Does the government’s latest population projection of 36 million residents by 2050 significantly underestimate the likely rate of growth, just as they did in 2004 when they forecast 28 million persons? Is it much more probable that Australia’s population hits 40 million people within four decades? And why don’t we have a national population strategy?

If a listed company announced that it was going to massively scale back its investment in people, and generally allow its workforce to age, the reaction of investors would presumably be very negative. After all, the principal driver of innovation, productivity and growth is “human capital” (i.e. you and me). Unsurprisingly, when you aggregate across all companies and think about an economy, or nations at large, you arrive at exactly the same conclusions. One of the critical enablers of productivity and thus economic growth is technological change (Australian economist Trevor Swan was one of the originators of this idea). And innovation is in turn fuelled by human capital, which is broadly a function of our education, training and population base.

The government’s Intergenerational Report (IGR) suggests that Australia will halve its population growth rate on average from the current 2.1% per annum rate to 1.2% per annum over the next 40 years (by 2050 the growth rate is expected to fall to just 0.9% per annum), which is influenced mainly by a major reduction in net overseas migration from the current 300,000 per annum run-rate to just 180,000 per annum by 2012. In fact, the IGR amazingly assumes that the absolute number of net overseas migrants coming to Australia each year does not increase at all from that 180,000 level between 2012 and 2050. Given a rapidly ageing population, this runs against the grain of all sensible economic logic. And if we assume that the IGR migration numbers are out by just 100,000 per annum, which would still be 20,000 per annum less than current net overseas migration levels, Australia will be staring down the barrel of 40 million people within four decades. That would put Sydney and Melbourne’s resident populations well past eight million persons individually.

What happens when you scale back your investments in people, as the IGR supposes? Well, we have one sobering counter-factual: Japan. Over the years many explanations have been posited for Japan’s so-called “lost decade” during which it experienced very low real economic growth. But this lost decade is actually looking like it will be a permanent phenomenon: real GDP per capita has remained low no matter how much Japanese authorities have driven down interest rates, or how much stimulus they have injected into the economy. Combined with an ageing population, Japan is running relentless fiscal deficits, which some are now arguing may presage a sovereign debt crisis in the future.

It all looks awfully similar to what Australia’s government claims will happen from 2030 onwards: based on some heroic assumptions regarding political fiscal restraint (limiting spending increases to just 2% of real GDP), the Commonwealth starts producing permanent deficits that rise to 2.75% of GDP by 2050. At that time, net government debt hits 20% of GDP. It is easy to conceive of much worse outcomes if one relaxes the assumptions about our politicians’ fiscal austerity.

To date, most economists have focused on micro-economic explanations for Japan’s demise, such as the coincident stock market and commercial real estate bubbles in the late 1980s in conjunction with underlying institutional and corporate governance dysfunctions that undermined the integrity of the Japanese financial system, and contributed to the cataclysmic unwinding of the bubble economy in the 1990s.

I have personally favoured a far simpler explanation for Japan’s economic malaise: simply put, its population base is shrinking. Japan has been subject to a declining rate of population growth since 1973, which finally turned negative in the noughties. The Japanese government now estimates that its population will contract by 25% over the next four decades. The main problem Japan faces are cultural constraints whereby Japanese society has not historically been open to assimilating foreigners. This has in turn meant that Japan has been unable to defray its ageing population via net overseas migration. Joshua Gans has framed this in the context of a long-term effective demand challenge: that is, a secular stagnation in demand that manifests when population growth falls.

I think that Japan today is a case study as to what Australia might look like in decades hence if we cease investing in human capital. Bizarrely, this is the government’s current position as evidenced via the IGR. Yet unlike Japan, Australia is actually an immigrant nation. One in every four Australians today were born overseas. About 40% of us have a parent that is not a native. In order to exploit our providential endowments of natural resources, Australia has had to rapidly expand its population base. Indeed, today we have the fastest rate of population growth in the developed world. But the government’s IGR projections portend a very different world: one in which just like Japan the working share of the population sinks, real GDP per capita slumps, the so-called “dependency ratio” rises, government spending on health and pensions exceed revenues, and the nation confronts the challenge of funding a tidal wave of deficits.

There are two obvious responses to Australia’s looming economic problems: we increase skilled migration and/or the natural birth rate. Australia currently confronts an international balance of payments problem: developed countries are “short” people — a deficit of human capital, so to speak. Developing countries such as China and India, on the other hand, are typically “long” people: that is, they have a human capital surplus. And so there is nothing wrong with importing new human resources to better support an ageing workforce.

More broadly, it is shameful that we don’t have a national population and infrastructure strategy. Policy makers have to look forward over the next four decades and work out our optimal population growth rate in the absence of any constraints. They then need to evaluate the magnitude of the actual constraints. But they should do so with an open mind. There is no point, for example, taking existing transportation technology and holding it constant. We have to back our ability to continue to innovate. By 2050 it is likely that all cars will be electric. This immediately removes the single biggest externality associated with traffic congestion: pollution. Over the past 50 years there have been enormous advancements in transportation, particularly with the advent of commoditised aircraft travel. We have on the immediate horizon new technologies, such as scram-jet engines, that could facilitate further revolutions in the way in which we transport human capital around the country and think about building our cities. So our national population plan has to look to the future and in a courageous and creative manner address:

1) Australia’s long-term human capital requirements;
2) The ramifications of those population projections for real GDP per capita and public finances;
3) The infrastructure that will be required to support the population base;
4) How that infrastructure will be funded by the public and private sectors;
5) The consequences of the population expectations for the nation’s housing needs;
6) Where we expect to locate this new housing (i.e. in which cities), and hence our long-term urban plans; and
7) The inextricable linkages between new housing supply and infrastructure investment, where the latter is a condition precedent to ‘enabling’ new shelter.

Population planning, infrastructure spending, and housing supply are not state government problems. They are first-order national policy imperatives. The federal government needs to articulate the blueprint and then work with the states to implement it.

With this in mind, I would propose that the federal government immediately establish a new Population and Infrastructure Planning Department to address the questions outlined above.

Based on extensive due diligence and consultation with states, the Commonwealth should develop a granular national infrastructure plan and ultimately provide funding for the key strategic projects that derive from this road-map (alongside the private sector and states, as required).

Crucially, this infrastructure spend can then be used as a driver of specific housing supply outcomes. That is, the Commonwealth could demand zoning, building approval, and land release results in exchange for underwriting new infrastructure development. The idea here is that you only elastify housing supply in areas where new infrastructure can support higher population densities.

Christopher Joye writes an economics, finance and real estate blog for Business Spectator. His “after-hours” blog can be found here.