For much of its history Australians have engaged in an on-going debate about the sustainable or desirable level of population and about policies to influence the rate of population growth, whether by natural increase or immigration. This is scarcely surprising given that we have the lowest population density of any OECD country (about 2.2 persons per sq kilometre), and are regarded as being geographically close to countries with much higher population densities, relatively low(er) incomes and different cultural and institutional backgrounds. That debate continues today in various forms and is sometimes based on misunderstandings of the likely benefits and costs of population changes.
I want to start by suggesting that there is little evidence to support the view frequently heard in the business community and some other quarters that a larger population would help bring about a significant improvement in business investment and economic growth. I am referring here, of course, not to total economic growth but to the rate of economic growth per head, which is the most meaningful measure of changes in overall living standards and which (subject to qualifications mentioned below) we should be aiming to achieve.
The absence of any significant co-relation between levels of population and GDP per head is well illustrated in Table 1 comparing populations and GDPs per head for OECD countries. Nor does there seem to be any co-relation between rates of growth of population and GDP per head. It will be noted that, except for the United States, the countries with populations above 30 million are mostly towards the bottom of the league ladder of GDP per head levels and that a number of small countries have relatively high levels of GDP per head, including several which have higher levels than Australia. It is of some interest that the current incomes of the slow-population-growing and low-population-level Irish and Danes are over 20 per cent higher than those of the much higher populated British and French.
An examination of less developed countries shows even wider differences in current income levels, including as between those with low and high population levels. With a population of 22 million, Malaysians, for example, have average incomes of about $8,000 pa or about two and a half times higher than their 215 million Indonesian neighbours. The 1.3 billion Chinese now have average incomes close to $4,000 pa or twice the size of their 1.0 billion Indian neighbours, whereas 25 years ago they were about the same. Both countries had long been thought to be "over-populated" and both have pursued policies to constrain population growth: but Chinese entrepreneurship may be handling better the alleged population problem.
This is not the occasion to attempt any detailed explanation of the complex of factors behind differences between countries in levels or rates of growth of GDP per head. There is, however, widespread agreement that among the most important influences are policies and institutions that are conducive to private investment and employment. Earlier this year the OECD published a report on "Sources of Economic Growth in OECD Countries" in which it suggested that "the overall size of government may reach levels that impair growth" and that "pro-competitive regulations improve industry-level productivity performance".
These were pretty brave words for an organization that includes members with governments that are both large-sized and prone to non-competitive regulation.
The Federal Treasury’s Statement 4 in this year’s Budget Paper No1 reinforced the OECD’s assessment by pointing out that "the central findings of recent research" suggest the need for "high competition and flexible, lightly regulated product and labour markets…to be set in a stable, low inflation macroeconomic environment, to facilitate investment and entrepreneurship". It also drew attention to the relatively small government sectors in countries experiencing fastest economic growth in recent years. That average incomes of Americans are around 40 per cent higher than their counterparts in the high-populated European countries (and 27 per cent higher than in Australia) emphasizes the importance of having more entrepreneurial policy and institutional frameworks.
Both the OECD and Treasury analyses lead to the conclusion that detailed government planning of and intervention in the economy is increasingly outdated. It is relevant that the Shadow Federal Treasurer, Mark Latham, was recently reported to be revising Labor’s platform on the basis it should recognize that "the market economy is here to stay". Hopefully, this means that the focus of government economic planning by both major political parties in Australia will increasingly be on those policies most likely to allow that market economy to operate efficiently and competitively and, in particular, to allow individuals and businesses greater scope to make their own decisions about their economic activities, including property development.
Of course, Government legislation and regulation aimed at protecting the rights of individuals and the community more generally will continue. The challenge will
be to allow more scope for own-decision making and to place greater reliance on the pricing mechanism to determine the direction and amount of investment. Concern has been expressed in some quarters about alleged adverse environmental effects from the concentration of population in capital cities (about 64 per cent), the projected continued slightly faster than average increase in such cities’ populations (projected to 67 per cent by 2051), and the cost of infrastructure to service them. But the rising dwelling and associated costs in those cities are encouraging people to move to regional centers, a number of which (including Gold Coast city itself) are growing faster than the average 1.2 per cent population increase for Australia. The increased development of more economic high-rise units in inner cities must also be helping to slow urban sprawl.
However, it appears even to an outside observer that urban planning schemes are highly interventionist and impose considerable costs on developers that are inevitably reflected in building costs. A recent report on Victorian urban planning, for example, revealed an increase in the average size of local planning schemes from 127 to 524 pages in the five years to 2001. Yet this produced a response from Minister Delahunty that the scheme itself, basically instituted under the Kennett government and largely unchanged by Labor, was to blame because it had attempted a "purely market-driven scheme"! There should be scope for urban planning that is less proscriptive and more sympathetic to residential and other development that extends above two stories without being unduly intrusive on neighbours. Property rights of both developers and those being adversely affected need to be recognized, but the balance now seems too often to be struck against development. The fact that no less than 6.8 million people (aged 5 years and over) changed their place of residence between 1996 and 2001 (including 797,900 who moved States) certainly provides prima facie evidence of the need for a flexible approach.
I do not want to suggest that Australia would not benefit economically from continuing to increase its population. Provided the economy is functioning reasonably efficiently, and is therefore able to absorb migrants under an appropriately structured and sized immigration program, the resultant increase in population probably helps increase average incomes in net terms. A larger population helps spread the high cost of providing public infrastructure, such as telecommunications and transport, and allows it to operate more efficiently. Further, although even a larger Australia would find it difficult to develop some industries on an internationally competitive basis, a higher population could also provide business with improved economies of scale. Finally, a larger population would increase our defence capacity and help deter potential aggressors.
My basic point, though, is that a higher population is likely to provide only a marginal economic benefit compared with having the right policy environment. And even if our population were to reach, say, 40 million in 2100 (the latest ABS projections range from 19 million to 38 million in that year) that would not make Australia self-reliant in defence.
Having the right policy environment is going to be increasingly important in the years ahead as the ageing of the population about doubles the proportion of people 65 and over, that is to 26 per cent by 2041, with a likely further increase in the remaining 60 years of the century (to reach around 30 per cent by 2100). This means that, unless policy or other changes prevent it, there will over time be a progressively lower proportion of the population working to produce the goods and services needed to support everyone’s living standards. This in turn would mean that living standards would grow at a considerably lower rate than they have been, with obvious adverse consequences for property development too.
Could this prospective "shortage" in those of working age be overcome by increasing the rate of immigration and/or the fertility rate?
The potential for achieving a higher rate of immigration is constrained by the emphasis now rightly placed on skill levels and English fluency, and by the need to limit the risk of the social and political divisiveness that could arise from any major sudden increase in the proportion of immigrants with cultural and institutional backgrounds that are not Western. The increasing sensitivity of some European countries to maintaining their Western cultures is illustrated by the recent decision of the UK Government to require would-be migrants to undergo compulsory citizenship programs that include English lessons and a knowledge of British history. Table 2 shows that over recent years the proportion of the Australian population born overseas has remained stable at around 23 per cent and that, although declining, more than half are continuing to come from European sources.
The potential for increasing the fertility rate also seems limited. Indeed, the existing lower rates in most other OECD countries, and their downward trend, as shown in Table 1, suggest that the current Australian rate of about 1.8 could fall further. The main exception is the United States, where the rate has actually increased in recent years to around replacement levels: perhaps this reflects the greater opportunities for individual advancement offered in that country. But, as Statement 4 in Budget Paper No 1 points out, even if higher birth rates could be achieved in Australia, it would take a long time before beneficial effects would start to be reflected in the working age population.
If a slowing in the growth in per head GDP is to be prevented over the next, say, forty years, what is clearly needed is a further major effort to implement the kind of economic reforms that contributed to the 2.4 percent growth over the past decade. Failure to do that could lead, under one plausible Treasury scenario, to GDP per head increasing at only about half that rate and to having to increase Federal taxation by about 5 per cent of GDP to meet an increasingly higher cost for the health and welfare of the over 65 year olds. (To give an idea of what that would involve, Federal taxation is currently about $166 billion and if the government were to increase taxes now by an amount equal to 5 percent of GDP that would raise about $40 billion more ie taxation would increase by nearly a quarter).
Statement 4 contains a most useful discussion of policies that would help avert this but the basic message is that action needs to be taken to encourage a higher proportion of the population to work. This applies to both those statistically classified as of working age (15 — 65 year olds) and those outside that age group. The general improvement in health that is reflected in the increase in life expectancy at birth over the past thirty years clearly provides more scope to extend working lives beyond 65 and to allow more employment to be undertaken, at least on a part time basis (male expectancy has increased by about ten years to 77 years, and female by about 8 years to 82 years).
There are, however, two major government policies that act as deterrents to increased participation in the work force of both the so-called working and non-working age groups.
First, around 20 per cent of even working age Australians, or no less than 2.8 million people, now receive income support that acts as a deterrent to work in one way or another. While the bulk of this support goes to lower income groups, benefits paid to middle and upper income groups — what is sometimes called the middle class welfare group - appear to be running at around 5 per cent of GDP. A tightening in the eligibility to access such support, with particular emphasis on income and asset testing, would encourage increased participation in the work force. For example, given that only about 15 per cent of social security recipients are currently required to look for work as a condition of receiving their benefit, it would seem appropriate for both economic and social reasons to require a greater effort to achieve self-reliance by some of the other recipients.
The second main deterrent to work force participation is the excessive regulation of the labour market. By next year our regulatory arrangements will have been operating for 100 years and Australia probably now has the most regulated system amongst OECD countries. Yet the rationale that there is a major imbalance of bargaining power between employers and employees requiring detailed regulation is highly suspect under most modern conditions. Australia has over one million employers who compete with each other for labour and who do not generally have any capacity to exercise monopoly control over wages and conditions.
Statement 4 gives considerable emphasis to the need for reducing labour market regulation and the potential that would have to increase employment and also reduce unemployment. Reduced regulation of employer-employee relations has the potential to increase employment rates at least to levels in countries with similar economic systems, such as the US, the UK and New Zealand. If, for example, the employed proportion of Australia’s working age population increased to US rates that would add another 600,000 or so to our employment levels. Indeed, quite apart from the obvious scope to reduce Australia’s 600,000 unemployed, there is potential for employing another 800,000 who, while not actively looking for work (and therefore not officially "unemployed), say they would like to be employed if work became readily available. In short, there is enormous potential for offsetting the "loss" of the working age population due to ageing and thereby making a major contribution to maintaining the higher growth needed to avoid reducing the growth in living standards and imposing higher taxation.
I have not attempted to address the opposition of environmentalists to increasing population because I believe that action can be taken, and is increasingly being taken, adequately to protect the environment as the population increases. Even though Australia is already one of the most highly urbanized societies, providing appropriate protective and pricing policies are adopted there is clearly scope for urban expansion while maintaining environmental assets. The "wastage" of soil and water to which attention is often drawn is probably due more to inadequate government policies (including land ownership, subsidization of irrigation and poor pricing of water) than to the growth of population per se. Indeed, while the ABS has insufficient data to estimate water and fish stocks, its estimates (published in "Australia’s Environment Issues and Trends 2003", ABS 4613) of the volume of land, subsoil assets, and timber (including native timber) show an increase of 18 per cent between 1993 and 2001, a period in which population also increased by almost two million.
In conclusion, there appears to be very limited scope to offset the effects of population ageing on future population levels by increasing immigration or fertility rates. However, changes to existing government policies would likely increase work force participation by those who are of working age and those who are over 65. From an economic perspective such changes would in effect replace the population that we otherwise face "losing" and would help maintain the growth in living standards. Those changes would also create an economic environment more conducive to entrepreneurial activity. That is the most important message I want to leave with both property developers and others today.
