Population growth: a mixed blessing

The third Intergenerational Report, released by the Government in January this year, projected that Australia’s population would reach almost 36 million by 2050, an increase of 13.7 million or nearly 62 per cent from the present level. This represents a substantial upward revision to the projections contained in the second Intergenerational Report released by the previous Government just under three years ago, which envisaged Australia’s population growing by 7.6 million or just over 36 per cent from its 2007 level to reach 28.5 million by 2047.

This is a remarkable difference in less than three years. It stems largely from upward revisions to the assumed net migration rate, from a steady 110,000 per annum in the 2007 report to, in this year’s report, 180,000 per annum from 2012 onwards (after declining from 285,000 in 2008-09).

Not surprisingly, the release of these latest projections has prompted a more vigorous debate about the desirability or otherwise of faster population growth, and of a larger population.

As the framework used to construct the economic projections in the Intergenerational Report makes clear, population growth is one of the three principal drivers of growth in the market value of goods and services produced, or gross domestic product (GDP). The others are workforce participation (the proportion of the population who work, and the hours which they work) and labour productivity (production of goods and services per hour worked).

Over the past forty years, about 42 per cent of the increase in Australia’s real GDP has been due to population growth. The significant acceleration in Australia’s population growth rate in recent years was one reason why Australia avoided falling into recession (as commonly defined) during the global financial crisis: had Australia’s population been growing at the same rate as, say, the United States or Britain, all else being equal Australia’s economy would have experienced consecutive quarters of negative real GDP growth in the second half of 2008, rather than just one.

Population growth contributes directly to growth in the demand for a wide range of goods and services, including housing, motor vehicles and other consumer durables. This is one reason why business organisations are typically in favour of rapid population growth. Population growth also allows businesses to spread their fixed costs over a larger and growing base, allowing them to achieve economies of scale and to reduce their unit costs.

Population growth through immigration adds to the supply of labour, and if the migration intake is appropriately targeted, can be particularly helpful in alleviating shortages of skilled labour and in dampening wage pressures which might otherwise develop when the economy is operating at close to full capacity (as it was in the years immediately before the onset of the financial crisis). These are also important considerations for businesses.

From a broader perspective, population growth through immigration also slows the rate at which the population ages, since immigrants (to Australia, at least) are typically younger, on average, than the existing population.

However faster GDP growth driven solely by faster population growth does not mean that people are becoming better off, even in a purely material sense. Improvements in people’s material standards of living are better (although by no means completely) measured by the rate of growth in real GDP per household, or per person.

Virtually all of the increase in Australian real GDP per person over the past forty years has come from improvements in labour productivity – that is, from the increases in output of goods and services per hour worked that come from working with more, or better, capital equipment; from the adaption and diffusion of new technologies; and from improved methods of managing and organizing the flow of work. Very little has come from increased labour force participation, because the increase in the proportion of the population who have a job has been largely offset by a decline in average hours worked. And with labour force participation likely to fall as a growing proportion of the population starts moving into retirement, productivity growth is likely to be the sole source of improvements in real GDP per person over the next forty years.

Population growth also brings costs. These include upward pressure on house prices and rents, where growth in the supply of housing fails to meet the increase in the underlying demand for it (as has been the case in Australia for the past two decades); increased pressure on transport infrastructure (congested roads, over-crowded public transport, longer commuting times); and longer waiting times or over-crowding at public facilities such as hospitals and pre-schools. Population growth can lead to the loss of land previously set aside for recreation, conservation, farming or other uses. And it can have adverse environmental consequences, including increased greenhouse gas emissions and waste generation.

These costs are often visible and tangible. For example, the cost of traffic congestion will rise from $9.4 billion in 2005 to over $20 billion in 2020, according to the State of Australian Cities 2010 report released last week. Yet even though people encounter these costs in their daily lives, they are typically not taken into account in deriving conventional estimates of the value of economic activity, such as GDP. This is one reason why many people are unpersuaded by the argument that a more rapidly growing population is a Good Thing simply because it will lead to faster economic growth.

Part of the problem stems from the fact that population growth occurs more or less continuously, while additions to the infrastructure which supports a growing population almost inevitably take place in a discontinuous or ‘lumpy’ manner. Unless governments (and, where appropriate, businesses) are willing and able to ensure the provision of economic and social infrastructure well in advance of the need for it (something which would likely entail higher levels of government borrowing than have been considered prudent over most of the past two decades), periods of ‘excess demand’ for the existing infrastructure are almost unavoidable.

On balance, the problems associated with a growing population are more manageable than those associated with a stagnant or declining one. But building public acceptance for “a bigger Australia” will require a greater willingness to acknowledge that it has costs as well as benefits, and to deal with them, than has thus far been shown by those most enthusiastic about the benefits of faster population growth.