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Wednesday, 18 November 2015

The demographic dividend (40 million)

Productivity Commission report

The most recent Intergenerational Report projected that the population of Australia will likely expand to around 39.7 million by 2055, while inferring that:
  • lower immigration would lead to slower economic growth;
  • lower immigration would lead to an ageing population; and
  • lower immigration would lead to lower participation rates (with an adverse consequences the tax take).
This week the Productivity Commission released the leviathan that is its draft report concerning Migrant Intake Into Australia, a 570 page monster of a document, but let us cut straight into it and take a look in three short parts.

Part 1 - The demographic dividend 

The Productivity Commission found that net migration into Australia can better preserve the current demographic profile but with a considerably larger population.

Under the "immigration" scenario, by the year 2060 there are projected to be 44 persons aged 65 and over for every 100 persons aged 15-64, whereas without immigration the ratio would be disastrously less favourable at 59 persons aged 65 or over for every 100 persons aged 15-64.

The key reason for this is that immigrants have a younger age distribution when compared to the Australian population as a whole, with the most significant age group of immigrants on arrival being the 25-34 year old cohort.

Tellingly, the Commission concluded that prime age migrants pay the most tax, while at the same time government spending on health, aged care, and the aged pension tends to ramp up sharply in relation to the part of the population that is aged 65 and over.

Net migration is of course projected to increase the level of Australia's GDP, but with labour productivity increasing at a slower rate than output. 

Perhaps more significantly, modelling concluded a favourable impact of net migration on GDP per capita by 2060 as compared to the scenario without immigration.

Furthermore, without immigration Australia's real income per capita is projected to increase less impressively than with it. In purely economic terms the implication of this is abundantly clear: immigration will make us better off. 

Part 2 - Visa and immigration processes

A significant proportion of those who are initially granted temporary visas to visit Australia - including myself, in fact - in time go on to become permanent residents and citizens of Australia. 

In this context the recent surge in student visas and education arrivals is a trend worth watching. I recently looked at this trend in further detail here

Between 2000 and 2013 the proportion of the Australian population born overseas has increased appreciably to beyond 25 per cent, with very few countries scoring higher than us on this measure.

As regularly documented on this blog each quarter, the rate of natural increase in Australia's population has declined since 2012, with the rate of net overseas migration set to be the key driver of population growth over the decades ahead.

Having surged dramatically since 1997 the number of permanent skilled immigration visa grants have remained relatively flat across the most recent four financial years as the mining boom has passed its peak.

The structure of the visa system has changed over time too. When I became an Australian resident more than a decade ago, I took the path that was taken by almost all new permanent residents at that time - points tested skilled migration, in my case as a Chartered Accountant (60 points...woop).

Since that time the split of permanent visas has shifted markedly towards employer sponsored grants. This has the potential advantage of allowing the visa system to be more flexible and responsive to skill requirements, with business sponsored visas generally delivering superior medium term employment outcomes than state sponsored grants. 

That said it would be in nobody's interests to promote a system which favoured the issuance of employer sponsored visas ahead of employing skills available domestically, particularly with youth unemployment tracking at double-digit levels (despite a promising recent improvement).

Part 3 - Who, where, and what?

Immigrants into Australia are typically aged between 20 and 45, with 25-34 year olds by far the most prominent cohort, particularly for overseas born citizens and permanent migrants. The report found that English language skills are of key importance for migrants.

And to do what occupations do migrants come? Mainly services based occupations - such as professional, scientific & technical services, financial services, healthcare and social assistance, and a great many others - as well as retail and wholesale trade positions, manufacturing, and education roles. 

It can be no surprise that the states with the most populous capital cities are expected to attract the greatest absolute population gains over time under every scenario.

Without immigration, population growth would continue to be spread across regions roughly as is thd case today, and would maintain approximately the current regional distribution. 

With the projected immigration until 2060, however, absolute population growth will be heavily skewed towards those states that are home to the largest cities (Sydney, Melbourne, Brisbane & SEQ, and Perth). 

The real eye-opener when it comes to immigration projections in this country is how overwhelmingly focussed immigrants are upon living in the major cities in preference to regional Australia. 

Consequently, as immigration inevitably accounts for a greater share of population growth than natural increase, the more pronounced this trend will become.

Some immigrants, particularly those on lower incomes, do tend towards fringe capital city dwelling where land prices are relatively cheap - such as on the outer south western Sydney limits, where few Australian born citizens tread. 

However, in absolute terms the great bulk of the immigrant population terms tends to reside in locations that are within comfortable striking distance of the Central Business Districts (CBDs) of the largest capital cities.

The report found that over time the proportion of immigrants residing in major urban areas has continued to increase relentlessly from 62 per cent in 1947 to 83 per cent by 2006 (the proportion of Australian-born residents living in urban areas has increased too, of course, but not to the same extent, rising from 50 per cent to 61 per cent).

The wrap

The report found that net migration will play a key role in determining Australia's future population, with a projected 40 million persons residing in Australia by 2060 under the modelled scenario.

Whilst it might at times read as though the report represents unabashed championing for the freeing up of Australia's borders at any cost, it is certainly not that. 

The flawed Significant Investor Visa (SIV) and Premium Investor Visa (PIV) programmes come in for a particularly scathing appraisal, purportedly sporting more potential holes than a Swiss cheese (though not in so many words).

Overall the findings of the Productivity Commission show that Australia will fare better with a high level of immigration over time, although this conclusion will doubtless be far from universally popular. 

Perhaps unsurprisingly the report found that unemployment and negative attitudes to immigration are highly correlated (yet unemployment is unrelated to actual levels of immigration).

For a country largely built upon immigration Australia has long had its anti-immigration undercurrents, but while in decades past prejudices related to skin colour or a distaste for foreign cultures, today's apprehension is often directed towards more practical misgivings, particularly the risks of land price inflation and congestion on the roads of our capital cities. 

Given that immigration is evidently becoming more focussed on urban areas and the suburbs of our major capital cities, these are valid concerns, although associated problems are often as much a failure of housing and infrastructure policies rather than a reason to cull immigration.

Peter Martin of The Age concluded: "The benefits of freeing up immigration dwarf those of anything else imaginable". 

I agree, of course, but then as an immigrant myself now with an Australian-born family, so I would.