Australia's booming population

Jeremy Thorpe is the Chief Economist at PwC Australia and a Partner in PwC’s national Economics & Policy consulting team.

He recently wrote an opinion piece that was published in The Australian regarding Australia's growing population, so I gave Jeremy a call to hear his thoughts on the matter and what it might mean for investors.

Jeremy what are you predicting now about population growth and where it’s likely to lead to?

Australia has amongst the highest population growth in the advanced economies at about 1.5% a year.  I think there’s suddenly though, a political imperative to have a population agenda or a population policy.  I think we’re going to see a tapering off of immigration going forward, but whether that is a material change or whether we still keep growing at world’s best pace, I think is an open question.

But you said something about getting to a certain high level of population earlier than expected, what are you saying about that?

The first intergenerational report that the then Treasurer, Peter Costello, put out in 2002 said that we would reach 25 million people in about 2038, so 20 years ahead of that projection last week, we hit the 25 million mark.  If that was the basis for thinking about infrastructure and the social and economic support that we have for a larger population, then we probably haven’t been doing what we need to be doing.  We might have grown 20 years faster in a population sense, but we haven’t built 20 years of infrastructure faster.  So this really goes to have we been doing what we need to be doing to support the population that we’ve got and maintain the standard of living?  I think most people would say we haven’t done that.  Our trains are full at peak hour, our roads are congested, our schools are full of demountables, we queue at hospitals.

We see a lot of construction at the moment but you can’t say that we’ve kept pace with what we need to with the population growth that we’ve had.

Well, indeed.  What should we have done?  I mean you mentioned public transport and schools and so on.  Is that really just it, that we should have built more schools, more train lines, more roads, that sort of thing? 

I think it really reinforces are we building or investing in the right things.  We’ve actually had a large boom, at least in some states, in investment in new infrastructure.  But it puts pressure back on saying, are we investing in the right infrastructure?  We’ve probably invested a lot into roads and you’d have to say from a broader public policy perspective, that may or may not have been the right answer, or are the roads in the right places?  I think the emphasis is on things that have been big and substantial like tunnels and roads, and more recently, rail.  But I’m not sure we’ve had, at least historically, the right emphasis on the social or the softer side of investment.  Have we had enough schools, have we had enough child care facilities, have we had enough hospitals?  Because what we know is, when your city is out of balance between creating jobs but providing a lifestyle and the amenity that you to encourage people to live, it is unbalanced and it doesn’t actually produce social outcomes that may be desirable.

I’d argue that it doesn’t produce economic outcomes that are desirable either because it doesn’t put people near their jobs, it creates a self-reinforcing problem of urban congestion and it doesn’t provide the happiness that people want in society.  If you’re not providing happy people that’s a challenge for generating a workforce that’s productive as well.

It’s interesting because as you point out that first intergenerational report predicting 25 million people in 2038 was completely wrong.  The reason it was completely wrong is because of government policy to increase immigration from about 2005/6.  The government itself actually made it wrong.

It’s a self-inflicted wound, that’s correct and on one level it’s entirely understandable and it’s a good thing.  Skilled migration has been really important for the Australian economy, particularly in a mining boom where we were importing both high skilled individuals but equally maybe less skilled but who were willing to go to particular places.  That growth in migration is entirely understandable in that context.  What though, that migration has done is it has masked some underlying problems in our economy by growing the skill migration, or in fact, growing migrants.  We’ve grown in a way that means that our population is younger, which is a good thing when your population is aging.  You want to be growing so people are coming in and being productive.

But what it has masked is, as our GDP has grown, and we like to talk about 27 years of continuous economic growth and hold that up as we must be doing something right; our GDP or our national income indeed, per capita, has actually stagnated now and in fact you could argue is declining slightly although it’s hard to observe in a day-to-day sense.  The migration has been entirely driven by government, supporting industry, there’s no doubt about that, but in the process has masked that we need to do some broader economic reform to drive greater productivity.

In fact, the congestion that’s been caused by the growth in population and the lack of infrastructure spending is itself causing a problem with productivity is it not?

It is, and in fact Infrastructure Australia called out congestion as Australia’s number one microeconomic challenge.  It affects every sector in the economy, it’s pervasive in Sydney, Melbourne and maybe Brisbane, less so in some of the other capitals.  But in fact, there are still costs in other capitals even from congestion and it is something that again, we can do something about but it takes political will.  Are we willing to consider congestion pricing – road user charges in a different way?  They’re hard things to think about when you start to say it’s a new tax, potentially, but they’re things we’re going to have to start thinking about.

If for nothing else, that our road pricing is effectively being done through fuel excise.  Now, once we have electric vehicles, fuel excise becomes a non-starter, so we have another budget shortfall.  It’s better that we address our future budget shortfall and make the economy work more efficiently by starting to think about road user charges.

Jeremy, it is the case that a big part of the economic growth that we’re experiencing at the moment is as a result of infrastructure spending, in particular, by the states, and in particular by Victoria and New South Wales. Are you saying that that spending is simply not enough, that there’s a bit of catch up but there’s nowhere near enough?

I am saying that.  I think we have a long way to go.  The headline in major infrastructure projects have been important catalysts for economic growth.  We just need to ensure going forward that there is a sufficient pipeline addressing the broader social infrastructure as well, and that where we are doing these major investments we are maximising the value out of that process.  I think that the system has possibly meant we’ve had a lot more investment into roads, either because of political or funding options.  Rail and major public transport still is a shortfall in many areas.  This is about connecting people where they live to where they work.

Ultimately, we want to be growing jobs near where people work [sic] so we need to start to think about infrastructure to support that and that might be a different type of infrastructure.  But the social infrastructure, only now the states are realising how many schools they need to build for the growing population.  We know it’s coming, and it means we need to start to think about doing infrastructure in a way that is different, that maximises the use of schools for example.  So they’re not just used from 9 o’clock to 3:30 – that we’re using them at night, we’re using at weekends and we’re getting value for money for the public expenditure.

It’s interesting because as I think you were suggesting, part of the reason we spend so much money on roads or built so many roads is because they can be privately funded through tolls, but that isn’t the case with either schools or public transport and for that reason they’ve been falling down.  And the problem, perhaps, fundamentally is that there’s so many other demands on government budgets at the moment.  In particular, welfare and NDIS and so on, that the government simply don’t have the money.  Is that true?

What you said is absolutely true, but let me throw in another reason, roads aren’t unionised and certainly from an investment perspective in trying to manage the politics of investing into a particular infrastructure, roads are somewhat simpler, in addition to all those other factors that you’ve said.  At the end of the day it’s about what choices are we willing to make, and this is where the rubber hits the road, so to speak.  We do need more hospitals, we do need more schools and so forth, but they are not going to be funded in a traditional market sense. But maybe we do need to find new models where new investment can come in from the private sector into those facilities.  Maybe that is about making use of those facilities in a more intensive way, outside traditional hours that gives access to a commercial opportunity, for example.

We do need to think laterally into this space and maybe the old ways we’ve done things aren’t the right way going forward.

What do you have in mind?  I mean are you talking about specific bonds, perhaps issued that are government guaranteed that are there to support public transport or schools or hospitals?

There might be some of that, but you’re still trying to – it will actually be at the margin still and I think the key here is to think about this as specific opportunities, but let’s find assets which have alternative uses.  I think schools are the perfect underutilised resource, take up a lot of land.  Can we re-think about the way schools get built and we’re starting to have what’s called vertical schools, in other words, high-rise schools.  Or can we find new opportunities to lease or rent sporting facilities or classrooms or catering facilities or whatever else makes up the school, are there different ways to think about how we leverage that asset and can make money off that to support the core institution, the school.

I think bonds and so forth, or new funding mechanisms need to be explored into that space.  They’re not easy because they have different risk allocations and different types of returns might be expected, but I don’t think we’ve got a choice but to start to think about that in a more sustained way.

Do you think that one of the problems we have is the debate over immigration has been characterised as right versus left and there is a debate going on about it, but it’s kind of being pushed by what you might call the right wing of politics and the left therefore feels obliged to defend it.  In particular there’s also a characterisation of those who are against immigration, that they’re racist. 

I think you’re right.

Do you think that’s causing a problem with the whole discussion?

What’s interesting is we didn’t really have a discussion about the growth in immigration but now we’re having a discussion about whether the current levels are appropriate.  So it’s a very one-sided debate that we’ve had or not had in the growth in migration.  The challenge here is there’s both the humanitarian and the commercial issue as well.  We have a very open skill focussed migration program, it dwarfs our humanitarian numbers.  We’re looking at, I think it’s around 10-14,000 per year in the humanitarian space, but we’re talking more than 100,000 in skilled migrants.  This ultimately is an economic migration program rather than anything else.  Keeping the debate at an economic level hopefully keeps it out of falling into a name-calling or discussion that it’s a racist issue.  But it is hard to talk about migration without name-calling in that sense.

Part of this is just educating the public and I’m not sure the public actually has a true awareness of the number of migrants, where they’re coming from, why they come and where they live.  Once you start to put the facts on the table it might change some of that debate.  The issue that seems to now be coming forward is certainly a very strong, we want to encourage migrants to move outside Sydney and Melbourne and particularly into the regional areas.  At the moment about 87% of people live in Sydney and Melbourne once they’ve come in as migrants.  We’re not getting a balanced migration pattern across the whole of Australia.  That puts additional challenges from an infrastructure and congestion focus particularly in Sydney and Melbourne that the rest of the country don’t feel as well.

We have different segments of the population, in a sense, bearing the cost of migration and not everyone is getting the benefits of migration as well.

Do you think it’s realistic to get migrants to move to the bush?  They don’t want to do it; they want to live in the city.

It’s really hard, no, we’ve struggled with that domestically with policies about encouraging people to train them as doctors as long as they stay in the bush for a period.  People want to live near communities that they feel comfortable and they want to live where they’ve got access to the facilities that they think they want in the Australian context.  I think it’s really going to be a challenge to shift that number.

Glad to talk to you Jeremy, I really appreciate it, thank you.

Thank you very much.

That was Jeremy Thorpe, Chief Economist of PwC.