Should Australia rethink its high population growth model? It’s one of many challenges, report says

The world has changed dramatically since the federal election in 2022 and Australia’s economic model may need adjusting, researchers have warned.

They say the sustainability of Australia’s high immigration growth model is also being questioned and our trade relationships may have to be reset.

In a joint report by the e61 think tank and UNSW, researchers and economists say Australia’s economic prosperity may be at risk if we don’t adjust to rapidly changing global dynamics.

The report is: The rising isolation of an island nation: Five economic themes that will dominate the next parliament.

They say the global trend towards populism in recent years, the re-election of Donald Trump in the United States, and the breakdown of the global trading system will be challenging for Australia.

They say these developments come as Australia faces domestic economic challenges, including a slowdown in productivity growth and growing fiscal pressures.

They have highlighted five economic themes they say will shape Australia’s policy debate in coming years and identified policy areas where Australia will be severely tested.

“We hope this will assist policymakers as they adapt to the new global order and tackle domestic pressures by framing the big policy challenges and identifying where policy needs to adapt,” they say.

Here are their five key themes:

Negotiating a new global order

The researchers warn the global economic order has shifted significantly.

“The rules-based system is giving way to a new era of power-based transactional negotiations, more like an arm wrestle among ‘strongmen’ leaders,” they say.

“Many nations are abandoning open trade and climate action. Others will pursue one or both, but outside any multilateral, rules-based structure. Many are pursuing industrial policy in the name of resilience, self-sufficiency or sovereign capability. This is not a temporary blip.

“A rules-based order relies on credible long-term commitment. The ripple effects of recent, dramatic US policy changes are far-reaching and cannot be easily reversed. There is no return to normal. 

“The risk to Australia is stark,” they warn.

In this environment, they say Australia’s relationships with the United States and China will be further tested and will require great skill to navigate.

They say climate change remains an urgent challenge, and Australia’s major political parties are committed to net zero, but Australia’s ambition to be a green energy superpower is “facing hurdles.”

“Australia must respond to this new dynamic,” they say.

“While many nations have responded by protecting and building up their domestic manufacturing capabilities, Australia should take a different approach.

“Altogether, this could position Australia to find opportunities in the shift to “friendshoring” – trading with trusted partners.

“In an increasingly unpredictable world, Australia is well placed to benefit. Australia’s stable financial system, democratic institutions and rule of law make Australia increasingly attractive to other nations and foreign investors navigating this new world order,” they say.

Re-examining Australia’s high population growth model

They say Australia’s had a high population growth model in recent decades, more than almost any other developed country. But is it sustainable?

Over the past 20 years, Australia’s population has grown by 35 per cent.

That is significantly higher than the OECD average of 13 per cent, and faster than any young, developed nations like Canada (27 per cent) and New Zealand (30 per cent).

They say high population growth has had clear benefits. It’s helped to keep Australia younger, it’s filled domestic skill gaps, and it’s provided a rich cultural diversity.

But it’s had “cumulative costs” too.

They say population pressures have increased housing demand and supply has failed to keep up, and public support for immigration has “seemingly declined” in the recent cost-of-living crisis.

They say Australia’s construction sector, as a share of the economy, is large compared to other developed countries, which means Australia has been more affected by the global slowdown in construction productivity in recent decades. And that’s hampered Australia’s ability to house a rising population “in a timely and efficient way.”

Given these challenges, they say Australia may not be able to rely so heavily on immigration to boost growth in the future, to fill skills shortages or manage demographic challenges, even though none of those challenges are going away.

And if that’s the case, what’s the alternative strategy for economic growth?

Boosting productivity growth, Australia’s businesses are ageing

They say Australia’s productivity performance has also been declining for decades.

Annual productivity growth fell from over 2 per cent in the 1990s to under 1 per cent in the 2010s and has been flat since the start of COVID-19. Below-trend labour productivity since 2014 has come at a cost of around $11,000 in lost income per person, per year.

They say it’s important that policymakers understand the drivers of the slowdown in productivity.

They say international research links the slowdown in productivity growth to a decline in “economic dynamism” – the extent to which the economy uses and reallocates resources.

Other explanations include slower technological progress, the impact of an ageing population on labour supply, and rising market concentration in key sectors which creates barriers to entry for new firms.

They warn the rate of new firms entering and old ones exiting has also declined in Australia, which is leading to an “ageing business population.” 

They say the rapidly growing care sector, which is now Australia’s largest industry, could be another contributor to the productivity slowdown.

“There is no quick fix,” they warn.

“Policymakers need new insights on how to create an environment conducive to the emergence and growth of high potential firms, how to remove barriers to job switching, and ways to achieve productivity growth in sectors like care, where it has traditionally been hardest.”

Restoring fiscal sustainability for state and federal governments

The researchers say Australian governments will need to focus on improving their fiscal sustainability in coming years. They say Australia’s debt-to-GDP ratio is low compared to OECD peers, but the direction of travel is “concerning.”

“Current estimates project the federal budget to be in deficit for every year over the next decade,” they say.

“The eventual return to balance is reliant on ever-increasing taxes, including through bracket creep, and no new spending priorities or emergencies over that period.”

They say Australia has a highly targeted welfare system which plays a significant role in reducing income and consumption inequality across households, but the nature of that spending has been shifting.

“Over the past decade government has decreased its relative reliance on this transfer system to provide social assistance (such as unemployment assistance and family payments), in favour of spending on in-kind benefits,” they point out.

“These benefits, such as aged care, childcare and the NDIS are less restrictively means-tested. In 2023-24, spending on these in-kind social benefits was larger than on benefit payments for the first time [see the graphic below].

“These areas of spending are only projected to grow,” they say.

The researches say serious consideration of tax and spending reform is needed. 

“The current political approach by all sides has been to lock in ongoing spending and hang on to bracket creep and upside surprises in iron ore prices to boost revenue,” they say.

“This is likely far from the optimal policy mix.”

Achieving a sustainable intergenerational bargain in Australia

Finally, the researchers warn younger generations may not end up better off than their parents and grandparents if housing affordability, fiscal pressures and lacklustre productivity growth “put the intergenerational bargain at risk.”

“Housing stands out as one area of particular concern,” they warn.

“Today’s 25-to-34-year-olds have a lower home ownership rate compared to their parents when they were the same age – with this disparity greater in capital cities.

“Young people have already lost in [the] productivity slowdown. Those aged 25 to 34 saw their real incomes grow by less than older age groups over the 2000s and 2010s.

“In the absence of tax reform, ongoing increases in government spending will be funded overwhelmingly by higher income tax on working-age Australians, including via bracket creep. 

“Alternatively, financing increased spending through higher deficits simply transfers tax burdens to future generations who do not directly benefit from current spending, further straining the intergenerational compact,” they say.