Report: Victoria’s people servicing strategy delivers dumb growth

Regular readers will know that I am a harsh sceptic of Victoria’s economic model, penning dozens of articles over the years criticising the state’s over-dependence on mass immigration and population growth to drive the economy, rather than productivity and export driven growth (read my most recent report here).

Bob Birrell and Ernest Healy from the Australian Population Research Institute (APRI) have picked up on this theme, publishing a new report entitled “Making things in Australia? Not in Victoria”. Below are key highlights from this report:

For much of the post-GFC era, the Australian economy was regarded with awe. Indeed, it has been dubbed a ‘miracle economy’. Why? It was because, alone among developed countries, Australia has experienced 29 years of unbroken nominal economic growth…

In recent years Australia’s commonwealth government has added another potent source of growth to the Australian economy. This is a commitment to a high net immigration intake. Net Overseas Migration (NOM) has been running at an annual rate of about one percent of Australia’s population. It has become a significant contributor to Australia’s 29 years of positive economic growth.

Victoria has been a great contributor. Though its share of Australia’s population is around 26 per cent, it has been absorbing some 37 per cent of Australia’s annual NOM. As we show in detail later, successive Victorian governments have reshaped the state’s economic strategy around this population boost.

For Australia, a ‘miracle economy’ indeed. But at the cost of extreme dependence on imports of manufactured goods. A brutal indicator is Australia’s increased reliance on the import of Elaborately Transformed Manufactures (ETMs). They grew (in nominal dollars) from $131.5 billion in 2007 to $215.6 billion in 2018-19. Over the same period Australia’s exports of ETMs hardly moved, with the result that the deficit on trade in ETMs reached $179.6 billion in 2018-19. This massive deficit has been covered by net exports of commodities.
Victoria is a major contributor to this deficit. In 2018-19 Victoria was responsible for $50.5 billion or 28 per cent of Australia’s total $179 billion net deficit on ETM trade. (See Table 2 below.)…

Debate about Australia’s embarrassing lack of manufacturing capacity has flourished in the post-Covid environment…

Victoria’s economic strategy has been brutally exposed by Covid-19. Though it has lost much of its manufacturing base, it has found a growth substitute stemming from rapid population increases in Melbourne and an accompanying boost to people services, housing and infrastructure industries. However, the sudden cessation of net overseas migration has threatened this business model…

Victoria’s export profile is that of a developing country. The state’s exports in primary products are worth far more than its exports of ETMs. In 2018-19, the value of these exports was $15.4 billion, mostly deriving from meat, wool, fruit and nuts, and dairy products.

Victoria is an agricultural state rather than a locus for knowledge intensive manufactures. But, even on this count Victoria is not pulling its weight. In 2018-19, Victoria imported more primary products ($16.9 billion) than it exported ($15.4 billion).

Victoria’s people servicing strategy: from Bracks to Andrews

There have been times when the catastrophe has been there for all to see. The headlines following the final days of operation of Ford, Toyota and Holden prompted brief outbursts of concern about Victoria’s manufacturing malaise.

They have been easy to ignore because Victoria’s political leaders have found a new basis for the state’s prosperity. It is a remnant of the heady cultural/hi-tech vision of the Brachs/Brumby years. It is providing for an increased population as outlined in the report: Melbourne 2030…

The Victorian government can claim that its urban growth and people servicing strategy has meant that Victoria is leading in promoting economic growth. As the Treasurer, Tim Pallas put it in his 2020-21 budget speech, despite having ‘only’ 25 per cent of the nation’s population ‘We have contributed almost a third of nation’s economic growth since 2015’…

The high-rise inner-city boom coincided with rapid expansion in the overseas student industry.

The original intention had been to attract a knowledge elite. Instead, it attracted temporary migrants. The City of Melbourne’s (COM) population exploded. Almost all of this expansion was attributable to Net Overseas Migration. Much of this in turn, reflected growth in the number of students enrolled in English language, vocational colleges and above all courses at universities.

The numbers were huge. By 2019, Melbourne University had 28,361 overseas student enrolments and there were another 18,697 enrolled at RMIT.

They contributed to a transformation of the Melbourne inner-city environment…

Victoria’s Post-Covid-19 realities

The Covid crisis has been catastrophic for Victoria.

Its business plan, dependent on providing people services and accommodation for an ever growing population, has been stopped in its tracks…

This has brutally exposed Melbourne’s vulnerabilities. The crisis spot is inner-Melbourne…

It should be obvious that Australia’s universities do not function to develop the knowledge and applied skills of Australian residents. They have become quasi-private corporations dedicated to maximising the revenue generated by the overseas student industry. This revenue is the foundation of the massive salaries paid to the top echelon of university officials, their showy campuses and their research reputations…

The prime focus – people servicing, infrastructure and accommodation

The Victorian government’s priority is the dispersal of funds to allow as many Victorians as possible to obtain employment in providing services for the State’s population and from its deepening investment in infrastructure and accommodation.

In the case of infrastructure, state investment will rise from $9.6 billion (actual) in 2019-20 to an estimated $18.5 billion in 2021-22 and $20.3 billion in 2022-23.

Additional billions are allocated for housing, in the form of subsidies and, in the case of social housing, massive capital investment.

Funds are thrown around like confetti to pay for more people services…

This surge in state activity will generate a huge gap between state revenue and expenditure…

It is the case that large numbers of Victorians have indicated their concerns about the quality of life issues generated by Melbourne’s rapid population growth. These include congestion, competition for services (as with hospitals), for access to amenity (parks and the like) and high housing prices…

Why worry?

Even on its own terms grounds Victoria’s strategy is vulnerable. There is no certainty that population growth will revive quickly…

Most of the Net Overseas Migration driving Melbourne’s growth derives from net inflows of temporary migrants, mainly overseas students. It could be several years before the influx of these students recovers. Meanwhile, Melbourne is facing an unprecedented net exodus of residents to the rest of Victoria and interstate. We have to go back to the early 1990s for a similar exodus. This was caused by the city’s deep recession at the time. It was several years before it was reversed…

Victoria’s people servicing strategy delivers dumb growth

The people servicing, accommodation and infrastructure industries all generate low growth in labour productivity. But productivity is the foundation for advances in the real income of Australian residents. The goods producing industries are the main source of these labour productivity advances. This means that Melbourne, as a people servicing city-state, must draw increasingly on the productivity deriving from activities elsewhere in Australia for advances in the real income of its residents.

There are also other direct and obvious subsidies. Melbourne’s people servicing economy depends on increased public expenditure to provide for the growing population’s health, urban amenity and other needs, much of which is paid for by the Federal government. The Commonwealth will have to step up to provide this support, just as it has done to support the Tasmanian economy over the decades.

However, Tasmania is a minnow with around 540,000 residents. Victoria, at 6.5 million, is twelve times larger. We wonder whether the rest of Australia will tolerate providing for a ‘giant Tasmania’, dependent on increased support from federal taxpayers for its exploding health, care and education needs.

There is another concern, this time related to the high costs of retrofitting an established city – as the huge price and frequent announcements of cost over-runs for the city’s tunnels and freeways attest.

Worse, such is the Andrew’s government desire to initiate new infrastructure projects that it is starting projects which may not be needed. The Suburban Rail Loop is an alarming example…

Victorians are also ultimately dependent for their affluent consumer lifestyle on the export performance of other states. Victoria makes little contribution to Australia’s export performance. As indicated, Victoria contributed only 10.9 per cent of Australia’s total exports in 2018-19. These are mainly commodities. They pay for Australia’s massive deficit on trade in ETMs which reached $179.7 billion in 2018-19. Victoria was responsible for $50.5 billion of this deficit.

Victoria is in this sense a parasite. How long will it be before Victoria is called to account on this issue by the rest of Australia?

The bottom line

Victoria is not just another, bigger Tasmania. It is the heartland of progressive political, social and cultural values in Australia. Social justice is its watchword. It supports greater rights and income support for minorities and for migrants (even those here on temporary visas) and a more open door for more immigrants, as well as gender diversity rights.

We endorse Victoria’s social justice values. However, they can only be implemented if Australia’s labour productivity continues to grow and our trade performance remains strong.

Victoria has ostentatiously rejected any responsibility to contribute to these ends. These issues are ignored in the State Budget and are never acknowledged by the Labor government or its supporters.

The Victorian government’s continued unwillingness to confront the state’s structural economic weaknesses could well tarnish its progressive population-servicing reputation. At what point does hubris around population building, urban infrastructure provision and people servicing cease to compensate for the state’s failure to modernise its economy?

Truer words have never been written.

I wrote a similar critique last month in my report entitled “As Victoria’s population boomed, residents went bust”. This report showed how Victorian living standards have plummeted as the state’s population has ballooned on the back of mass immigration.

With immigration gone for the foreseeable future, how will the Victorian Government create an economy that is based on genuine and sustainable growth, which actually improves the living standards of the resident population?