Migration and difficult decisions
Tuesday night’s federal Budget forecast a “surge in net overseas migration” over the next couple of years, as fewer people leave and many overseas students, skilled temporary visa holders and working holidaymakers return following the pandemic.
The “surge” is expected to be temporary – a rebound from the huge decline in net migration during the pandemic – but never one to miss out on a headline, opposition leader Peter Dutton went on the attack:
“We all support planned migration but your budget announcement every 1.5 million people over this five year period is more than the entire population of Adelaide, and you have no plan.
Every city is already congested. Infrastructure is cut in this budget. There is no plan where these people live … economists point out that this is inflationary.
It will keep interest rates higher for longer. Why did the Treasurer not make any mention of this in his speech last night?”
Migration is a tricky issue for any government. Australia is a desirable place to live, notwithstanding certain members of the political class. In terms of costs, migrants certainly increase congestion in cities, but that’s mostly a policy choice: beyond the very short term, liberalising zoning laws so that supply can adjust would mitigate most of the pressure migrants put on housing.
But migrants also come with many benefits. For one, and contra Peter Dutton’s uncited economists, they tend to reduce inflation. More workers means more output, more output means more goods and services are produced, which puts downward pressure on prices. While migrants also demand goods and services, that isn’t “inflationary” unless the rate of growth of the money supply also increases, which is once again a policy decision.
But perhaps a more important benefit from a political point of view is that migrants are needed to sustain the kind of debt-financed Budgets we saw on Tuesday. Generations of Australians have voted themselves benefits that are not sustainable without a growing population. Indeed, since the early 1970s – around when the large Baby Boomer cohort reached voting age – Australians have progressively expanded pensions and other age-related benefit schemes. Social security and welfare is now the biggest ticket item in the Budget, accounting for over a third of total spending, followed by health. Both of those items are expected to grow as the population ages: the National Disability Insurance Scheme (NDIS), which is currently seeing costs rise at close to 15% annually, is already the fastest-growing major federal government expense.
As people age, they use more public services. In the past people would die before it became too much of an issue: the life expectancy of a male baby born in 1960 was 68 years; but a male baby born in 2020 is expected to live until they’re 81. None of the age-related benefits in Australia are indexed to age, so if people are living longer they can be expected to draw on those for longer. According to a study by the UK Parliament the prevalence of disability also rises with age, with 42% of those aged over 66 and 59% of those aged over 80 reporting a disability. An older population means more pension payments, more disability payments, and more public healthcare payments.
And Australia is getting old. When many of today’s aged benefits were being devised, Australia’s dependency ratio – the number of people aged over 64 to the working-age (15-64) population – was at an all-time low of around 13%. But Baby Boomers decided to have fewer children than their parents, meaning the dependency ratio is now at an all-time high of 25%. The nation’s fertility rate, which needs to be at around 2.1 children per woman to stop population decline (‘replacement level’), has been below that figure since 1976!
If the pink line remains below 2 we’ll have to break promises made to the Boomers, or increase migration.
Without migration to prop up the bottom half of the demographic pyramid
scheme, even harder decisions will have to be made, such as which Baby Boomer promises (benefits) to cut, or by how much the tax burden should be raised on the remaining workers to pay for the ever-growing cohort of ageing dependants. You can only increase net debt to paper over the issue for so long; eventually the piper has to be paid, and rising interest rates have brought that day of reckoning forward.
There are no easy answers to this problem. But having a sensible, well-devised migration policy is one very important piece of the puzzle. And fixing the country’s migration policy should be a high priority: a recent review of Australia’s migration system deemed it “not fit for purpose”, concluding that fixing it “involves making difficult decisions about trade-offs”.
Unfortunately Peter Dutton’s use of migration as a political weapon, and the government’s retort “that migration would have been higher under their [the Coalition’s] figures”, signals that neither major party is willing to make the difficult decisions required to solve the issue of an ageing society that promised itself benefits we cannot afford.