Appendix A: Modelling and scenario assumptions

What are computable general equilibrium (CGE) models?

CGE models are large numerical models that combine real world economic data with economic theory to computationally derive estimates of how an economy may react to a change in policy or external shock. The data in CGE models typically come from national input-output tables, which contain detailed information about the supply and use of products in the Australian economy and the structure of and inter-relationships between Australian industries. The data are fitted to a set of equations that ascribe behavioural rules determining the way firms, governments and households respond to change. CGE models are used to derive measures of an economy before and after a shock with the differences between the two providing projections of the potential impacts.

Which CGE model did the NSC use for the scenario modelling?

The scenario modelling was conducted using the Victoria University Employment Forecasting (VUEF) model. The VUEF is a family of models centred on a CGE model of the Australian economy. The VUEF brings together a large body of demographic, employment and macroeconomic data, as well as forecasts from government and industry bodies. The VUEF captures the dynamic adjustment to a shock by solving for output and price of a detailed set of industries before solving for employment by industry, occupation and educational attainment. It accounts for scarcity of resources and accommodates a variety of taxes, as well as technical change and changes in taste.

What was the modelling process to develop the scenarios?

The VUEF is used to derive quarterly projections of employment over the period 2020Q1–2027Q2, with initial shocks applied in 2020Q2. Two key components of the VUEF model are used to derive the projections.

Table 8: The VUEF model: Key components

VUEF spine VUEF no-COVID-19 base

The VUEF spine forms the backbone of the model. It is based on the 3Ps: Population, Productivity and Participation. Shocks are applied to the VUEF spine to simulate the impacts of COVID-19 under a range of scenarios.

Some adjustments have been made to the VUEF spine to allow for unusual COVID-19 conditions, such as allowing capital stock to pause and resume production without requiring new investment, to account for the impact of social distancing closures on businesses. It does not include structural changes within industries or occupations by default.

The VUEF no-COVID-19 base contains the 2019 VUEF employment forecasts. These are derived from the VUEF spine but take into account structural changes in the economy, including changes in technology (inputs to production), labour market composition and tastes.

Figure 29: Five-step modelling process

Five-step modelling process. 1. Assumptions for Economic Restoration scenario developed to align with the 2020–21 Budget forecasts. 2. Assumptions for Fortress Australia, Impeded Recovery and Accelerated Digitisation scenarios developed relative to the Economic Restoration scenario. 3. Assumptions for each scenario are fed into the VUEF spine.  4. Outputs for each scenario are produced as percentage deviations from the VUEF spine. 5. The percentage deviations are applied to the VUEF no COVID-19 base, enabling headcounts (or employment levels) to be produced.

Real-time data improved the model

Real-time data from two sources, Xero and Illion, improved the precision and timeliness of some key assumptions underpinning the model. This was particularly critical given the unprecedented and rapid nature of the downturn as a result of COVID-19.

Data from Illion, a credit rating company, was used to monitor how household expenditure has changed since COVID-19 began. Xero accounting data was used to measure the impacts on small business jobs and revenue and to test the validity of short-term assumptions based on observed monthly effects that were reported during the study.

What are the key assumptions for each scenario?

The central Economic Restoration scenario is simulated as a set of deviations from the VUEF spine. The paths for key macroeconomic variables in the Economic Restoration scenario have been developed to broadly align with the macro-economic outlook depicted in the 2020–21 Budget. While the Economic Restoration scenario is aligned to the 2020-21 Budget forecasts, the sector specific results have not specifically taken account of recent Australian Government policy decisions, such as the Modern Manufacturing Strategy.