Migration is among the measures laid out in the latest intergenerational report, to help address the problems of an ageing population in an increasingly indebted country. By Karen Middleton.
What’s different about this intergenerational report
In economic debate, an old small-Australia trope attracts a standard response: migrants don’t steal Australian jobs, they are good for the economy.
Two as-yet-unpublished studies from the Paris-based Organisation for Economic Cooperation and Development challenge that trope more specifically. They find that not only does adding more migrants to Australian regions, towns and cities inflict no harm on the employment prospects of locals – precisely the opposite is true.
Cited in the federal government’s latest intergenerational report (IGR), which Treasurer Jim Chalmers published on Thursday, the two upcoming OECD studies of migration’s impact on productivity and local labour markets in Australia indicate that boosting the percentage of migrants in a local area increases both the productivity of the existing workforce, and the number of Australian-born locals employed.
The studies by the OECD, which is now headed by a Belgian-born Australian, former Liberal finance minister Mathias Cormann, examined population flows in Australia between 2010 and 2018.
As quoted in the IGR, the OECD finds that increasing the proportion of overseas-born people in an area’s population by 10 per cent raises the local Australian-born workforce’s productivity by 1.3 per cent. Increasing the annual inflow of migrants by one percentage point boosts employment of Australian-born workers in that area by 0.53 per cent.
Cormann told The Saturday Paper this week that a well-managed migration program delivers benefits to the whole population.
“Australia has long been a migrant success story,” Cormann said. “Over many decades and through several generations, migrants have helped grow and develop the Australian economy. The intake of predominantly younger skilled migrants can also help counter some of the negative impacts of population ageing on workforce participation levels, productivity and growth – which benefits the economy and employment overall.”
Cormann said a feature of migration into Australia, compared with OECD countries overall, was that migrants to Australia have been concentrated in cities. He said there had been much effort over the past two decades to ensure the benefits of skilled migration were more evenly distributed across the country. “Further, the issue when it comes to boosting productivity and benefits for the economy overall is not simply to increase the share of migrants into Australia, but to ensure that there is the right match between the skills the economy needs and the skills migrants bring to the table.”
The IGR notes the Covid-19 pandemic highlighted the role migration plays in combating the problems associated with an ageing population. It finds that as a result of Australia’s closed borders, the population’s median age leapt by almost a full year in 2020-21 compared to pre-pandemic projections. The number of working age people also fell by 0.5 per cent for the same period, despite the overall population increasing slightly.
Therefore, migration features heavily among the government’s policy levers for boosting the nation’s productivity, in response to what the IGR says are five key challenges facing Australia in the coming 40 years.
The report lists those “major forces” as: the ageing population; technological development, especially the shift from information technology to artificial intelligence; climate change and the drive towards net zero emissions; the rising demand for care and support workers; and geopolitical volatility and the risk of “fragmentation”.
The IGR is normally a five-yearly exercise, but its predecessor was issued just two years ago. Jim Chalmers is using it to explain and justify what he calls “a big, bold reform agenda” that he says is designed to help Australia understand, anticipate and take advantage of a challenging set of future circumstances.
“We can own the future, but only if we take the big shifts seriously,” Chalmers said.
Among those big shifts, for the first time, the IGR emphasises the impact on climate change. The report suggests higher temperatures may cut Australia’s economic output by up to $423 billion over 40 years, in today’s dollars. Even without accounting for lower rainfall, the temperatures alone could reduce crop yields by 4 per cent. Increased frequency and severity of natural disasters could see the Commonwealth’s disaster recovery costs almost quadruple. The services sector could also suffer as climate change affects where and when tourists travel.
The IGR confirms the biggest spending pressures in the future will be, as they are now, in health, aged care, the National Disability Insurance Scheme, defence and the interest owed on government debt. Together, these are forecast to account for half of all government spending in 2063, up from a third currently. Deficits are expected to persist and widen from the 2040s onward.
Woven through the report is the government’s blueprint for addressing what is clearly a population skewing strongly towards older age.
By 2063, the report estimates, the nation will have a population of 40.5 million. The economy will be 2.5 times larger than it is now, albeit growing more slowly, and incomes will be 50 per cent higher. But the demographics will have changed dramatically. Advances in medicine and technology will keep people living longer. This, combined with low fertility rates, will lead the number of Australians aged 65 or over to more than double, and the 85-and-over population will more than triple.
As a result, the IGR predicts annual spending on health per head of population will more than double, from the current $4000 for every adult and child in Australia, to $8677 in 2062-63, in current dollar terms. It finds that spending on aged care will more than triple, from $1076 to $3481, and spending on the NDIS will balloon to $2879 per head of population – almost 3.4 times more than the current rate of $855. Of the overall $140 billion increase in government spending between now and the 2060s, 40 per cent is expected to be attributed to ageing.
It is not clear how Australia will fund this.
Forecasting a lower proportion of working-age people by 2063, the projections have serious implications for the workforce. Compared with 2020-21, the IGR says the numbers required for care and support services will likely double by 2050.
“This presents strong job opportunities but is a workforce planning challenge,” it observes.
The shrinking workforce also has implications for revenue. Fewer paid workers means less tax, at a time when bulk commodity exports are set to decline, leaving income tax carrying a heavier load.
Ahead of the report’s formal release, shadow finance minister Jane Hume said it looked like becoming “a Trojan Horse for higher taxes”.
On Monday, the Business Council of Australia (BCA) issued its own report, which it titled “Seize the moment”, urging the government to consider substantial tax reform, including increasing and broadening the base of the goods and services tax (GST) – at 10 per cent since its introduction in July 2000 – and cutting the corporate tax rate to 25 per cent. The BCA said the government must diversify and modernise the economy, because red tape and over-regulation were “suffocating business”.
“On our current path, we face the real risk of Australia being overtaken by the rest of the world and Australians being worse off for generations to come,” its report said.
But Chalmers has rejected tax changes beyond those foreshadowed, which include the delivery of the stage three tax cuts legislated under the previous government. He revealed on Thursday he wants to discourage people from hoarding superannuation to pass on to their children, and flagged new products with incentives for account-holders to spend their super as intended – on themselves.
On the revenue side, Chalmers says he is focused on existing commitments – making multinational corporations pay more, cracking down on tax avoidance, paring back the current concessions on large superannuation balances, adjusting the petroleum resources rent tax and increasing tobacco excise.
“I’ve described them in the past as modest but meaningful,” Chalmers told the ABC’s 7.30 program on Wednesday, on the eve of the report’s release. “They are meaningful tax changes. They are helping us get the budget in much better nick.”
But the IGR confirms the transition to renewable energy will reduce the role of fossil fuels in the economy and the incidence of smoking will also decrease – meaning the revenue from both will fall over time.
On Thursday, Chalmers acknowledged this, emphasising a smarter, more productive, more efficient workforce in new industries. He said he hoped a future treasurer would be able to say: “We’re no longer collecting any tax on smokes.”
He also ruled out any repeat of Howard-era treasurer Peter Costello’s baby bonus as a way to manage falling fertility rates.
Chalmers said his reform agenda would help buffer the budget against current global uncertainty and also cut the long-term interest bill on debt.
As the report was being released, government sources pointed to a new treasury analysis they said found that banking 87 per cent of revenue windfalls from the government’s first two budgets would reduce interest on debt by 25 per cent over time and, by 2063, slice $440 billion off it, in today’s dollars.
Chalmers said the government was having to balance that savings imperative against needing to provide targeted cost-of-living relief when Australians were struggling.
The Australian Council of Social Service said more reform was needed. ACOSS called for a 15 per cent levy on post-retirement superannuation earnings, to be used to fund aged-care services, and a higher Medicare levy to fund the health system. It also proposed a 10 per cent royalty on offshore gas resources and the abolition of off-road fuel tax credits, exempting agriculture, to fund the energy transition. ACOSS also wants the stage three tax cuts scrapped.
“With the inevitable pressure on current and future budgets to provide the health and care services we need, respond to climate change, and lift people out of poverty, the government and all stakeholders must ‘get real’ on tax reform,” ACOSS chief executive Cassandra Goldie said on Thursday.
Grattan Institute chief executive and economist Danielle Wood also backed an end to generous super concessions and imposing a higher GST.
“When you look at the scale of the challenge that this report is pointing to – the scale of the imposts that we’re going to be pushing on today’s young Australians and indeed their children – I think we’re going to have to do something more substantial when it comes to shoring up the tax base,” Wood told ABC radio.
But Chalmers favours increasing national income by boosting productivity, rather than through tax increases.
The BCA argued its proposed corporate tax cut was essential to boosting productivity, by making Australia a more attractive prospect for foreign investment.
Chalmers responded that while foreign investment played an important role, it was not the only way to achieve the objective.
He pointed to the earnings potential in the energy transformation, new technology and Australia’s resource base of critical minerals.
At a time when so many Australians are focused on just getting through the week, Chalmers faces a particular political challenge in advocating for long-term reform.
“There will never be a quiet time to think about the future,” he told the National Press Club, unveiling the report on Thursday. “There will always be competing pressures and urgent calls on our attention. The best leaders can focus on more than one thing, more than one horizon, more than one set of opportunities.”
He said he wanted the future challenges to be seen as opportunities – and for government to shape, not be shaped by, them.
“We approach this as maximisers, not just managers,” Chalmers said.
In the short term, the government’s answer is to gather more data to inform policy direction. An employment white paper is in the works, along with a review of competition policy and a new investment blueprint aimed at business expansion to and from the markets of South-East Asia.
A full migration review is also coming, along with a whole-of-nation population plan aimed at meeting future needs in housing, infrastructure and services.
“What this really goes to is the country’s ability to think about the future,” Chalmers said.
Asked to name the biggest obstacles, he replied: “Short-sightedness.” Then, after a pause: “And the Senate.”
Diagnosing the problems of 2063 is hard. Getting the parliament of 2023 to agree on solutions may prove harder still.
This article was first published in the print edition of The Saturday Paper on August 26, 2023 as "Forty years older and deeper in debt".
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