Australia's stronger immigration - the other inflation dampener

Tucked away in Friday’s Reserve Bank statement on monetary policy is the assumption that Canberra is too afraid to make: Australia’s working age population will grow by 1.7 per cent over the next 2 years “in line with the recent pick-up in the rate of immigration”.
Ever since Kevin Rudd made the mistake of calling a population of 40-odd million “Big Australia”, politicians on both sides have run a mile from population growth figures. Government and opposition alike prefer to ignore population questions and, when cornered, tend to resort to various weasel words to give the impression that nothing much is happening and we should all just move along. It’s even Liberal Party policy to out-source migration levels to the Productivity Commission so that politicians won’t be held responsible.

But what both sides of politics know and quietly go along with is that 40 million is not actually a “Big Australia” – it’s simply what we have to have to handle the strain of Baby Boomers retiring from the workforce and becoming very expensive to keep in their old age. Without an on-going strong skilled migration program, Gen X and Y would have to pay vastly more tax to support Boomers for whom compulsory super came along too late. And even with migration growth, our demographics say the total tax take will still have to rise.

(At this stage, the anti-population growth mob generally jump up and down, shouting that we can’t just keep growing to support retirees, that it’s a giant population Ponzi scheme. But we don’t have to keep growing – once the Boomers eventually shuffle off, Gen X and Y should have enough superannuation to fund their own retirement.)

Part of the immediate impact of stronger working-age population growth is to dampen inflation. With the labour market already soft and employment growth low, adding more people to the mix – especially in areas of shortages – tends to keep wages growth subdued. The 1.7 per cent forecast of working age population is quite strong, particularly when employment growth itself is flat. Thus it’s not a surprise that the RBA forecasts wages index growth will slow a little to 3.5 per cent in 2013 and 2014.

That in turn is one of the reasons why I think the RBA isn’t quite as worried about the inflation rate increasing a little next year as most of the commentariat assumes. The central bankers also note that our productivity growth rate has picked up recently – another way of keeping inflation under control.

And really the neat thing about well-targeted immigration is that while it can dampen inflation, it can also lift economic growth. For example, it’s one of the factors that has the RBA and the Treasury believing the housing industry will pick up next year after being flat this year and going backwards in 2011.

Most discussion about managing the economy tends to concentrate on just monetary (interest rates) and fiscal (government spending) policy, ignoring the third arm of population policy. Fortunately, the RBA doesn’t.

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