Population Growth and the Economy: A Mixed Blessing?

Immigration is an Australian success story. One of the great things about hopping a train in Sydney or Melbourne is that you can instantly tell where you are in the world by the simple fact that the people next to you are from a confusing mix of cultures. It is rarely seen outside of Australia.

Following two years of border restrictions throughout the COVID-19 pandemic, the Australian government quickly returned Australia’s immigration intake to already high pre-pandemic levels, with the aim of „making up” for lost time. As a result, it aims to bring in 350,000 people this year (nearly 1.5 percent growth).[1]. The moves are largely supported by business leaders, who lament the significant skills shortages caused by the pandemic gap on global mobility.

Although rarely discussed, population ranks as one of the big three economic levers of monetary and fiscal policy. Increasing population growth through immigration creates economic activity by increasing aggregate demand and provides an effective means of bridging strategic skills shortages. Australia’s high standard of living makes it an attractive migration destination, enabling the government to set population growth at any level it deems appropriate.

Economic growth, measured as a country’s gross domestic product or gross domestic product, is baked into the national psyche. We’re ingrained in us that high levels of economic growth are good, and declines are bad, the latter embodied in dreaded terms like „recession.” One of Australia’s great prides until the COVID-19 pandemic was its almost three decades of uninterrupted economic growth. Our insatiable appetite for economic growth is grounded in the vision that a bigger economy will make us all richer. What is commonly missed is that this relationship only exists when the economy grows on a per capita or per capita basis. This creates an interesting dichotomy between businesses and government on the one hand, and individuals and families on the other about the benefits of rapid population growth.

Population growth creates additional demand in the economy for goods and services, from housing to washing machines and haircuts. Business and property owners benefit greatly from this as it generates more customers and helps them grow sales and profits without having to take away customers from another business. The government also benefits from population growth, and increases the population’s spending, making the economy bigger. When people view economic growth favorably, providing it increases the probability of electoral success. Therefore, population growth creates „easy” or „lazy” business and economic growth.

READ California's economy is showing alarming signs. Is a recession imminent?

Making growth more attainable for businesses reduces competitive pressure, thereby limiting incentives to invest in productivity-enhancing activities such as research and development. Instead, retained earnings are returned to business owners or shareholders in the form of dividends. Profit shares can be taken advantage of by business owners, although they carry funds that can be invested in a business. It is crucial to maintain global competitiveness. The lack of investment is reflected in Australia’s weak productivity growth, which has fallen to a six-decade low. A productivity plateau is undermining the quality of life for all Australians, the Productivity Commission has warned.

Despite benefiting business and capital owners, rapid population growth was not without costs. Absorbing the equivalent of another Canberra city in Australia each year puts enormous pressure on existing infrastructure, services and resources used by the community. School places, hospital beds and housing facilities each need to rise at a rapid pace to meet demand. To do so saps green spaces around major centers, threatening biodiversity and amenity, while the net effect on economic activity generally fails to raise productivity. Housing construction and service provision are labor-intensive activities that make them highly unsuitable for productivity growth, while many goods purchased by a growing population are imported. Also, many of the immigrants brought in to fill labor shortages create more shortages in the absence of productivity growth as demand for housing, goods and services increases with population.

A large share of the rise in property prices stems from rapid population growth. Evidence of this can be seen in the „surprise” change in Sydney property prices in March 2023 (+1.4 per cent), despite the rapid tightening of monetary policy by the Reserve Bank of Australia from May 2022.[2] As supply fails to keep up with demand, rents have risen 20 per cent in the past year, with the national vacancy rate below one per cent. At the same time, property listings have fallen, despite reduced borrowing power among buyers, putting upward pressure on already high property values. Basically, if demand exceeds supply, asset prices will continue to rise.[3]

READ China focuses on finance, technology and farms in 12-sector digital drive for real economy by 2026

Although a classic view of economic activity dictates that supply rises to meet demand, the opposite occurs. High interest rates and a tight credit market have limited the capital available to developers, many builders have faced financial difficulties due to high inflation and fixed-price contracts, and the availability of land, labor and materials has been severely restricted.[4] Planning restrictions, which exist for many good reasons, limit the type and size of properties that can be built in an area. Paradoxically, restrictions tend to be stronger in more desirable areas closer to employment opportunities. So we want to see our homes become more valuable and the net benefits of population growth pay big dividends, but many communities resist further development in their local area due to concerns about extended services and infrastructure. This suggests that population growth is creating a cost to Australian communities. Yet any solution to the pressures stemming from a growing population ignores better demand management and instead emphasizes the challenging and protracted task of raising supply.[5]

Another potential and rarely acknowledged cost of rapid population growth is its contribution to inflationary pressures. Inflation is usually triggered by imbalances between supply and demand, which causes prices to rise. Rapid population growth acts like low interest rates, stimulating demand for goods and services. This creates a policy challenge between the Reserve Bank’s desire to reduce inflation by raising inflation and introducing a government demand „shock” through higher levels of immigration. If population growth continues unabated at a high level, it will end up being a short-term shock, making supply difficult to catch up. This is especially true in cycles of monetary tightening when investment is suppressed. The end result will be inflationary pressures, especially in the housing/rental market. Diverting a large portion of the nation’s resources to housing stock is inherently inefficient and starves capital away from productive investment opportunities that could actually raise living standards.

READ South Africa's hidden economy is R750 billion with no taxes – BusinessTech

In short, immigration has made Australia the successful multicultural society it is today. Rapid population growth has made our homes more valuable and has helped our businesses become more profitable by creating a larger market. Yet population growth imposes costs and pressure on essential services and rapid inflation of property prices have masked falling productivity. This has undermined the quality of life and fueled the current rental and housing crisis. Distribution cannot immediately keep pace with Australia’s current population trajectory. Interestingly enough, it was a period of low immigration during Covid-19 that finally helped wage growth pick up, rents fall and unemployment hit record levels![6]

Population policy needs to be brought to the forefront of policy debate and understood to be not an unlimited panacea for economic prosperity, but a policy tool that needs to be carefully managed in the interests of the population as a whole.