The Size of the Norfolk Island Economy

PACIFIC ECONOMIC BULLETIN

The size of the Norfolk Island economy

Malcolm L. Treadgold

As early as the 1970s the residents of Norfolk Island had Malcolm Treadgold is achieved a high level of income per head by international Professor of Economics at standards. The Commonwealth Grants Commission has the University of New recently estimated that in 1995–96 Norfolk Island’s per capita England, Armidale. GDP was 70 per cent higher than Australia’s. After reviewing earlier measurements of the output of the island, this paper provides a critical evaluation of the Commission’s estimate of GDP and offers an alternative estimate. It uses the alternative to assess how Norfolk Island compares with Australia in per capita income terms and, relatedly, to question the Commis- sion’s findings about the revenue-raising capacity of the Norfolk Island government.

Norfolk Island lies in the Pacific Ocean industry catering mainly for the needs of about 1,700 kilometres east-north-east of tourists. The Australian dollar is the Sydney and 800 kilometres south of currency in circulation. Noumea. It is an Australian external In 1997, in response to an Australian territory with a substantial degree of Government request, the Commonwealth internal self-government. A 1996 census Grants Commission provided ‘advice on recorded a resident population of only Norfolk Island’s economic capacity, 1,772 persons, including about 700 financial and administrative arrangements descendants of the Pitcairn Islanders who and government services’ (Commonwealth were resettled on Norfolk Island in the Grants Commission 1997:iii). In its report, mid-nineteenth century. Tourism is the the Commission estimated GDP (or, to principal means of livelihood: 53 per cent use the Commission’s phrase, the ‘size of of those in employment at the time of the the Norfolk Island economy’) at A$80.347 census indicated that they worked in an million in 1995–96. This sum divided by

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the resident population recorded at the measure the output of the Norfolk Island 1996 census gave a GDP per head of economy. In the intervening period, A$45,343 which was nearly 70 per cent beginning in the early 1960s, the island above the corresponding figure for experienced a phase of rapid economic Australia in 1995–96. This paper provides and demographic expansion. Between a critical evaluation of the Commonwealth 1961 and 1978 the resident population Grants Commission’s estimate of the doubled, employment more than trebled, Norfolk Island per capita GDP and offers and the value of merchandise imports an alternative estimate. (albeit at current prices) increased 14 fold. On the demand side, the main stimulus to expansion was the growth of Earlier estimates the tourist industry, although for a time this was reinforced by the use of the Norfolk Island does not have a regularly island as a tax haven. On the supply side, produced series of social accounting expansion was facilitated by inflows of statistics. It is, however, probably unique migrant labour and foreign capital. among the small islands of the South The effects of the expansion were Pacific in that there exist isolated annual captured in a set of social accounts estimates of the gross product of its tiny (Treadgold 1979), using data sources that cash economy in the second half of the included an economic census of business nineteenth century (Treadgold 1988:94– enterprises on the island, the 1978 census 100). The earliest social accounting of population and housing, and a survey estimates for the twentieth century—the of tourist and visitor expenditures. The first attempted for Norfolk Island—were accounts included a domestic production made in 1952 by L.T. Gleeson who was account for Norfolk Island for the years then Officer in Charge of the Economic 1975–76 to 1977–78, and income and Branch of the Commonwealth outlay, capital and overseas transactions (Australian) Department of Territories. accounts for the island for 1977–78 alone. He calculated that in 1951–52 the gross The format and concepts followed as far ‘national’ product of the island amounted as possible the Australian national to £205,000 (A$410,000). The per capita accounts of the time. figure was £173 or only 39 per cent of the The domestic production account level of GNP per head in Australia at that yielded a value of GDP at current prices time (Gleeson 1952:72). of A$10.9 million in 1977–78, which was Gleeson’s estimates are very rough equivalent to A$6,450 per head of resident and appear to be distorted by the population. The latter figure was approx- erroneous inclusion of transfer payments imately equal to that of Australia for in the form of war pensions received 1977–78; and the same was true of the from abroad. Nevertheless, the estimated two preceding years. This similarity in shortfall in GNP per head relative to output per head of population reflected Australia is broadly plausible, given the offsetting differences in output per failure of the island’s commodity- employed worker and in the proportion exporting sector to recover fully from the of the population that was economically disruptions of the international depression active. Thus, in 1977–78, GDP per of the 1930s and World War II. employed person in Norfolk Island was It was over a quarter of a century only 77 per cent of GDP per employed before another attempt was made to person in Australia, but the island’s

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unemployment rate was much lower government business enterprises and the (that is, the percentage of its labour force activities of the Commonwealth in employment was much higher), its Government on the island. Relevant data labour force participation rate was much were reported to be mostly ‘of good higher, and a higher proportion of its quality’ (Commonwealth Grants population was of working age. Commission 1997:32). The fact that the estimates of GDP The Commission was faced, however, per head for Norfolk Island in the second with ‘an absence of comparable private half of the 1970s were in money terms sector data’. (Unlike the situation existing approximately the same as those for when the social accounts for the late Australia does not rule out the possibility 1970s were prepared, there was no recent that they differed significantly in real economic census of business enterprises terms or, in other words, that price levels to provide a data base.) The Commission differed substantially between the two therefore derived an estimate of the economies. However, there is no strong private-sector contribution to gross evidence to support this possibility. incomes from productive activity (A$57.4 Available price comparisons are confined million) by taking the total number of to only part of the private consumption private sector employees and applying to component of GDP, and here the results this figure the following assumptions are inconclusive. An inter-regional price • an average wage per employee in index for June 1978 suggests that prices the private sector equal to 90 per for a limited range of consumer goods cent of the corresponding public and services common to Norfolk Island sector figure and Australia were on average more than • an average gross profit per 20 per cent higher in the island; but there employee in the private sector were major omissions from the index. equal to 80 per cent of the They included consumer durables, some corresponding figure for the of whose prices were up to one third profitable government business lower in Norfolk Island than in Australia enterprises. because of the island’s low customs No specific reasons were given for duties at that time, and housing, the costs selecting these particular percentages, of which (according to census data) were although it was noted that the profitable also far lower (Treadgold 1988:236–7). government business enterprises ‘being statutory monopolies…should be able to raise above-average profits’ The Commission’s 1995–96 estimate (Commonwealth Grants Commission 1997:32n). The Commonwealth Grants Commission The final step was to add indirect used the income approach to obtain its taxes less subsidies (A$7.6 million) to the estimate of Norfolk Island’s GDP at public and private sector contributions to current prices in 1995–96. It began by gross incomes from productive activity. estimating the contribution of the island’s The result formed the Commission’s public sector to gross incomes from A$80.3 million estimate of ‘the size of the productive activity (A$15.3 million). This economy’ or GDP in 1995–96. This sum, contribution originated in the general divided by the resident population, gives government functions of the Norfolk a GDP per head nearly 70 per cent above Island Administration, various the Australian level for the same year.

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There are two reasons why it is difficult accompanied by a very substantial to accept a gap of this magnitude in favour difference in private consumption per head of Norfolk Island. First, it implies an in favour of Norfolk Island. Moreover, implausibly high rate of growth of real this presumption is strengthened by the GDP per head in Norfolk Island between likelihood that household disposable 1977–78 and 1995–96. In 1977–78 the income was higher relative to GDP in estimate for nominal GDP per head in Norfolk Island than it was in Australia, Norfolk Island (which was constructed partly because of the absence of income from a data base far superior to that tax in the island and partly because of a available for the 1995–96 estimate) was large net inflow of private property about the same as the Australian figure. income and transfers from abroad. (In Over the following 18 years real GDP per 1977–78 the inflow had been equivalent head in Australia grew at an average to nearly 12 per cent of GDP.) annual rate of 1.8 per cent. Since Norfolk The available evidence, however, Island’s membership of the Australian does not point to a very high level of monetary system would have prevented consumption per head in Norfolk Island the long-term rate of inflation in the island relative to that of Australia. Survey data from diverging significantly from the long- presented by the Commonwealth Grants term rate of inflation in Australia, it follows Commission (1997:27) itself indicates that if nominal GDP per head in Norfolk that in 1995 average household weekly Island in 1995–96 were to have reached a expenditure in Norfolk Island was only level almost 70 per cent above the 4.5 per cent above the level in New South Australian level in that year, the average Wales. Even allowing for a lower number annual rate of growth of real GDP per head of persons per household in Norfolk Island in Norfolk Island would have to have been (1996 census results show 2.2 persons per as high as 4.8 per cent between 1977–78 private occupied dwelling compared and 1995–96. It seems most unlikely that with 2.7 in Australia as a whole), these anything like this was achieved, judging data offer no support for an estimate of from the rate of expansion of tourism, the Norfolk Island’s GDP per head in 1995–96 dominant force in the island economy nearly 70 per cent above the Australian throughout this period. Between 1977–78 level. and 1995–96 real tourist outlays per head Assuming that the Australian data of resident population are estimated to and the census-based figure for the have increased at an average annual rate Norfolk Island population are essentially of only 1.4 per cent.1 accurate, it follows from the above The second reason for questioning an arguments that the Commission’s estimate of GDP per head nearly 70 per estimate of a total GDP of A$80.3 million cent above the Australian level is based for Norfolk Island in 1995–96 is likely to on the arguments that GDP is a major be a considerable overestimate. Given the determinant of household disposable reported good quality of data on public income, and that household disposable sector activities, the main sources of income is, in turn, a major influence on overestimation appear to lie in the crude private consumption. Even allowing for method used to estimate the contribution the possibility of some difference in house- of the private sector to GDP. However, hold propensities to save, these arguments the Commission is also certainly guilty of create a strong presumption that a 70 per one, and probably two, basic errors in cent difference in GDP per head would be measuring the contribution of the public

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sector. First, the ‘general government’ recorded at the 1996 census. Government contribution (gross product at factor cost) final consumption expenditure, gross fixed of the Norfolk Island Administration is capital expenditure and the increase in estimated by adding to ‘general govern- stocks were all estimated by extra-polating ment’ wages, salaries and supplements, forward 1977–78 data, using a range of not the appropriate item of ‘general indicators. Gross fixed capital expenditure government’ consumption of fixed capital, was then separated into its general but rather total ‘general government’ government, public enterprise and private capital expenditure. Second, the estimated components, using Commission estimates contribution or gross product of the for the first two components. Exports of activities of the Commonwealth goods and services were constructed Government on the island (A$3.804 around an Access Economics figure for million) exceeds the Commission’s own tourist outlays reported in Commonwealth figure for all Commonwealth expenditure Grants Commission (1997:36). Other on Norfolk Island in 1995–96 (A$3.795 components of exports were estimated million), a figure which includes some either directly from trade statistics or by transfers (veterans’ pensions of A$0.805 extrapolation from 1977–78. Finally, million) and presumably also the value of imports of goods and services were intermediate inputs. extrapolated from their 1977–78 estimate, the f.o.b. component according to the increase in the value of total merchandise An alternative estimate for 1995–96 imports, and the remainder according to the increase in the total turnover of goods Because of the shortcomings of the and services in the island, that is, the sum Commission’s estimate of GDP, an of the estimates of consumption, alternative estimate for 1995–96 is investment and exports (Table 1). constructed here. To avoid the data Clearly, the heavy reliance on extrapol- limitations that hampered the ation techniques over a period of 18 years Commission’s income approach, the means that the alternative 1995–96 alternative was constructed using the estimate for GDP of A$53.4 million cannot expenditure approach. Thus GDP was be regarded as more than an approximate obtained as the sum of private and figure. Nevertheless, it is much more government final consumption expend- plausible than the Commission’s estimate itures, gross fixed capital expenditure, of A$80.3 million, particularly since its the increase in stocks and exports of implied level of GDP per head of A$30,131 goods and services less imports of goods is only 12.4 per cent above the Australian and services.2 figure for the same year (A$26,808). No less Private final consumption expenditure plausible is the estimate of the largest was estimated by converting the survey single expenditure component contributing figure for average weekly household to GDP, namely private consumption expenditure in 1995 to an annual basis, expenditure. It yields an estimate of private inflating by the increase in the Norfolk consumption per head of A$16,791 which Island retail price index between 1994–95 is virtually the same as the corresponding and 1995–96, and multiplying by the Australian figure of A$16,636. This result number of occupied private dwellings was, of course, to be expected, given the

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Table 1 Alternative estimate of gross domestic product at current prices, 1995–96 (A$’000)

A$’000 Final consumption expenditure Private 29,754 Government 6,347 Gross fixed capital expenditure Private 5,804 Public enterprises 971 General government 616 Increase in stocks 1,315 Gross territory expenditure 44,807 Exports of goods and services 43,615 Territory turnover of goods and services 88,422 less imports of goods and services 35,030 Gross domestic product (GDP) 53,392

Source: Author’s calculations. method of estimation and the similarity 1977–78 social accounts showed a current between the estimates of average weekly account surplus equivalent to 21 per cent household expenditure in Norfolk Island of GDP. and New South Wales. Perhaps the most problematic aspect of the alternative estimate of GDP is the size Accounting for the per capita of the associated surplus in the balance of difference trade in goods and services. At nearly A$8.6 million, it is equivalent to 16 per cent The Commission’s estimate of Norfolk of GDP. Having regard also to the Island’s GDP for 1995–96 implies not only Australian Government’s net current an implausibly high estimate of GDP per transfers to the island (Commonwealth head of resident population, but also a no Grants Commission 1997:69–73) and less implausible level of GDP per employed Norfolk Island’s recent history of large person of A$74,395. This estimate, which receipts of private property income and can be interpreted as a crude measure of transfers from abroad (Treadgold the monetary value of labour productivity, 1988:235–6, 242), the trade surplus is nearly 27 per cent higher than the suggests an even larger (possibly much corresponding Australian level for the larger) surplus on the current account of same year (Table 2). By contrast, using the the balance of payments. However, the alternative estimate of GDP presented in likelihood that, for its size, Norfolk Island Table 1, a level of GDP per employed was a very substantial net exporter of person in Norfolk Island is obtained that, capital should not come as a surprise. The at A$49,437, is 16 per cent below the

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Australian figure of A$58,759. This result Revenue-raising capacity sits much more comfortably with the earlier The Commission’s over-estimation of the data for 1977–78 which indicated a 23 per GDP of Norfolk Island would perhaps be cent shortfall of GDP per employed person of only academic interest were it not for in Norfolk Island relative to Australia. the serious doubt that it casts on one of the Despite this shortfall, Norfolk Island’s Commission’s key conclusions; namely GDP per head in 1977–78 was approx- that, if the Norfolk Island government imately the same as the Australian level at increased its revenue-raising effort to that time because a higher proportion of Australian levels, it could afford to Norfolk’s population was economically upgrade the provision of services for which active. Eighteen years later the proportion it presently has responsibility to continued to be higher, as shown by the Australian standards, meet associated comparisons in the last three rows of Table infrastructure costs, and indeed take on 2. A greater proportion of Norfolk’s labour extra responsibilities (Commonwealth force was in jobs; a greater proportion of its Grants Commission 1997:xv, 174, 177). population of working age was in the The Commission used the term labour force; and a greater proportion of its ‘financial capacity’ to describe the amount total population was of working age. It is of public revenue the Norfolk Island this set of circumstances that accounts for government would receive if it increased its the alternative estimate of GDP per head revenue-raising effort to Australian levels. for 1995–96 being 12 per cent above the The Commission’s approach to the Australian level in that year, even though estimation of this sum involved essentially the alternative estimate of GDP per three steps. First, Australian public employed worker is 16 per cent lower than revenue was disaggregated into detailed its Australian counterpart. categories. Second, the effective tax rate for

Table 2 Norfolk Island and Australia: some comparative data

Norfolk Island Australia GDP per head, 1995–96 A$30,131 A$26,808 GDP per employed person, 1995–96 A$49,437 A$58,759 Percentage of labour force in employment 99.3 91.5 (1996 census) (average for 1995–96) Labour force participation rate (per cent) 77.1 63.7 (1996 census) (average for 1995–96) Percentage of population of working age (15 years and over) 79.6 78.3 (1996 census) (average for 1995–96)

Sources: Table 1; Administration of Norfolk Island, 1996. Norfolk Island Census of Population and Housing, 6 August 1996—Statistical Report on Characteristics of Population and Dwellings, Administration of Norfolk Island, Norfolk Island; Australian Bureau of Statistics, 1996. Labour Force, Australia, July 1996, ABS Catalogue No. 6203, Canberra; Australian Bureau of Statistics, 1997a. Australian Demographic Statistics, March Quarter 1997, ABS Catalogue No. 3101.0, Canberra; Australian Bureau of Statistics, 1997b. Australian National Accounts: National Income, Expenditure and Product, September Quarter 1997, ABS Catalogue No. 5206.0, Canberra.

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each category was calculated by (Commonwealth Grants Commission expressing the revenue raised in the 1997:173). category as a percentage of what was The problem with these findings is that assumed to be its underlying tax base. (For the Commission used its A$80.3 million example, the value of imports was chosen estimate of GDP in 1995–96 and some of as the tax base for customs duties.) Third, the factor income components of this the effective tax rates were applied to estimate as tax bases for estimating various comparable tax bases on Norfolk Island to components of potential public revenue for obtain, after summation, an aggregate the island. Hence, even accepting the figure for the total public revenue that Commission’s methodology, the A$15.9 could be raised on Norfolk Island if the million figure for the island’s financial full range of Australian revenue-raising capacity is almost certainly an over- measures were introduced at the effective estimate. rates applying in Australia. This final step Partly because the much lower incorporated, however, some downward estimate of GDP presented in this paper adjustments to allow for the ‘special is not separated into factor income circumstances’ of Norfolk Island. These components and partly because of were the likelihood of smaller yields from inadequate detail in the Commission’s income tax (possibly reflecting greater presentation of its calculations, it is not scope for tax avoidance and evasion), possible to quantify the extent of the cultural factors that restricted the tax base over-estimation by re-working the for revenues from gambling, and a lack of Commission’s calculations. However, it is capacity to raise revenue from mining. possible to revise an alternative, ‘broader The Commission’s resulting estimate measure’ of financial capacity presented of financial capacity for 1995–96 was by the Commission (Commonwealth A$15.9 million or A$8,956 per capita, an Grants Commission 1997:159). The amount clearly much larger than the Commission’s broader measure was A$9.9 million (A$5,771 per capita) of obtained, in effect, by adjusting total public revenue actually raised in Norfolk public revenue in Australia in 1995–96 Island in 1995–96. Together with A$1.5 for the equivalent of Norfolk Island’s million from the undistributed profits of ‘special circumstances’, expressing the government business enterprises and outcome as a percentage of GDP for depreciation provisions, it would have Australia (24.04 per cent), and then provided sufficient resources to have applying the percentage to the funded the substantially increased levels Commission’s estimate of GDP for the of expenditure (A$15.5 million) that the island. When the resulting amount of Commission estimated that the Norfolk A$19.3 million is revised by using the Island government would have needed to alternative estimate of GDP presented make in 1995–96 in order to have met here, it becomes only A$12.8 million, a Australian standards in the provision of downward revision of more than a third. public services and associated The Commission’s preferred estimate infrastructure costs. Moreover, there of financial capacity of A$15.9 million would still have been a surplus of A$1.9 would not be subject to the same million available for meeting the costs of proportionate degree of revision because taking over some of the Australian not all the disaggregated tax bases on Government’s remaining responsibilities which it is built depend on the in relation to Norfolk Island Commission’s estimate of GDP and its

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components. Nevertheless, a downward Conclusions revision of only 12 per cent would be enough to eliminate the A$1.9 million The Commonwealth Grants Commission surplus that the Commission’s preferred appears to have greatly exaggerated the estimate suggests would have been size of the Norfolk Island economy. The available in 1995–96 for funding Commission’s methodologically flawed additional responsibilities; and any greater estimate of GDP for 1995–96 translates downward revision would reduce into a level of output per head of estimated financial capacity below the population nearly 70 per cent above the level that, according to the Commission’s Australian level. A difference of this figures, would have been required to magnitude implies an implausibly high upgrade the provision of public services rate of per capita growth since the late to Australian standards and meet 1970s, and is inconsistent with associated infrastructure costs. independent evidence on household The probability that a revenue-raising expenditure levels in Norfolk Island and effort comparable with the Australian New South Wales. effort would not have been sufficient to The alternative estimate of GDP for allow Australian standards of public 1995–96 is as much as a third lower than services and infrastructure might seem the Commission’s estimate. It suggests a relatively low, given that the alternative, level of output per head only 12 per cent lower estimate of Norfolk Island’s GDP above the Australian level. Output per still implies a GDP per head higher than employed person appears, indeed, to be 16 that of Australia. The probability is, per cent below its Australian counterpart; however, strengthened by three factors. but this shortfall is more than offset by First, the allowance for Norfolk’s special the much higher proportion of Norfolk circumstances means that, in fact, its Island’s population that is economically assumed revenue-raising effort would active. not have been fully comparable with The alternative estimate of GDP also Australia’s. Second, a failure to maintain suggests that the Commission has drawn the physical capital stock of the island’s an excessively optimistic picture of the public sector appears to have contributed revenue-raising potential of the Norfolk to particularly high infrastructure Island government. As a consequence, spending requirements. (In per capita there must be considerable reservations terms, the Commission’s estimate for about the Commission’s conclusion that 1995–96 is nearly three times the level of the Norfolk Island government has the public investment in Australia in that year.) financial capacity to achieve Australian Finally, there must be a strong likelihood standards in the provision of services, that the island suffered significant cost meet associated infrastructure cost, and disadvantages in the provision of many assume additional powers. public services because of its remoteness and the diseconomies arising from the tiny scale of its public sector operations.

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Notes References

1 The estimate is derived using a figure for Administration of Norfolk Island, 1996. total nominal tourist outlays of A$40.4 Norfolk Island Census of Population and million in 1995–96 (an Access Housing, 6 August 1996: statistical Economics estimate reported in report on characteristics of population Commonwealth Grants Commission and dwellings, Administration of Norfolk Island, Norfolk Island. 1997:36) and a corresponding figure of A$8.741 million in 1977–78 (Treadgold Australian Bureau of Statistics, 1996. 1988:242). Nominal outlays were Labour Force, Australia, July 1996, ABS converted to real outlays by deflation Catalogue No. 6203, Canberra. with a composite price index Australian Bureau of Statistics, 1997a. constructed by splicing the Norfolk Australian Demographic Statistics, Island retail price index and the March Quarter 1997, ABS Catalogue Australian consumer price index. No. 3101.0, Canberra. 2 As in previous attempts to measure the Australian Bureau of Statistics, 1997b. output of the island economy, data Australian National Accounts: national difficulties precluded the inclusion of income, expenditure and product, an imputed value for non-market September Quarter 1997, ABS Cata- primary production (and consumption). logue No. 5206.0, Canberra. This item was undoubtedly of major Commonwealth Grants Commission, importance in the nineteenth century, 1997. Report on Norfolk Island 1997, and probably still of some importance Australian Government Publishing when Gleeson (1952) prepared his Service, Canberra. estimate of GNP. It was much less Gleeson, L.T., 1952. The Economy of significant by the late 1970s. Its Norfolk Island—With Reference to the omission from both the Commission’s Administration Activity and the Financ- and the alternative estimate for 1995–96 is ing of the Administration, Department judged as unlikely to be a source of of Territories, Canberra. serious distortion. Treadgold, M.L., 1979. Norfolk Island: social accounts statistics, 1975–76 to 1977–78, Department of Home Af- fairs, Canberra. ——, 1988. Bounteous Bestowal: the economic history of Norfolk Island, Pacific Research Monograph No. 18, National Centre for Development Studies, The Australian National University, Canberra.

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Response

The Commonwealth Grants Commission was invited to submit a rejoinder to Malcolm Treadgold’s article ’The size of the Norfolk Island economy’. The following response was prepared by Catherine Hull, Assistant Secretary at the Commonwealth Grants Commis- sion responsible for revenue capacity asssessments. The Commission has not examined the article and the comments provided are the responsibility of the author.

The Commonwealth Grants Commission’s Commission’s report is based on Report on Norfolk Island 1997 estimated reasonable assumptions and is probably that the size of the Island’s economy in conservative. As a result, I do not believe 1995–96 was about A$80 million. The revenue-raising capacity is overstated or preceding article suggests that the that there should be concerns about the Commission’s estimate is too high because Commission’s conclusions. • a flawed approach was used to measure the size of the economy Commission’s estimate of GDP • the estimate translates into a level of output per head of population The Commission chose an income that was nearly 70 per cent above approach to measure the size of the the Australian level and implies an implausible rate of growth for the Norfolk Island economy, or its GDP, for Norfolk Island economy two reasons. It was considered that the components of the income approach were • an alternate method of calculating more useful in estimating revenue-raising GDP produces an estimate of A$53.4 million which is more capacity, and that the data supporting consistent with other indicators. this method were more reliable. Measuring GDP in any small economy It therefore concludes that the is likely to be difficult because of data Commission has been much too optimistic deficiencies that usually accompany the in its assessment of the revenue-raising need for privacy. As noted in the capacity of the Norfolk Island government Commission’s report, data on public and questions the conclusion that the sector activities on Norfolk Island were Norfolk Island government has the available and of good quality. However, financial capacity to achieve Australian private sector data were not available. standards in providing services, meet The best that could be found were from associated infrastructure costs and assume the Australian Bureau of Statistics additional powers. Norfolk Island Household Expenditure While accepting that the Commission’s Survey of 1995. The Commission decided estimate of GDP for Norfolk Island is not that the results of that survey were perfect because of the unavailability of unreliable and could not be used to all of the necessary data, I believe that estimate GDP using an expenditure the estimate of GDP used in the approach.

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The survey results were based on 217 of the figure for the profitable households out of a sample of 520 selected government trading enterprises.1 to participate. While the 217 households These assumptions were made on the represented 30 per cent of Norfolk Island’s basis of information gained through population, the response rate of 40 per visits to Norfolk Island and discussions cent suggested that there was likely to be with members of the government, some bias in the results. In fact, several representatives of the private sector, the sources reported to the Commission that public service, the managers of • those that had responded would government trading enterprises and the not have been keen to divulge community. They were considered by the personal information to ‘the Norfolk Island government and private government’ sector representatives when a draft • it was highly probable that higher report was distributed and discussed at a income households had not public conference. responded. At that conference, there was general I am not certain why the author of support for the Commission’s assumptions. the paper extrapolated so many of the However, the view that the private sector components of his estimate of GDP as would only make 80 per cent of the profit data were available on government final per employee that emanated from the consumption expenditure, gross fixed profitable government enterprises was capital expenditure, and imports and considered by the Norfolk Island exports. Other data, such as increases in government and representatives of the stocks, could have been constructed using private sector to be conservative. The accumulated capital expenditures. The Commission chose to maintain this low approach taken by the author ensures percentage because it believed that the that errors built into the original estimate, trading enterprises were monopolies that which was made 18 years ago, were should be able to make above average carried forward and compounded with profits. In addition, it made a conscious new errors in the unspecified ‘range of decision that its measure of GDP should indicators’ used in the extrapolation. As be seen as conservative. Its estimate of noted by the author, the estimate certainly the private sector contribution may thus ‘cannot be regarded as more than an be an understatement. approximate figure’ (p70, this issue). It is however consistent with the The Commission’s decision to use the Access Economics (1997:21) estimate that income approach to the measurement of the tourism sector contributed A$41.4 GDP meant that an estimate of the private million to the Norfolk Island economy in sector’s level of output was required. It 1995–96 and the 1996 Norfolk Island used data on the numbers of employees Census figure that 53 per cent of the in the government and private sectors resident working population had a job and made some assumptions about their directly related to tourism. The same relative contribution to the economy. It productivity in the non-tourism element assumed that of the private sector would imply a total • average wages for each employee in economy of about A$78 million. The the private sector were 90 per cent Commission also noted that some of the public sector figure estimates put the size of the economy at • gross profit for each employee in over A$90 million (implying a private the private sector was 80 per cent sector contribution of A$70 million).

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The GDP estimate of A$53.4 million capital expenditure of the general calculated in the paper implies a private government sector of Norfolk Island was sector output of only about A$30 million only A$616,000 (a small contribution to (compared with a Commission estimate the A$80 million GDP figure), the of A$57 million). This would imply that Commission did not believe such an • average wages in the private sector approach was warranted. Again, it were very much lower than those in considered that the amount used was the public sector (maybe 45 per cent probably an underestimate of true capital of the public sector level) consumption because its examination of • that gross profit per employee in the public accounts suggested that the the private sector was substantially Norfolk Island government was running less than that of employees in down its capital stocks. government trading enterprises On the other hand, the estimate of (perhaps as low as 40 per cent). Commonwealth output used by the These results seem somewhat unlikely.2 Commission in calculating GDP may be too high because of the small error of The Commission’s estimate has also A$9,000 pointed out in the paper. But been criticised because it used reducing the estimate by this amount, or • general government capital expen- as much as A$900,000 implied in the ditures, rather than the consump- paper,3 would have little impact on the tion of fixed capital, to derive a final outcome. measure of the output of this sector The fact that the Commission’s • a measure of the output attribut- estimate implies a level of output 70 per able to the Commonwealth Govern- cent above Australian levels was ment of A$3.804 million, when the acknowledged in the report. Moreover, the report showed total Common- wealth expenditure on Norfolk following extract from the report indicates Island to be A$3.795 million. that the Commission considered such a differential to be plausible. General government capital expenditures were used as a proxy for Table 1 provides some selected statistics for the Norfolk Island and consumption. An assets register that mainland economies. It shows that included stock valuations for the general Norfolk Island’s estimated gross government sector was not available and product per capita is 70 per cent depreciation is not shown in the general above that of mainland Australia. government accounts as they are prepared The relatively better performed on a cash basis. The Commission decided Norfolk Island economy is consistent to use capital expenditure to estimate with an export-oriented economy capital consumption because, over the where income is generated from a long term, depreciation of stock approx- wider population base (particularly imates capital expenditures—particularly tourists) than the local community. Compared with mainland Australia, in an economy in which the population is the estimates show that Norfolk has not growing. both a higher average per capita A consumption figure could have been profit (142 per cent higher) and estimated using a method based on higher average per capita wages (5 depreciated accumulated capital expend- per cent higher). This is consistent itures, such as the perpetual inventory with its method used by the Australian Bureau of • higher workforce participation rate Statistics. However, given that the 1995–96 (76.5 compared to 63.7 per cent)

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• higher proportion of the relevant have a tendency to understate population in full-time employment income levels. In addition, even the (87.2 compared to 69.1 per cent) Australian Bureau of Statistics • negligible unemployment revises its estimates of GDP and acknowledges that the statistical • possibly, longer working hours discrepancy of quarterly GDP (many people seem to have more income and expenditure estimates than one job) (Commonwealth can be as high as 7 per cent (Aus- Grants Commission 1997: 39–44). tralian Bureau of Statistics The criticism that the high level of 1990:234). Thus, the 1977–78 base output translates to an implausibly high used by the author could well be average annual rate of growth in GDP of underestimated, and growth rates 4.8 per cent is rejected for a number of overestimated. reasons. • A growth rate of 4.8 per cent is not • The paper uses a 1977–78 base to implausible for a small isolated derive the growth estimate. While it economy at a different stage of asserts that good data were avail- development to the mainland, able to derive the original estimate, especially when times have been it is unclear just how reliable it was. (relatively) good. During its inquiry, the Commission • Tourist numbers increased by 30 was frequently told by people on per cent from 1979–80 to 1995–96 the island that Norfolk Islanders and Access Economics estimates are usually resistant to providing that tourism contributed A$41.4 information to government and million to the Norfolk Island

Table 1 Selected statistics, Norfolk Island and the mainland, 1995–96

Norfolk Island Mainland Economic statistics Gross product (A$ per capita) 45,343 26,735 Wages and salaries (A$ per capita) 13,735 13,131 Gross profit (A$ per capita) 24,829 10,274 Population statistics Percentage aged 65 and above 13.5 11.3 Percentage aged 15 to 65 66.0 66.3 Percentage in the workforce 76.5 63.7 Labour force statistics Percentage in full time work 87.2 69.1 Percentage in part time work 12.8 22.5 Percentage unemployed - 8.5

Notes: Norfolk Island economic statistics were estimated. Its population and labour force statistics were compiled from Norfolk Island Census of Population and Housing, 6 August 1996. The assumptions used to calculate Norfolk Island’s gross product, wages and salaries and gross profit figures are given in the footnotes to the Commission’s Report on Norfolk Island, 1997: Table 4-1. Sources: Figures for Australia were compiled from Australian Bureau of Statistics, 1996. Australian Economic Indicators, May, ABS Cat No 1350.0, Canberra: Tables 1.4, 6.1 and 9.2; Table L-7 from the Commission’s Report on Revenue Grant Relativities, 1997 Update.

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economy in 1995–96. Other export million, if it raised revenue at mainland industries (including mail order) standards. have also grown. Although early In concluding that the Norfolk Island data on government revenues are government had the financial capacity to not given in the Commission’s meet Australian standards of services, report, it shows that these grew the Commission by 16 per cent from 1993–94 to 1994–95 and 13 per cent from • calculated revenue-raising 1994–95 to 1995–96. capacity by applying Australian mainland tax rates to Norfolk The paper also claims that the Island tax bases, adjusted5 to take Commission’s estimate that GDP per account of the real constraints capita is nearly 70 per cent above the Norfolk Island faced in collecting Australian level is invalid because it does revenue not translate into a substantial difference • took into account the additional in private consumption between Norfolk services required and the higher Island and Australia. Again, the author of costs of providing all services on the paper relies on evidence from the Norfolk Island due to its flawed Household Expenditure Survey to remoteness, scale diseconomies suggest that household weekly and so on expenditure on Norfolk Island is only 4.5 • allowed for the backlog of per cent above the level in New South infrastructure requirements. Wales. I noted earlier the unreliability of The figures provided in Table 8-4 of this survey for Norfolk Island, and its the Commission’s report (reproduced probable bias in favour of the less well off. here as Table 2) justify the conclusions that the Norfolk Island government has Norfolk Island taxable capacity the financial capacity to and its ability to provide • meet the obligations associated Australian-standard services with its existing government functions, in terms of both service provision and infrastructure As the Commission’s measure of the size requirements of the Norfolk Island economy is not overstated, I do not accept that its • fund some additional services. measure of the Island’s capacity to raise Using the paper’s estimate of GDP revenue is overstated. Even if the would, at most, lead to the conclusion Commission’s estimate of GDP were that Norfolk Island may not have the high, revenue capacity could only have capacity to fund any additional been overstated by the extent to which responsibilities. the private sector outputs were used in In relation to these, the Commission the calculations. Information provided suggested that no discussion on possible in the report suggests that, even if the transfers take place until the Norfolk paper’s estimate of Norfolk Island’s Island government had met its existing GDP were correct, the maximum service obligations. The Commission also overestimate would be some 12 per cent.4 noted that administrative capacity was the On this basis, Norfolk Island would still main factor limiting the ability of Norfolk have the capacity to collect A$13.9 Island government to deliver services.

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Table 2 Illustrative 1995–96 Norfolk Island budget, assuming mainland expenditures and revenue-raising effort

Amount (A$’000) Revenue at mainland revenue-raising efforta 15,900 Less Recurrent expenditureb 7,500 Extra recurrent expenditure to provide mainland standardsc 2,470 Surplus on recurrent account 5,930 Plus Undistributed profits of business enterprisesd 280 Funds from depreciation provisions 1,200 Total funds available for capital expenditure 7,410 Less annual capital requirement 5,500 Surplus, estimated 1,910 a From Table 7-12. b Total 1995-96 expenditure of the Revenue Fund less capital expenditure ($620 000) and expenses recovered from business enterprises ($600,000). c From Table 8-2. d Surplus of business enterprises for 1995–96 ($2,100,000) less revenues at mainland revenue efforts for landing fees, Healthcare levy and transfers from business enterprises ($1,620,000). Actual revenue from the Workers Compensation Levy (about $200,000) has also been deducted as the analysis assumes it is part of pay-roll taxation. Source: Commonwealth Grants Commission, 1997. Report on Norfolk Island 1997, Australian Government Publish- ing Service, Canberra.

Conclusions If there are flaws in the estimate, they are due to data deficiencies that will I believe the Commission used a affect all measures of GDP. The conservative but realistic estimate of the Commission rejected the use of an size of the Norfolk Island economy in its expenditure-based estimate because it report. The Commission visited Norfolk was considered less reliable, due largely Island on several occasions and held to problems with the Household extensive discussions with the govern- Expenditure Survey results. The income- ment, the public service, the private sector based measure was also more useful for and the community. The size of the its estimates of revenue capacity. economy was discussed with all interested The difference between Norfolk parties on the Island. The Commission’s Island’s per capita level of output and judgement, based on the knowledge and Australia’s per capita output is not experience it gained, was that the estimate unexpected, given the conditions on the derived and the assumptions used were Island. The growth rate implied for the consistent with the best information Norfolk Island economy is not implausible, available. particularly if the base is incorrect and

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probable flaws in the household ——, 1996. Australian Economic Indicators, expenditure data are recognised. May, ABS Cat No 1350.0, Canberra. The Commission’s conclusion that Commonwealth Grants Commission, the Norfolk Island government has the 1997. Report on Norfolk Island 1997, financial capacity to achieve Australian Australian Government Publishing standards of service provision and meet Service, Canberra. infrastructure costs stands. The question of additional responsibilities can easily wait for another day.

Notes

1 The figures for the three subsidised enterprises (KAVHA, Bicentennial Integrated Museums and the Healthcare Fund) were not included. 2 Other possible assumptions, such as average wages in the private sector remaining at 90 per cent of the public sector figure and private sector profits being 25 per cent of trading enterprises profits, are equally unlikely. 3 A$9,000, plus A$805,000 for war veterans’ pensions and another amount for the value of intermediate inputs. 4 Only 36 per cent of the Commission’s estimate of Norfolk Island’s taxable capacity is dependent on estimates of private sector output. 5 Adjusting the tax base does not reduce Norfolk Island tax effort at all.

References

Access Economics, 1997. Norfolk Island: recent economic performance, present situation and future economic viability. Is there a case for change?, Canberra. Australian Bureau of Statistics, 1990. Australian National Accounts, Concepts, Sources and Methods, ABS Catalogue No 5216.0, Canberra.