Economy faces declines in all three Ps, not just population

Tucked away in Budget Paper 3 today will be a crucial number for the government’s economic growth estimates and for Scott Morrison’s self-declared target of 3.75% GDP growth every year for five years.

That’s where the budget forecasts for population growth — fertility and net overseas migration — will be tucked away.

Last year, long before anyone had heard of COVID-19, the government used a dodgy population figure to inflate its economic growth forecasts for a pre-election budget: the fertility of Australian women was forecast to surge from 1.781 babies per woman in 2018 to 1.9 in 2021 — a remarkably rapid demographic turnaround for our declining fertility rate.

It also forecast a rise in net overseas migration at a time when the government had cut the permanent migration program.

Experts like Abul Rizvi and experienced economic observers like Michael Pascoe called bullshit on the trick. They’ve since been vindicated.

As it turned out, the trick was tempting fate, because now the government has been mugged by reality on population, courtesy of the pandemic. The borders are shut, killing most temporary migration — particularly temporary workers and foreign students — and crippling permanent migration. And economic uncertainty will see families decide to delay having kids.

As Jason Murphy has pointed out in Crikey, the hit to population growth is a gut punch to an economy that not merely has key industries like higher education that rely heavily on temporary population, but has been increasingly reliant on population growth to drive economic growth.

As the Productivity Commission showed in 2015, Australia has come to rely more heavily on population growth to fuel economic growth in recent years as the two other “Ps” of Ken Henry’s growth triumvirate — productivity and participation — have fallen away. The contrast is especially strong with the 1990s, when productivity growth was significantly stronger than population growth.

Productivity growth has slumped under the Coalition after rising under Labor, and in 2018-19, labour productivity actually fell for the first time since records began in 1994, reinforcing the deep stagnation inflicted by the Coalition on the economy.

Business and many in the media continue to push for WorkChoices-style industrial relations “reform”, which led to a collapse in labour productivity in the years before the Fair Work Act was introduced.

On the other hand, participation has been a remarkable success story for the Coalition: against the tide of an ageing Australia, participation has risen from below 65% when Labor left office to 66% at the end of 2019.

That’s been driven by a three percentage point rise in female participation. Indeed, the government upped its forecasts for participation in last year’s MYEFO — previously it seemed that it believed the participation rise had maxed out at 65.5%, but that was bumped up to 66% last December.

Like much else, that success story came to a juddering halt this year. So far, participation has only recovered about two-thirds of the falls earlier this year for both men and women, and appears to be flattening out, effectively back at 2013 levels — and at historically low levels for men. The July economic update conservatively reset participation to 64.75% for this year.

Without a recovery in participation, Australia faces negatives on all three of its key economic drivers, at a time when the Prime Minister claims that growth will surge back to levels last seen in the mining boom years under Labor.

The shutdown in migration will also have flow-on effects into specific industries, and not just the obvious ones like higher education, travel or infrastructure provision. Sectors that rely heavily on temporary migrants will be hard hit. The exploitive horticulture industry is already calling for young people to be forced to pick fruit due to the absence of much of its temporary migrant workforce.

The IT industry, which has preferred to use temporary visa holders to source software engineers and programmers rather than invest in training, has also been affected. And Australia’s ability to rapidly increase its aged care workforce to address persistent inadequate staffing will also be limited by an inability to source foreign workers.

But while population will have a critical bearing on our growth trajectory and on key industries, it’s the lack of offsetting growth in the other two elements of Ken Henry’s famous growth triumvirate that will shape our sluggish economic start to the 2020s.