination’ advantage will be lost. (This will not be the only loss as suppliers, in practice, despatch longest ‘use by’ dated stock to export destinations, and the shortest ‘use by’ dated stock to domestic destinations.)

Also in the foodstuffs line, importers clearly try to source items from the least expensive supplier, and often this is in New Zealand rather than Australia. With Norfolk Island part of the Australian tax and GST system, Australian companies may insist that all purchases be from the Australian based company or wholesale supplier, and preclude any purchases from their New Zealand subsidiaries. In fact this has already happened in recent times with one major multinational food company operating in both Australia and New Zealand. In the event that a New Zealand subsidiary markets products not usually available in Australia, companies may require these subsidiaries to provide the ordered items to the parent (Australian) company prior to shipment to Norfolk, thereby increasing transport and handling costs. (We may recall that all sea cargo to Norfolk Island from Australia comes via New Zealand - a major reason being that the larger size of Australian ships makes it inefficient to service Norfolk Island for small cargo volumes.)

A similar situation faces companies that import goods direct from suppliers in Europe, the US and elsewhere, where provision by direct ‘export’ to Norfolk Island may be replaced by provision from Australian agents - as has already been experienced on the island some years ago in relation to the distribution of photographic goods. 

A major concern here is that with distribution companies growing larger and more international, and with their inexorable impulse to systematise their operations, such changes as outlined may be inevitable. 

The DIRD Fact Sheet (‘answers to your questions’) of May 2015 states: “Law modelled on New South Wales law will be progressively applied to Norfolk Island from 1 July 2016”.  The introduction of NSW employment laws into Norfolk Island will have a major impact on prices. This is not only a matter of businesses factoring in the minimum wage for employees, which currently can be more than 25 per cent below NSW award rates, but also: overtime and penalty rates, and requirements in relation to meal allowance; clothing, equipment and tools allowance; uniform and laundry; vehicle allowance; working late or early; first aid qualification allowance; performance of higher duties; holiday pay and sick pay; as well as employee superannuation (an increasing levy rising from one to nine per cent over time). And in addition importers will have to cover the cost increases in these things as they are suffered by the lighterage and transport businesses on the island. Quarantine inspection charges will also be introduced on a cost-recovery basis.

And then in addition there will be the consequences of compliance with NSW laws in relation to occupational health and safety (certification, training, protective equipment and so on)  applicable to primary production, food handling and vehicle standards.  And hidden behind the foregoing issues is the mountain of on-going paperwork involved in completing records, maintaining compliance, and preparing tax returns, which will add further costs to every business on the island.

As we do not currently know what the exact situation will be in the years ahead, these issues - of Australian GST, foodstuffs importation, NSW employment laws, and increased regulatory requirements - must be classed as ‘very serious overhangs’ on the price of goods retailed on Norfolk.  There is one glimmer of light for the commercial sector however: after 1 July 2016 imported goods not for resale will not attract Norfolk Island customs duty. As such goods can include expensive capital equipment, this change can be significant for individual businesses. So do you still think that prices will fall after 1 July 2016?  If I’ve missed something important I’d be happy to be told of it (, take it on board, and if necessary eat humble pie. Next week we will look at some of the regulatory issues coming to the island, particularly as they relate to the hospital and health services.

- Chris Nobbs

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The underlying model of the economy that the Commonwealth government brings to its consideration of Norfolk Island is what can be called a ‘free market’ or ‘neoliberal’ model.  A core assumption of this model is that private enterprise is necessarily more efficient than government enterprise, and that consequently government functions should be reduced where possible, services privatised, taxes reduced, and social services strictly limited, and the market allowed to rule.

How do we know this is the underlying model in use for Norfolk Island? It suffuses much of the reportage provided in recent months by consultants to the Commonwealth, it underpins views promoted by NIAC in Discussion Paper 2 that we discussed last week (a paper without doubt drafted by the Commonwealth-provided secretariat), and recently Executive Director Peter Gesling has noted publicly his view that government “shouldn’t be involved in monopoly provision” (ATA meeting, 29/10/15). All this should not be surprising as the same model underpins the Australian government’s current approach to economics more generally. However the real question is whether it is in any way appropriate that such a model be imposed on small isolated island economies such as Norfolk’s. I argue here, and have argued elsewhere that, for several reasons, it is not.

The application of any economic model to an economy brings winners and losers. With regard to the Commonwealth model to be applied on Norfolk Island, there is one thing we can say with almost 100 per cent certainty: that the winners will be those with financial capital (including the owners of privatised monopoly enterprises), and the losers will be wage earners. We can be confident of this because rising income inequality has been the outcome in every country around the world in which this model has been applied.  Is this really what Norfolk needs or wants?  (We’ll come to the matter of economic growth in a minute.)

The Commonwealth’s NSW ‘regional council’ model also dictates winners and losers. Because council rates are calculated in relation to land value, substantial losers will be Norfolk Island families who are land rich but cash poor. For these families, the transfer of land through generations is fundamentally a symbol of continuity and identity with their homeland, notwithstanding the fact that land has also a monetary value that might be drawn on in times of need.


The Commonwealth has been loud in espousing a concern for Norfolk Island’s unique culture and heritage. What the Commonwealth seems never to comprehend is that island culture is not something that exists in a museum cabinet, but is lived experience, and that to remove the context in which it has flourished is to risk the dispersal and destruction of the culture itself.   

In further considering the Commonwealth’s approach to Norfolk Island at this broad level, you might ask: ‘Well, Norfolk Island has been in the economic doldrums in recent years, so doesn’t it need some free market loosening up to get economic growth going again?’ Well, no.  There have always been available alternative models of the economy, most of which take a broader view of what economics, government, and society are all about. The most prominent alternative is the ‘mixed economy’ model which underpinned the economic successes of the post-World War 2 decades up to the advent of the ‘free market’ revolution of the Thatcher/Reagan years, and which is far more appropriate to the needs of small island economies than this latter model.  The economy of the Falkland Islands, a successful British overseas territory with a balanced budget, is an exemplar of this alternative approach. Furthermore, the available evidence does not support the case that a free market approach to the economy is necessarily more successful in promoting economic growth than is a mixed economy. In fact the weight of evidence supports the contrary view, namely that when a government is more active and supportive of its citizens, then the economy thrives better.

Next week we look at the more down-to-earth matter of prices on Norfolk Island after 1 July 2016.

        - Chris Nobbs.

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In recent weeks I’ve attended a number of meetings on Norfolk concerned with the change process currently under way: both as an observer and as a participant. I’ve also had numerous one-on-one discussions with individuals. One thing that stands out in all these meetings is the scale of complaints about lack of information from the Commonwealth on the detail of the changes proposed, and lack of consultation, which for some businesses and individuals has made future planning well-nigh impossible. The substance and implications of the change process are urgent matters for the life and careers of many Norfolk Islanders.

Even so, some facts relating to the change are known or can be inferred, and together with experience overseas with similar processes, do enable us to start to see where the Commonwealth is heading, and what the effects of changes on the Island might be. Here and in the coming weeks I propose to explore these matters in the columns of TNI, both as a matter of record, and as a contribution to clarifying a very blurred situation. It should help to uncover the roots of what is being proposed and the likely outcomes at a general level. These articles will be distributed elsewhere and made available on the web.

In this first column I discuss the proposed “core principles” which according to the Norfolk Island Advisory Council (NIAC) Discussion Paper 2 “could guide the ultimate makeup of the Norfolk Island Regional Council’s (NIRC’s) responsibilities and in framing future strategic directions.” I have already provided some observations on these principles to NIAC as part of a written submission I made in relation to Discussion Paper 2. (If anyone is interested this should be available from the NIAC secretariat, or they may contact me.)

Here we focus on the final three proposed principles, which state:
“(6) The Council should avoid where possible, providing services which could be provided by the private sector. These services should be regularly market tested to ensure the community is receiving value for money.
(7) Where the Council does undertakes business activities, they should reflect the full cost of service, so as not to distort the market. The services should, in the case of critical utilities, be cost neutral.
(8) There should be transparency in revenue generation and a clear link to expenditure (for example, charges for waste management, would be spent on waste management/minimization activities).”

The first question that occurs is: Where is it proposed that these principles end up? Is it intended that they be, if adopted, legally enforceable directives to the NIRC, or merely statements which have some, but not over-riding, significance? This seems to be a very important point, but we are not told, nor asked our opinion.

The assumption is made in (6) that the NIRC should avoid providing services that could be provided by the private sector. Why so? Although we are not told, this reflects the belief by some economists that private provision of services is inevitably more ‘efficient’ than public provision of the same service. As a general proposition this is not true, as the near disastrous experience of the privatisation of New Zealand Rail and Air New Zealand show. And in Australia, according to a recent survey of electricity privatisation in Australian states by the Australian Energy Marketing Commission, the data show no clear link between electricity bills and privatisation. (1)

The proposition of ‘efficiency’ as promoted in economics depends on the existence of a ‘market’ in which there are many buyers and sellers, and such a thing exists for few services on small islands such as Norfolk. Indeed on Norfolk we are usually talking, inevitably, about the monopoly provision of services i.e. by a single provider, and this does not constitute an economic market. (Think of fuel importation, electricity provision, lighterage, the airport). In situations of monopoly, economic theory predicts the occurrence higher prices than ‘efficiency’ prices. This monopoly situation requires, first, that ‘efficiency’ pricing has to be estimated by a regulatory agency - which can be done equally whether the service is publicly provided or privately provided.

Second, private enterprises function to increase profit for their owners - large companies are legally required to do so - which means that monopoly providers of ‘public’ services are always difficult to control. In New Zealand for example, the energy regulator found it impossible to control the pricing behaviour by energy companies for many years, and disputes still surround the matter. How would an NIRC be expected to control the behaviour of a large overseas company providing a monopoly service on the island? Thirdly, experience from overseas indicates that it is the profitable public services that are usually privatised, while the unprofitable ones are retained in public ownership, thus depleting the public (represented by the NIRC) of revenue while increasing the burden of its costs. For a small island like Norfolk where revenue raising is a major issue, the better solution appears to be not privatisation but government ownership with oversight, or maybe joint public-private partnership.

Following on with this economic focus, the proposed principles (7) and (8) appear to want to put the NIRC into an economic straightjacket in which: any transgression from austere profit-seeking efficiency is unacceptable; which recognises no value except the market (however distorted that may be in reality); and which is incapable of independent or other activity on behalf of the community. But should the owners of cows on public land charge the NIRC for mowing their grass? Why should any profits from grass mowing be applied to more grass mowing? What is to happen if the community, in its community development strategy, wants its NIRC to undertake an activity whether it is profitable or not? (Perhaps setting up a co-operative, or maybe undertaking some other type of activity not yet envisaged?)

Do these proposed principles really reflect what the NIAC wants Norfolk to sign up to, without genuine discussion? Surely things on a small island should be more straightforward than this. Given a good community engagement strategy (principle 1) and public accountability (as in principle 8), it seems much more reasonable to sort these things out by community-based processes on the island (and all things considered, maybe more efficiently too).

Next week we will consider more broadly the economic model that underlies the Commonwealth’s approach to Norfolk Island’s future, and some of its implications.

- Chris Nobbs
(1) ABC News, “Fact Check: Does privatisation increase electricity bills?” 30/03/2015

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