The Australian Treasury has reportedly provided briefing to the Turnbull Government spruiking the economic benefits of mass immigration and warning against any cut to the migrant intake. From The Age:
The migrant intake from 2014-15 alone will provide a $10 billion boost to the budget over the next five decades, the newly released Treasury and Home Affairs analysis found. It warned of “far reaching effects” of significantly lower economic growth if the current rate of migration is not maintained…
[The report] found migrants boost the Australia economy by up to 1 per cent per year and those who have arrived since 1996 performed better in the workforce than the average Australian-born employee.
It warned Australia’s workforce will begin shrinking unless the immigration rate is retained, as Sydney and Melbourne become dependent on migrants to counter slowing birth-rates and an ageing population.
“Migrants deliver an economic dividend for Australia due to current policy settings which favour migrants of working age who have skills to contribute to the economy. This leads to higher rates of workforce participation and likely productivity benefits,” the report found…
“This, in turn, increases Australia’s GDP and GDP per person, with positive flow-on effects for living standards.”
Mr Morrison said the new analysis provided “a clear evidence base for the government’s migration policy settings supporting our national interest”…
The report conceded a large Australian population brings challenges including “congestion, pressure on the environment, and additional demand in key markets like housing”.
“These pressures exist regardless of migration, but a growing population exacerbates existing pressures, particularly if policy and planning efforts do not keep pace,” the report warned…
“As well as delivering an economic growth dividend, migration improves the Commonwealth’s fiscal position, since migrants are likely to contribute more to tax revenue than they claim in social services or other government support,” the report found…
It said skilled migrants, the focus of Australia’s modern migration program, earn significantly higher incomes and that “migration mirrors trade in the benefits it can bring to an economy.”
It’s sad watching the Australian Treasury become a political arm of the government, rather than giving independent ‘frank and fearless’ advice like it used to. Because this briefing has so many holes, it is hard to know where to start.
First, the claim that “migrants boost the Australia economy by up to 1 per cent per year” is hardly surprising given immigration is responsible for 1% of Australia’s annual population growth (i.e. more inputs in people equals more outputs in GDP):
Second, it is undoubtedly true that immigration provides benefits to the Federal Budget. The federal government collects more than 80% of Australia’s tax revenue, therefore it collects the lion’s share of the financial benefits that come with immigration, such as increased personal and company taxes.
However, a holistic analysis of budgetary impacts needs to also take into consideration the impact on state budgets, which carry the cost of infrastructure and services to support population growth (think roads, public transport, schools and hospitals).
Analysis by the Grattan Institute in 2014 showed that “unprecedented infrastructure spending by states and territories” since the escalation of population growth from 2004 is “largely responsible for a $106 billion decline in their finances since 2006“, and that “after a threefold increase in capital spending over the last 10 years, states are paying 3 per cent more of their revenues in interest and depreciation”.
Separately, Grattan executive director John Daley recently noted that “state governments were struggling to deal with rapid population growth in their major cities and the quality of life of residents – represented by the rapid growth in house prices in recent decades – was suffering”.
Further, a holistic analysis should also take into consideration the costs of mass immigration on household budgets, such as from increased user charges (e.g. toll roads, water desalination, etc). According to the Productivity Commission’s (PC) recent Migrant Intake Australia report:
A larger population inevitably requires more investment in infrastructure, and who pays for this will depend on how this investment is funded (by users or by taxpayers). Physical constraints in major cities make the costs of expanding infrastructure more expensive, so even if a user-pays model is adopted, a higher population is very likely to impose a higher cost of living for people already residing in these major cities.
Of course, you could also do what Australia’s governments have done and ‘save’ money by simply refusing to undertake the required infrastructure investment, the end result of which has been massive infrastructure bottlenecks, congestion, and eroded living standards.
In short, the costs on state and household budgets from mass immigration need to be considered alongside the financial benefits to the federal budget.
Third, the claim that migrants perform “better in the workforce than the average Australian-born employee” and “earn significantly higher incomes” is highly dubious.
The PC’s recent Migrant Intake Australia report stated that around half of the skilled steam includes the family members of skilled migrants, thus around 70% of Australia’s total permanent migrant intake is not actually ‘skilled’:
…within the skill stream, about half of the visas granted were for ‘secondary applicants’ — partners (who may or may not be skilled) and dependent children… Therefore, while the skill stream has increased relative to the family stream, family immigrants from the skill and family stream still make up about 70 per cent of the Migration Programme (figure 2.8)…
Primary applicants tend to have a better fiscal outcome than secondary applicants — the current system does not consider the age or skills of secondary applicants as part of the criteria for granting permanent skill visas…
The PC also showed that while primary skilled migrants have marginally better labour market outcomes than the Australian born population in terms of median incomes, labour force participation, and unemployment rates, secondary skilled visas, and indeed all other forms of migrants, have worse outcomes:
Meanwhile, the latest report from Dr Bob Birrell from the Australian Population Research Institute, which is based on 2016 Census data, revealed that most recently arrived skilled migrants (i.e. arrived between 2011 and 2016) cannot find professional jobs, with only 24% of skilled migrants from Non-English-Speaking-Countries (who comprise 84% of the total skilled migrant intake) employed as professionals as of 2016, compared with 50% of skilled migrants from Main English-Speaking-Countries and 58% of the same aged Australian-born graduates:
The recent major survey from the Bankwest Curtin Economics Centre also found that 53% of skilled migrants in Western Australia said they are working in lower skilled jobs than before they arrived, with underemployment also rife:
Whereas the Australian Bureau of Statistics (ABS) latest Characteristics of Recent Migrants report, released in June last year, revealed that migrants have generally worse labour market outcomes than the Australian born population, with recent migrants and temporary residents having an unemployment rate of 7.4% versus 5.4% for the Australian born population, and lower labour force participation (69.8%) than the Australian born population (70.2%):
Fourth, Treasury’s claim that skilled migrants earn more than your typical Australian is superficially correct, and confirmed by the ABS’ Personal Income of Migrants, Australia, 2013-14, which revealed that permanent migrants reported higher average incomes ($48,400) than the median employee income for all Australian taxpayers ($45,700):
The median Employee income of migrant taxpayers in 2013-14 was $48,400. This represented a 1.0% increase in real terms on median Employee income in 2012-13.
The median Employee income of migrant taxpayers was higher than the median Employee income for all Australian taxpayers ($45,700).
However, this is misleading because the “median Employee income for all Australian taxpayers ($45,700)” includes every employee in the country – such as young uni students working at Coles, Kmart or Maccas, mums working part-time, etc – which obviously pulls the national median income down.
It’s fair to assume that most migrants are not granted permanent residency so that they can pack shelves at Coles or work at 7Eleven. Rather, those in the ‘skilled’ stream at least, which makes up the overwhelming majority of permanent migrants, are expected to be working at high capacity. In this regard, I am surprised that their median earnings were only $52,892 in 2013-14, which seems pathetically low.
A fairer ‘like-for-like’ comparison of the productivity of migrants requires them to be compared against local workers of similar composition. Again, as Dr Birrell showed in the first table above, so-called ‘skilled’ migrants have terrible employment outcomes when compared against locals with similar qualifications.
Further, as shown by the ABS above, permanent and recent migrants also have higher unemployment than the Australian born population, which means less taxpayers overall.
In any event, PC modelling shows that the distribution of ‘benefits’ from skilled migration flows to the migrants themselves as well as to the wealthy owners of capital, whereas existing workers are made worse-off. Shouldn’t the Australian Treasury be concerned primarily with the welfare of existing and future Australians over that of prospective migrants?
Finally, the claim that Australia’s ‘skilled’ migration program provides “likely productivity benefits” ignores the damaging impacts on productivity from congestion and dis-economies of scale in infrastructure (e.g. tunelling, land buybacks, water desalination, etc).
What economists know but try not to think about – and never ever mention in front of the children – is that immigration carries a huge threat to our productivity.
The unthinkable truth is that unless we invest in enough additional housing, business equipment and public infrastructure to accommodate the extra workers and their families, this lack of “capital widening” reduces our physical capital per person and so reduces our productivity.
Think of it: the very report announcing that our population is projected to grow by 16 million to 40 million over the next 40 years doesn’t say a word about the huge increase in infrastructure spending this will require if our productivity isn’t to fall, nor discuss how its cost should be shared between present and future taxpayers.
Whereas the PC noted in its recent 5-Year Productivity Review:
Growing populations will place pressure on already strained transport systems… Yet available choices for new investments are constrained by the increasingly limited availability of unutilised land. Costs of new transport structures have risen accordingly, with new developments (for example WestConnex) requiring land reclamation, costly compensation arrangements, or otherwise more expensive alternatives (such as tunnels).
Overall, this is a weak attempt at justifying mass immigration by the Australian Treasury, which has clearly abandoned its “Wellbeing Framework”.
For a comprehensive analysis of the economic impacts of Australia’s mass immigration ‘Big Australia’ policy, check out MB’s submission to the Department of Home Affairs permanent migration program review (reproduced below).
THE BLIND MARCH TOWARDS A ‘BIG AUSTRALIA’
Submission to the Department of Home Affairs’ Managing Australia’s Migrant Intake Review
At MacroBusiness we support immigration, but at sustainable levels.
Australia’s immigration levels are too high – higher than our cities can absorb. The infrastructure costs of high immigration are excessive and Australia’s infrastructure supply is not keeping up with demand, despite our best efforts.
The economic arguments frequently used to justify high immigration fail the evidence test. Empirical data does not support mass immigration. Excessive immigration also damages Australia’s employment market and the environment.
It is time for an honest debate.
Currently, Australia’s immigration program is overloading the major cities with tens of thousands of extra people each year to stoke overall economic growth (but not growth per person) and to support business (e.g. the property industry and retailers), despite growth per person stagnating.
Meanwhile, individual living standards are being eroded through rising congestion costs, declining housing affordability, paying more for infrastructure (e.g. toll roads and water), environmental degradation, and overall reduced amenity.
The economic evidence for the above is contained in this submission.
The Australian Government needs to stop ignoring these issues. Australia’s living standards are at stake.
MacroBusiness urges the Australian Government to reduce Australia’s immigration intake back towards the historical average of around 70,000 people per annum.
1. Australia’s immigration program is unprecedented:
One of the most profound changes affecting the Australian economy and society this century has been the massive lift in Australia’s net immigration, which surged from the early-2000s and is running at roughly triple the pace of historical norms (Chart 1).
In the 116 years following Australia’s Federation in 1901, Australia’s net overseas migration (NOM) averaged around 73,000 people a year and Australia’s population grew on average by around 180,000 people.
Over the past 12 years, however, Australia’s annual NOM has averaged nearly 220,000 people a year and Australia’s population has grown on average by 370,000 people.
The principal driver of Australia’s population increase has been the Australian Government’s permanent migrant intake, which has increased from 79,000 in 1999 to nearly 210,000 currently, including the humanitarian intake (Chart 2).
Due to this mass immigration ‘Big Australia’ policy, Australia’s population has expanded at a rate that is more than 2.5 times the OECD average, easily the fastest of advanced English-speaking nations (Chart 3).
This rapid population growth is expected to continue for decades to come, with the Australian Government’s Intergenerational Report projecting population growth of nearly 400,000 people a year – equivalent to one Canberra – until Australia’s population reaches 40 million mid-century (see Chart 1 above).
However, the problem with Australia’s mass immigration policy is not just the extreme volume, but also the concentration of migrants flowing to Australia’s largest and already most overcrowded cities.
As shown in Chart 4, around three quarters of Australia’s NOM has flowed to New South Wales and Victoria, principally Sydney and Melbourne:
In the 12 years to 2016, Melbourne’s population expanded by nearly 1.1 million (30%), while Sydney’s population expanded by 845,000 (20%). There was also strong growth in Brisbane (537,000) and Perth (502,000) (Charts 5 and 6).
The migrant influx helps to explain why dwelling price growth has been strongest in Sydney and Melbourne, and why housing is most unaffordable in these two cities (Charts 7 and 8). While the Australian Government and property lobby likes to blame a ‘lack of supply’, the problem rests primarily with excessive demand from mass immigration.
The chronic problems around housing and infrastructure will only get worse under the current mass immigration policy.
State Government projections have Melbourne’s population expanding by 97,000 people each year (1,870 people a week) and Sydney’s by 87,000 people each year (1,670 people each week) for the next several decades until both cities’ populations hit around 8 million people mid-century.
To put this population growth into perspective, consider the following facts:
- It took Sydney around 210 years to reach a population of 3.9 million in 2001. And yet the official projections have Sydney adding roughly the same number of people again in just 50 years.
- It took Melbourne nearly 170 years to reach a population of 3.3 million in 2001. In just 15 years, Melbourne expanded by 34% to 4.5 million people. And the official projections have Melbourne’s population ballooning by another 3.4 million people in just 35 years.
No matter which way you cut it, residents of our two largest cities will continue to feel the impact of this rapid population growth via: traffic gridlock; overloaded public transport, schools, and hospitals; pressures on energy and water supplies; as well as more expensive (and smaller) housing.
It is a clear recipe for lower living standards.
2. No economic bonanza:
Politicians and economists frequently claim that maintaining a ‘strong’ immigration program is essential as it keeps the population young and productive, and without constant immigration, the population would grow old and the economy would stagnate.
For example, Prime Minister Malcolm Turnbull has stated previously that “anyone who thinks it’s smart to cut immigration is sentencing Australia to poverty”. In a similar vein, former KPMG partner and “unabashed supporter of a bigger Australia”, Bernard Salt, has produced reams of articles warning that Australia faces economic and fiscal catastrophe without ongoing strong immigration.
Economic models are often cited as proof that a strong immigration program is ‘good’ for the economy because they show that real GDP per capita is moderately increased via immigration, based on several dubious assumptions.
First, it is generally assumed in these models that population ageing will result in fewer people working, which will subtract from per capita GDP. However, it is just as likely that age-specific workforce participation will respond to labour demand, resulting in fewer people being unemployed, as we have witnessed in Japan, where the unemployment rate is below 3%.
Even if this assumption was true, the benefit to GDP per capita would only be transitory. Once the migrant workers grow old, they too will add to the pool of aged Australians, thus requiring an ever increasing immigration intake to keep the population age profile from rising.
Indeed, the Productivity Commission (PC) has for more than a decade debunked the myth that immigration can overcome population ageing. For example, in its 2010 submission to the Minister for Population, the PC explicitly noted that “substantial increases in the level of net overseas migration would have only modest effects on population ageing and the impacts would be temporary, since immigrants themselves age”.
Academic demographer, Peter McDonald, has also previously stated that it is “demographic nonsense to believe that immigration can help to keep our population young” .
Second, it is generally assumed that migrant workers are more productive than the Australian born population and, therefore, labour productivity is increased through strong immigration. However, the evidence here is highly contestable, with migrants generally being employed below the level of their qualifications, as well as having lower labour force attachment than the Australian born population (more information here).
Third, economists and their models generally ignore obvious ‘costs’ of mass immigration on productivity. Growing Australia’s population without commensurately increasing the stock of household, business and public capital to support the bigger population necessarily ‘dilutes’ Australia’s capital base, leaving less capital per person and lowering productivity. We have witnessed this first hand with the costs of congestion soaring across Australia’s big cities.
Moreover, the cost of retro-fitting our big cities with infrastructure to cope with larger populations is necessarily very expensive – think tunnelling and land acquisitions – with costs borne largely by the incumbent population. This fact was explicitly acknowledged by the PC’s recent Shifting the Dial: 5 year productivity review:
“Growing populations will place pressure on already strained transport systems… Yet available choices for new investments are constrained by the increasingly limited availability of unutilised land. Costs of new transport structures have risen accordingly, with new developments (for example WestConnex) requiring land reclamation, costly compensation arrangements, or otherwise more expensive alternatives (such as tunnels)” .
Finally, while economic models tend to show a modest improvement in real GDP per capita, the gains are more likely to flow to the wealthy, whereas ordinary workers are made worse-off.
In 2006, the PC completed a major study on the Economic Impacts of Migration and Population Growth, which modelled the impact of a 50% increase in the level of skilled migration over the 20 years to 2024-25. The modelling found that even skilled migration does not increase the incomes of existing residents. According to the Commission: “the distribution of these benefits [from skilled migration] varies across the population, with gains mostly accrued to the skilled migrants and capital owners. The incomes of existing resident workers grow more slowly than would otherwise be the case” .
Of course, there are other costs borne by incumbent residents from immigration that are not captured in the economic modelling, such as worsening congestion, increased infrastructure costs, reduced housing affordability, and environmental degradation – none of which are given appropriate consideration by politicians nor economists.
Adding a Canberra-worth of population to Australia each and every year – with 80,000 to 100,000-plus people going to Sydney and Melbourne – requires an incredible amount of investment just to keep up. Accordingly, Australia’s infrastructure deficit has fallen badly behind over the past decade, and will continue to do so under Australia’s mass immigration program, thus eroding residents’ living standards.
3. Empirical data does not support mass immigration:
While the economic models might show small per capita gains from immigration-fuelled population growth, based on faulty assumptions, the actual empirical evidence shows no link between population growth and prosperity.
Since Australia’s immigration intake was expanded in the early-2000s, trend GDP per capita growth has plummeted to recessionary levels, suggesting falling living standards (Chart 9).
Chart 10 plots the growth in GDP per capita versus population change between 2000 and 2016 across OECD nations and shows no correlation (Australia denoted in red):
Meanwhile, there is a slight negative relationship between labour productivity and population growth (Chart 11):
Whereas there is zero correlation between population growth and multifactor productivity across OECD nations:
A recent study by economists at the Massachusetts Institute of Technology (MIT) also found “that even when we control for initial GDP per capita, initial demographic composition and diﬀerential trends by region, there is no evidence of a negative relationship between aging and GDP per capita; on the contrary, the relationship is signiﬁcantly positive in many speciﬁcations” (Chart 13).
There is also evidence to suggest that mass immigration is partly behind Australia’s trade and current account deficits, as well as the nation’s ballooning foreign debt.
The lion’s share of Australia’s export revenue comes from commodities and from Western Australia and Queensland in particular (Chart 14):
However, the majority of Australia’s imports and indeed private debt flows to our biggest states (and cities), New South Wales (Sydney) and Victoria (Melbourne). Sydney and Melbourne also happen to be the key magnets for migrants (see Charts 4,5 and 6 above).
Increasing the number of people via mass immigration does not materially boost Australia’s exports but does significantly increase imports (think flat screen TVs, imported cars, etc.). Accordingly, both New South Wales and Victoria have driven huge trade deficits as the extra imports have far outweighed exports (Chart 15):
All of these extra imports must be paid for – either by accumulating foreign debt, or by selling-off the nation’s assets. Australia has been doing both.
Australia would improve its trade balance and current account deficit, as well as reduce the need to sell-off assets and binge on debt, if it simply cut immigration.
Australia will ship the same amount of hard commodities and agriculture regardless of how many people are coming in as all the productive capacity has been set up and it doesn’t require more labour.
4. Lowering immigration would raise wages:
Hand wringing over Australia’s anaemic wages growth (Chart 16) hit fever pitch recently, with politicians, economists and media all searching for answers.
One cause that has received scant attention is the role caused by mass immigration in driving-up labour supply and reducing the bargaining power of workers.
Employer groups often argue that a strong ‘skilled’ migration program is required to overcome perceived labour shortages – a view that is supported by the Australian Government. However, the available data shows this argument to be weak.
The Department of Employment’s 2016-17 Skills Shortages report revealed that Australian skills shortages “continue to be limited in 2016-17”, and that there are a high number of applicants per job (Chart 17):
The Department of Employment also revealed a record number of Australians studying at university (Chart 18):
Of whom many graduates cannot gain meaningful employment (Chart 19):
The Australian Bureau of Statistics’ labour force data also shows that Australia’s underutilisation rate remains high, especially for Australia’s youth, despite the recent improvement in the labour market (Chart 20).
Curiously, Australia’s permanent skilled migrant intake is significantly higher today (128,550) than it was at the peak of the mining boom in 2011 (113,850). Why? Unlike then, labour shortages are “limited”, wages growth is running near the lowest level on record, and labour underutilisation is high. What is the economic rationale for running the highest permanent migrant intake on record when economic conditions do not warrant it?
Standard economic theory claims that net inward migration has minimal long-term impact on wages. That is, when the quantity of labour increases, its price (wages) falls. This will supposedly increase profits, eventually leading to more investment, increased demand for labour, and a reversal of the initial fall in wages. Immigration, so the theory goes, will enable the larger domestic population to enjoy the same incomes as the smaller population did before.
However, a recent study by Cambridge University economist, Robert Rowthorn, debunked this argument. The so-called ‘temporary’ effects of displacing incumbent workers and lower wages can last for up to ten years. And if there is a continuing influx of migrants – as is the case in Australia – rather than a one-off increase in the size of the labour force, demand for labour will constantly lag behind growth in supply .
In other words, if the Australian Government was to stem the inflow of foreign workers, then workers’ bargaining power would increase, as will wages growth. It is basic economics.
As noted in April last year by The Australia Institute’s chief economist, Richard Denniss, the very purpose of foreign worker visas is to “suppress wage growth by allowing employers to recruit from a global pool of labour to compete with Australian workers”. In a normal functioning labour market, “when demand for workers rises, employers would need to bid against each other for the available scarce talent”. But this mechanism has been bypassed by enabling employers to recruit labour globally. “It is only in recent years that the wage rises that accompany the normal functioning of the labour market have been rebranded as a ‘skills shortage'” .
Australia’s youth is effectively caught in a pincer by the Australian Government’s mass immigration program. Not only does it hold down their wages, but it also inflates their cost-of-living via more expensive housing (both prices and rents).
5. It’s time for a national debate and population policy:
The Australian Government under both the Coalition and Labor has long supported mass immigration and a ‘Big Australia’ on flawed economic grounds.
Behind the scenes, the ‘growth lobby’ of retailers, the banking sector, the property industry and erroneously named ‘think tanks’ all push the growth-ist agenda, while completely ignoring the cost burden on ordinary residents.
At the same time, many on the left pursue the globalist agenda of ‘open borders’ citing spurious social justice concerns.
Currently, there is no coherent plan other than to inundate the major cities with extra people each and every year to stoke overall economic growth (but not growth per person), to support big business (e.g. the property industry and retailers), and to prevent Australia from going into recession (despite growth per person stagnating).
Meanwhile, individual living standards are being eroded through rising congestion costs, declining housing affordability, paying more for infrastructure (e.g. toll roads, water and energy), environmental degradation, and overall reduced amenity.
Never have Australians been asked whether they want a population of 40 million-plus mid-century. Nor whether they want Sydney’s and Melbourne’s populations to swell to eight million mid-century.
Yet immigration and population growth affects every facet of Australian life, including: how long one spends stuck in traffic; whether one can get a seat on a train or a spot in hospital or school; and/or whether one can afford a good sized home within a decent commute to where one works. It is a key determinant of living standards above all else, yet is rarely questioned by the media nor politicians.
Without mainstream political representation on this issue, divisive elements like Pauline Hanson’s One Nation party have emerged to wrongly use the ills of overpopulation to attack the small number of refugees arriving in Australia, as well as Muslim and Asian immigration.
As this submission has shown, there is strong justification to reduce Australia’s permanent migrant intake back to historical levels primarily by slashing skilled migration, which has been the driver of the influx. This would take the strain off the major cities, put a floor under wages growth, and safeguard Australia’s environment.
Australia could achieve such immigration cuts without affecting its global obligations via the humanitarian migrant intake. Indeed, much of Australia’s 130,000 strong permanent skilled migrant intake comes from countries where skills are more desperately needed than in Australia. Australia’s immigration program is depriving these countries of skills, and we have a moral obligation to limit the brain drain.
More broadly, Australia desperately needs a national debate and a population strategy, led by the Australian Government. The Government needs to conduct a population plebiscite asking Australians how big they want the nation to become, and then set immigration policy accordingly. The Australian Government also needs to provide a comprehensive plan detailing how and where it will accommodate all the extra people, while safeguarding incumbent residents’ living standards.