Australia | Oct 18 2023
Australia's economic prowess is supported by migration, but growing the population is not a free lunch for everyone.
-Interrupted by covid-19, migration numbers in Australia have ramped up significantly
-Skilled migration delivers a net positive fiscal impact
-Skilled young migrants earn more, work longer, spend more and pay more taxes
-Demographic pressures on Australia's urban infrastructure a growing concern
By Preetam Kaushik
In FY23, net overseas migration (NOM) in Australia surged to a historic 490,000. Oxford Economics highlights the current level is 63% higher than the previous record set in FY09.
A -15% cut in annual migrant intake in 2019, followed by a pandemic-induced exodus of migrant workers and students, had left the local economy in severe shortage of skilled labour. The relaxation of pandemic restrictions, the pent-up demand since 2020, and the depreciation of the Australian Dollar have all been cited as possible contributors to the current situation.
With ABS data reporting over 432,000 unfilled job openings across 28% of all businesses in May 2023, an influx of labour may seem like a welcome development. However, the surge in NOM could exceed 800,000 in two years according to a recent estimate by Jarden.
The positives to the labour market and certain sectors or the economy could be offset by negatives in sectors like housing and the minimum wage situation.
Despite the presence of a highly effective and strict immigration control program, the issue of migration is becoming a contentious issue in Australia. Economic and demographic realities play a critical role in this rather paradoxical situation.
In this deep dive, we take a closer look at the net positives and negatives of the current immigration policies and trends in the Australian economy.
Migration by the Numbers in Australia
According to the 2021 Census, 28% of Australians were born overseas; 20% (one in five) have one or both parents who were born overseas. Nearly half (48%) of all Australians have at least one parent who is an immigrant. The comparable figures for the US are 12% and for the UK 16.8%.
Since 1980, Australia has welcomed more than 4.7m foreigners. Between 2010 and 2019, over 190,000 permanent visas (for skilled workers, their partners, and parents) were issued each year, along with nearly a quarter million student visas.
After a short-lived reduction in numbers by the government during the pandemic, the number of visas issued under the permanent Migration Program has returned to pre-pandemic levels. Offshore student visa applications have also surged, with a 71% increase reported in Q2 2023 over the same quarter from 2019.
Another significant cohort is that of skilled workers who arrive under temporary worker visas. In 2021, there were 95,000 such workers in Australia, along with 654,000 New Zealand citizens (under special category), and around 31,000 working holiday makers, according to the latest official data.
The current spike in migration is expected to be short-lived with a projected NOM of 375,000 in 2024, followed by a fall to 250,000 by 2026, as projected by Oxford Economics.
The Fiscal Impact of Skilled Migrants on Australia
In 2021, the Treasury released a paper on the economic contributions of skilled migrants, explained under the Fiscal Impact of New Australians (FIONA) model. According to the stats from 2018-19, migrants from the Skill stream had a fiscally positive impact of $127,000 per person over the average Australian population.
These individuals account for 61% of the permanent migrant population. Partner visa holders, accounting for 22% of the migrant cohort, had a fiscal impact that is comparable to the regular population. Only parent visa holders had a lower impact and they accounted for just 4% of the cohort.
In aggregate, the FIONA model estimates the positive aggregate lifetime fiscal contribution of the 2018-19 skilled permanent migrant cohort will be $20bn more than the contribution of a similar-sized cohort of the Australian population.
The lower age of the immigrant population is the single biggest driver of fiscal impact. Skilled young migrants in the age group of 25–35 are more likely to be in higher-paying jobs for a longer period, make more purchases, and pay more taxes.
Overseas students contributed an average of $40bn each year to the local economy before covid-19, and around $25bn in 2022. Around 28% also use post-study work rights and make further contributions to the domestic economy, with 16% eventually becoming permanent residents.
The Myths versus Reality of Temporary Migration in Australia
Apart from permanent visa holders, Australia has a workforce of nearly 2m temporary migrants. They include individuals on student visas, New Zealand citizens, and temporary skilled workers.
There has been considerable opposition towards this cohort within Australia, largely based on the perceived impact they have on local jobs. According to the Committee for Economic Development of Australia (CEDA), many of these concerns are without factual basis.
According to CEDA, temporary skilled visa holders are not a threat to local workers since they represent less than 1% of the 13.5m Australian labour force. And with a high average base salary of around $95,000 in 2018, these workers are not undercutting local employment terms.
However, as highlighted by Jarden, excess migration can put a downward pressure on wages and raise unemployment rates due to higher labour supply.
Temporary workers do not receive any free/subsidized government services, contrary to the common accusation of migrants “being on the dole.” In fact, they contribute a net positive fiscal effect through tax revenues to the local governments.
Certain industries with higher exposure to migrants enjoy a net positive impact from increased immigration. The impact could be through increase in aggregate demand (supermarkets, telecom), or a rise in labour supply (mining and healthcare services).
According to McKinsey, migrants in Australia have contributed over $330bn to the national GDP between 2000 and 2014. By the middle of this century, migration will increase the Australian population by 14m to 38m, contributing $1.6trn to the national GDP and generating 5.9% in GDP per capita growth.
The Per-Capita Reality of the “Australian Miracle”
Between 1991 and 2020, Australia maintained a nearly 30-year streak of no “technical” recessions – two or more consecutive quarters of negative GDP growth. In reality, the economy has witnessed at least three recessions in that period – in 2001, 2006, and 2018.
According to the Federal Reserve Bank of St. Louis, the rapidly rising population, fuelled in part by immigration, is what kept the Australian economy in its growth mode. Even during the 2008 Global Financial Crisis, the Australian GDP growth was sustained by record levels of immigration.
In 2023, the Australian economy is on the cusp of a recession if we take into account the -0.3% fall in per capita GDP in the June Quarter of 2023. The seasonally adjusted GDP growth was at 0.4%, representing a seventh straight rise in quarterly figures since 2020.
As household consumption remains weak and consistently high-interest rates create a cooling effect on domestic demand, much of the growth in 2023 is driven by net exports, investment, and the return of students, who add an estimated $29bn to the local economy.
Sustainability Concerns versus Threat of Demographic Stagnation
The opposition towards increasing immigration levels is driven largely by concerns about sustainability. More than 80% of Australians live near the coast, in densely packed urban centres. And in the last decade, cities have been plagued by congestion, overcrowding, and rising property prices.
Housing crisis, in particular, is a major pain point in Australia. Vacancy rates are at historic lows and rent has risen by 10% in capital cities. A further increase in demand posed by an influx of 800,000 new residents will increase rental rates and increase dwelling demands by a record 300,000 in 2023 alone.
However, a drastic reduction in immigration levels may have a net negative impact on the domestic economy. An analysis of the post-Brexit UK experience throws up some interesting insights when compared to Australia and Canada.
All three are highly developed economies with high GDP, rapidly ageing populations, and falling fertility rates under 2.1 TIFR. Of the trio, Britain has reported the highest inflation rates of around 7.1% in May 2023, compared to Australia's 5.6% and Canada's 3.4%.
Although net immigration levels have increased post-Brexit in the UK, there has been a marked shift in the nature of migrants. The influx of skilled workers from Eastern Europe has been largely replaced by students and refugees.
The shortage of workers has resulted in persistent vacancies and skill gaps, tightening the labour market. Combined with volatility in the energy market and pandemic aftershocks, the labour market has played an active role in the inflation levels in the UK.
In contrast, both Canada and Australia enjoy more than double the jobs growth compared to both the UK and the US in 2023, without any overheating in labour markets. Pro-immigration policies, particularly those related to skilled categories, clearly played a role in this.
The Continued Relevance of Migrant Labour in Key Sectors
According to the National Skills Commission, four service industries will account for 65.4% of employment growth until 2026. These are healthcare and social assistance, scientific and technical services, education and training, and accommodation and food services – all sectors that are heavily reliant on skilled permanent and temporary immigrant workers.
While skilled visa holders gravitate more towards the higher-end professional services, students are more likely to be absorbed into the hospitality sector. As highlighted by Jarden, the sector that accounts for the greatest uptick in visas since 2019 is mining.
The demographic pressures exerted by rapidly expanding populations on the urban infrastructure in Australia are a growing concern, especially given the forecasts of sustained undersupply. However, equally valid are the needs of the economy for a constant stream of skilled labour for sustained growth.
A middle-ground solution that addresses both sides of the equation is critical for the future of the Australian economic growth story.
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