The Economics of Population Growth

Jonathan Rochford

The elephant in the room for Australia’s Federal Parliament has finally been called out. Australia’s rapid population growth is arguably as important an issue as balancing the budget and the environment. Yet almost no one has dared to mention it since Kevin Rudd talked of a “big Australia” in 2009. This failure to talk about it doesn’t mean that politicians don’t have a view. The major parties, by their actions have tacitly continued to implement a big Australia policy. Even the minor parties have said little and it has been left to non-politicians like Dick Smith to raise the issue.

Dick Smith’s involvement is indicative of the low quality of economic understanding when it comes to the implications of population growth. He’s half right and half wrong in his major claims that population growth makes housing more unaffordable (right) and will increase unemployment (wrong). This article brings basic economic principles and observations to the debate. It discusses both the obvious and the unseen implications of population growth, with the aim of allowing all Australians and particularly our leaders to consider whether a bigger Australia is better.

Australia’s Population Growth is Abnormal

Over the last decade Australia has averaged annual population growth of 1.7% compared to 0.8% in the US and 0.1% in Europe. Of the world’s wealthy nations only Singapore and Israel had similarly high levels, although Singapore has pulled back substantially with only 0.1% growth in 2017. Over the decade, 41% of Australia’s population increase has come from natural growth (births minus deaths) and 59% has come from net migration.

However, this split of population growth between natural growth and migration is deceptive. Since 1976 Australia has had a fertility rate (average births per woman) of less than the replacement rate of 2.1. Whilst much of the natural growth is due to increased lifespans, migration plays a major part. Australia’s migrants are predominantly aged under 40, making most of them in, or soon to be in, their most fertile years. Once in Australia their future children count as natural population growth. Whilst there are many good arguments for focussing Australia’s migration intake on highly skilled younger people we need to acknowledge that this group will have a secondary boost on our population by having children after they arrive.

Population Growth and Economic Growth

At the most basic level, population growth increases the total size of the economy including the demand for labour. There are more people purchasing goods and services so the economy grows to meet that demand. Politicians are positively disposed to population growth as it allows them to boast about economic growth and job growth. Big businesses love population growth as they are able to grow their customer base without having to aggressively compete. Unions may also benefit from population growth as it increases the total size of labour force and their pool of potential members.

However, this is a very shallow line of thinking as ordinary Australians have been receiving little benefit from broadly measured economic growth. Ordinary people want their incomes to increase relative to their expenses and this requires real (after inflation) GDP per capita growth. As the graph below shows, real GDP per capita growth has averaged less than 1% over the last decade. This explains much of the disquiet amongst Australians with both major parties since the end of the Howard/Costello government. Australians became used to stronger growth in real incomes and are now unhappy that this has slowed.

Source: ABS

Population Growth and Employment

The lie that population growth takes jobs fools many as it contains a kernel of truth. On an overall basis, skills based migrants (but not family and humanitarian migrants) are likely to create slightly more jobs than they take through their upskilling of the workforce and broader contribution to the economy.

However, some migration does take jobs that would have otherwise gone to Australians. Several sectors such as restaurants, construction, mining and technology have found that it is easier and cheaper to hire a skilled worker from overseas than to train a local to do the job. For technology, it is arguable that a business would relocate some or all of its operations overseas if it cannot get the skilled workers they need in Australia. However, in restaurants, construction and mining jobs rarely can be outsourced overseas.

There are two issues behind the problem of businesses looking to import labour. First, in some cases businesses are neglecting their social responsibility to train the workers they need. There are substantial discounts to the minimum wage for many trainees, apprentices and employees aged under 21. There are government schemes encouraging traineeships and apprenticeships, as well as low cost training via TAFE. In some sectors, the availability of visas should be withdrawn altogether and businesses should source their employees solely from the domestic population.

Second, there is a willingness to work issue amongst a small portion of Australians. This is particularly apparent in unskilled jobs, which are often filled by backpackers and overseas students. The levels of unemployment and underemployment indicate that some Australians prefer to live on welfare (often topped up with cash in hand jobs) rather than take an unglamorous job. Welfare and tax reform aimed at eliminating the “welfare trap” and more stringent testing of attempts to find work are required. In extreme cases, unemployed people should be directed to attend a workplace with a vacancy rather than being given continued flexibility to search for their ideal job.

Population Growth and Housing Affordability

Whilst there are many factors that impact housing affordability, rapid population growth is arguably the largest contributor to Australian housing being amongst the most expensive in world. Housing (both purchasing and renting) functions like almost all other markets in that demand and supply determine the price. Rapid population growth is a continual boost to the demand for housing. The supply of housing has struggled to keep pace with demand growth, as evidenced by rent and house prices rising much faster than inflation for several decades.

Reducing the migration intake is just one of eight reforms politicians should pursue to make housing more affordable. Of the eight reforms, it is amongst the least controversial and would have the most impact. If Australia was to dramatically slow its population growth (most easily achieved by reducing the migration intake) the stock of available housing could increase faster than demand for it. The basic laws of demand and supply would then see rents and house prices fall as the number of vacant properties increased. Slowing the rate of population growth would have a secondary impact on prices as the cost of building would fall as the stretched capacity in the construction industry returned to normal levels.

Quality of Life Impacts

Even if discussions of economic growth are shifted to a real GDP per capital basis that still ignores the quality of life impacts. Roads and public transport have become more congested, capacity at schools and hospitals is stretched and housing must densify to cope. As backyards become less common, the use of public spaces like beaches, parklands and sporting fields increases. Governments often respond to the increased usage by implementing user pays charges, (e.g. toll roads and parking meters) another impost on citizens who are already angry that the quality of services they receive for their taxes appears to have declined. For the average citizen, a bigger Australia is not a better Australia.

Population Growth is Expensive

Whilst the broad economic growth that comes with population growth is obvious, the financial cost of the growth is often forgotten. The infrastructure spending binges in Sydney and Melbourne will need to continue for decades if population growth doesn’t slow. These projects create a temporary boost to the economy and employment but are a huge impost on government budgets. Rapid population growth makes these projects even more expensive as the construction industry is already stretched keeping up with the demand for additional housing.

The lack of available land means most new transport projects require tunnels. These are many times more expensive than previous projects, as tunnels are far more expensive to construct than above ground road and rail infrastructure. If Australia’s population was stable only a small fraction of current infrastructure spending would be required to maintain the existing infrastructure base.

Will Cutting Migration Cause a Recession?

Proponents of high population growth often argue that if Australia stopped its rapid population growth a recession would ensue. Superficially this seems correct as construction and associated industries employ a material portion of the population. However, as discussed in the previous paragraphs rapid population growth is expensive for governments. A slower level of population growth would require less infrastructure spending. This would allow governments to cut taxes, increasing spending in other areas or a combination of both. If taxes were cut, residents would allocate their increased spending power to other areas of the economy offsetting the reduction in construction.

What About an Ageing Population?

The Productivity Commission has substantially debunked the arguments that Australia needs migration to counter the ageing population. It noted in its 2016 report that migration “does not offer a long term panacea – immigrants age too”. Australia must confront the costs of an ageing population eventually. What is often forgotten is that whilst the population is living longer, it is also healthier for much longer. Despite these substantial health and life expectancy improvements the pension eligibility age has barely moved in 100 years. The obvious solutions are to continue to increase the starting age for the pension, along with reform of the tax and welfare systems to encourage all adult Australians to work at least part time.

Are There Other Ways to Generate Growth?

As discussed earlier, population growth is a cheap way to generate headline economic growth, but it does little for real GDP per capita. To do this, all levels of government should embark on a wave of taxation and productivity reforms. Taxation reform would encourage underemployed Australians to increase their levels of work, saving and investment. Productivity reform would remove unnecessary regulation and government interference in the economy allowing businesses to produce better goods and services at a lower price.

The analysis of these reforms has already been done by the Henry Review, the Tax White Paper process and the Productivity Commission. It’s a matter of having the political leadership and courage to implement them. Together these reforms will increase incomes and decrease the cost of living, delivering the disposable income growth Australians are demanding.

Who Should We Encourage to Migrate to Australia?

Given growth is expensive, Australia should focus a limited migration program on new residents who will be substantial taxpayers, more than covering the costs they create by their addition. This program would encourage high skill and high wealth migrants. High skill migrants that earn high wages pay material income tax and GST. They also assist Australian businesses to be internationally competitive thus increasing our exports. High wealth migrants should be encouraged to live and invest in our economy, with the additional jobs and taxes generated a net positive. High wealth migrants are likely to purchase very expensive properties, generating substantial property tax revenues with little impact on the pool of affordable housing.

The Refugee Question

The United Nations currently cites 65.6 million people as forcibly displaced and 17.2 million people as UNHCR refugees. Australia’s annual humanitarian intake is less than 0.1% of UNHCR refugees and 0.03% of forcibly displaced people. Even if all wealthy nations were as generous as Australia in accepting humanitarian migrants only a tiny portion of these groups would ever be resettled in wealthy nations.

Humanitarian migrants have historically made up 5-10% of Australia’s net migration. These migrants predominantly come from non-Western and non-English speaking backgrounds. Whilst not a significant part of total migration these migrants have significant difficulties adjusting to life in Australia, requiring disproportional ongoing government assistance. This assistance is in addition to the costs created by increasing the population.

The approach of Australia and other wealthy nations means that a tiny proportion of potential humanitarian migrants are able to resettle in comparative comfort whilst tens of millions remain impoverished. These migrants create substantial direct and indirect costs. It is arguable that a fairer outcome is to provide greater assistance to a much larger number of displaced people at their current location instead of allowing a much smaller number to migrate to wealthy countries. As an example, Australia spent $9.6 billion in three years on migration and border protection measures. This amount could have bought 32 million temporary family shelters including sleeping mats, blankets, kitchen equipment and a stove.

Conclusion

Australia’s rapid population growth has had substantial negative impacts on existing residents, yet Australia’s politicians have chosen to not discuss the elephant in the room. This doesn’t mean that they don’t have a view, their continuation of abnormally high levels of migration shows they are strong supporters of a big Australia. Rapid population growth is expensive and has decreased the quality of life for Australians. Population growth has been poorly managed with vital transport and social infrastructure failing to keep up with the population that uses it.

Arguments that population growth is necessary to avoid a recession or to prevent ageing of the population are erroneous. Australia should implement tax, welfare and productivity reforms to lift incomes, decrease the cost of living and to underpin Australia’s future economic prosperity. Migration levels should be dramatically reduced with the migrants selected being those who have the best prospects of contributing more than they cost. More than ever, Australians are looking for political leadership and courage with population growth an obvious area to begin.

Written by Jonathan Rochford for Narrow Road Capital on March 26, 2018. Comments and criticisms are welcomed and can be sent to info@narrowroadcapital.com


Jonathan Rochford

Narrow Road Capital is a credit manager with a track record of higher returns and lowers fees on Australian credit investments. Clients include institutions, not for profits and family offices.

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Michael Mann

Good article, as usual it will take a disaster before issues are addressed. In relation to housing and land availability their has been little Regionalisation. There is not a lot outside Capital Cities. No one is interested in encouraging regional city growth which will mean infrastructure spending. As a result Capital City property price trend will keep rising. Employment = more spending = more jobs as well as a proportionately higher number of unemployed.. As we are a bottom up economy ie, we distribute money to welfare, aged and low income earners to keep the cash registers ticking over we need extra jobs for the taxation to keep this moving. Historically we have found an easy solution to employment issues, We just keep raising educational requirements. It does not seem all that long ago that long ago that full time employment commenced for many at 15 or 16 years of age.. If immigration levels decrease (it will not as we are locked in) a simple solution would just be to raise the retirement age 5 or more years to make up forgone revenue due to less jobs/tax.. We need immigration to support our aging population. Our pension system will really start to hurt when we get the late 70's and 80's bulge. That is the age spending starts to fall off and money is deposited in the 'mattress bank'. Less spending will likely hurt the economy.

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adam vandervelde

While a balanced article your opinion that wealthy immigrants are a good thing for our country is nonsense. Wealth via tax generation to increase the pool for politicians to disperse is an unquenching thirst, the more money the pollies have the less the benefits per dollar spent. The only thing that matters is the average and below average Australian has a quality life, the rich can look after themselves! Chasing GDP growth, being internationally competitive is nonsense talked by men in suits which does not in any way improve the Australians life or environment. Our wages for eg. are nowhere near internationally competitive and wont be for decades if this was our goal to make them a competitive slave labour rate. We already have a competitive internal economy and do not need to compete with other countries in a race to the bottom. eg RIO, BHP, hardly failing companies. Therefore chasing wealthy immigrants is for selfish purposes only. To increase house prices, help politicians and to help shareholders of corporations and their directors. Class dictates wealth as the overriding factor, the current immigrants are wealthy immigrants so basically every average Australian is lower in class than the wealthy immigrant and subservient to them. It also has proven to ruin Aussies dreams of living where they want such as being so greedy as to want to live near their sick mother for example or other family.

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Matt Hol

Enjoyed a balanced non emotional paper.

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Alan Lobley

What has not been said in this article is that migration often causes an increased cost via Centrelink type payments. It takes time for new Australians to contribute to the economy - not a problem but larger numbers mean larger issues. The real problem for population growth is the balance between the opposing forces in action. Of greater concern is the actions of politicians - no longer do they serve the people. John Howard once said that the 'loyalty' of politicians is firstly to the party, then the prime minister and then the Australians that voted (or didn't vote) for them! Politicians no longer care for the voters, no matter what persuasion they are - there is little difference between liberal and labour ideals. Politicians act like children in their realm, acting as enemies but knowing that they have (almost) ensured that one or the other will have the balance of power (two party preferred voting system). Both parties favour the rich in society, neither will reduce the cost of material things - eg why do Australians pay more for gas than people living overseas, why do tax havens only exist for those with money (already) increasing property costs, why are wages for 'ordinary' Australians limited while those for politicians and those who are 'well to do' are not limited, etc, etc, etc? Why don't we have salt water desalination plants feeding the Artesian Basins - no evaporation losses and it would feed already populated areas. Why doesn't the Government develop electricity storage capacity for solar energy generated by householders instead of criticising the number of households owning solar panels as being too large - and still trying to championing coal power plants??? STUPID idea so there is probably a well disguised 'kick back' for the government or their 'well to do' friends!!!! What happened to government by the people and for the people???

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Alan Lobley

There is a balance between the cost of increasing the population to expand the GDP and increasing the cost of Centrelink type payments. The exact balance is difficult to establish and maintain! The thought that the Government would allow ordinary wages to increase is absurd - for several years the 'ordinary people' have had their wages limited, while the 'well to do' have not had any restrictions. In addition these well of people have been able to access - negative gearing, family trusts, income splitting and other systems to reduce their tax. These systems are not available to 'ordinary' people. Worse is the fact that Australian resident pay more for gas (Australian owned) than people in other countries. How is this reasonable BUT typical of the Government, no matter the persuasion. I think this harkens back to John Howard when he said politician loyalty was to the party and prime minister then to the voters (for and against) - how is this reasonable? Your employer who pays not only your salary but your 'lurks and perks' are last in line!!??!! This is a ridiculous situation. Further the 'two party preferred voting system' almost ensures that one of the two major parties will be in power. Why listen to the voters???? Only the 'well to do' are looked after. Surly the government and opposition could agree on ideas which are positive for the country instead of acting (I hope it is an act) like spoilt children in the parliament - Paul Keating has a lot to answer for in my humble opinion. What could be positive for Australia?? 1. Make sure Australians pay the same or less for Australian owned resources 2. Australia is a dry continent so desalination plants (solar) providing water to the Artesian Basin feeder positions would help areas already populated - no evaporative loss in underground situations. 3. Liberal government should applaud household with solar panels and develop a power storage system eo the stored energy could be used at other times. Instead the Government are critical of the 'high' number of solar households with panels. Governments are very short of ideas that are positive for Australia - what a sadly lacking governmental system we have, are we still the 'lucky country'

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Alan Lobley

My comment was not complete! Surly the Government could be involved in positive and helpful endeavours 1. Applaud the high number of household with solar panels and develop a storage system for the power, to be used when appropriate. Unfortunately the current government supports coal fired energy and is very negatively inclined towards solar energy systems. 2. Australia is a dry continent and dam storage of water is subject to evapouration problems. Solar desalination near Artesian Basin feeder points would provide much needed water to already populated districts at minimal cost. Siphoning across mountain ranges in pipes would also allow water to be provided to other areas that are populated. I am sure that other positive ideas would become available to governments!!

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Jonathan Rochford

Thank you all for the comments. I share the sentiment that politicians are not acting in the interests of all Australians and are not spending our taxes efficiently.

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Unified Co

What a fascinating balanced article. Government should take initiative to implement the better reform than wait. The best part was instead of spending 9.6b in 3 years, the amount could have bought 32m family shelters. Once again happy to read such a great article.

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