National Competition Policy analysis

Terms of reference

I, Jim Chalmers, pursuant to Parts 2 and 4 of the Productivity Commission Act 1998, hereby request that the Productivity Commission undertake a Study to assess the impacts to GDP, economic growth, productivity, government revenue and consumer wellbeing from the implementation of competition reforms proposed by the Commonwealth, states and territories as part of a revitalised National Competition Policy being progressed through the Council on Federal Financial Relations (CFFR).

In undertaking this work, the Commission should consider the November 2023 Statement of Expectations, which directs the Commission to consider national prosperity and economic progress broadly, to ensure strong, sustainable and inclusive economic growth and rising living standards.

Background

The Australian Government recognises the importance of competition in lifting dynamism, productivity and wages growth, putting downward pressure on prices and delivering more choice for Australians dealing with cost-of-living pressures.

Australia’s productivity growth has slowed over the past decade, and we are facing challenges from an uncertain international environment and structural changes taking place from the transition to net zero, digitalisation, and the expansion of the care and support economy. We need a competitive and resilient economy that can adapt to these challenges and make the most of opportunities in our economy.

Laws and policies at all levels of government – Commonwealth, states and territories, and local – impact the competitiveness of our economy. In this context, the Australian Government is committed to working with states and territories on reforming national competition settings to ensure these challenges are met. At the December 2023 CFFR meeting, Treasurers agreed to progress competition-enhancing reforms by revitalising National Competition Policy.

To inform this work, and recognising the principle that all governments should share the benefits of economic growth and revenue from competition reforms to which they have contributed, CFFR agreed the need for economic modelling to assess the impact of proposed reforms, including impacts on government revenue. This will be required to inform any intergovernmental agreements associated with revitalised National Competition Policy, and to inform the National Reform Program – which consists of a National Reform Agenda and jurisdiction-specific Reform Plans.

Scope of study

The Commission will undertake a study to assess reform options proposed by Commonwealth, states and territories as part of the revitalised National Competition Policy (as considered by CFFR in mid-2024) to understand the economic and other benefits to the Australian community, as well as the government revenue impacts. While the reform options are yet to be agreed by CFFR, it is important that they tackle shared priorities such as addressing cost-of-living pressures, and adapting to the net zero transition, digitalisation, expansion of the care and support economy, and creating a more dynamic business environment.

In undertaking this assessment, the Commission should provide an assessment of:

• The long-run economic impacts arising from the implementation by all levels of government of proposed reforms to revitalise National Competition Policy, including:
  • the expected impact on GDP
    • to the extent possible, the analysis should separately identify the contribution to GDP that would arise from the reforms being implemented by (a) the Commonwealth; and (b) state, territory, and local governments.
  • any impacts on dynamic efficiency and other measures of economic progress and national prosperity.
• To the extent possible, the total additional revenue accruing to the Commonwealth, and states, territories, and local governments, arising from the proposed reform options.
• Benefits accruing to Australian households and, to the extent possible, distributional impacts. This should include estimated impacts on aggregate measures of incomes, prices and wages; the differential impacts across various groups (delineated, to the extent possible, by age, gender, income and education); and measures of consumer wellbeing, such as impacts on cost-of-living or consumer choice.
• Where possible, other impacts on consumers that may be difficult to quantify, such as improved quality of service, living standards or other outcomes for consumers.
• Impacts, in terms of output, prices, productivity and growth in relevant industries and sectors.

Where possible, the Commission should provide an indication of the likely time over which any economic or other impacts are expected to occur.

In providing its assessment of the benefits to the Australian community, the Commission should provide an explanation of the methodology and assumptions used to derive the estimates. The Commission should also undertake sensitivity analysis of the results to the assumptions used.

The Commission should also consider any available reviews, estimates or analysis of the potential impacts of proposed reforms.

Process

The Commission should:

1. Develop a suitable methodology and framework to model the direct and economy‑wide economic and revenue impacts of the proposed reform options and revisions to revitalise National Competition Policy. This should be informed by a review of previous modelling undertaken by the:
   • Industry Commission in 1995 on the growth and revenue impacts of the original National Competition Policy, and
   • Productivity Commission in 2005 to estimate the benefits of the original National Competition Policy.

   The Commission will be provided with early indicative reform options to inform model development.

2. Model the impacts of reform options considered by CFFR using the developed methodology to estimate the overall economic and revenue impacts, and other outputs described above.
3. Prepare a report which provides analysis of the likely impacts of reforms, covering the outputs and analysis described above.

The Commission will consult as required, including with state and territory governments, in completing this Study.

The Commission should provide a report to the Government by 1 November 2024.

The Hon Jim Chalmers MP
Treasurer

[Received 15 March 2024]