Treasurers say budget is on a sustainable path does not match

The 2021 IGR assumes real economic growth at a more modest rate of 2.6% per year. But can we trust that?

The expected real economic growth of 2.6% is slightly higher than the real economic growth of 2.4% per year actually achieved in 2013-2019.

Building on this would ignore the fact that once a country’s elderly population grows faster than its working-age population, real economic growth has rarely exceeded 2% per year on average for an extended period.

It also ignores the fact that Australia’s retiree population will grow by another million over the next 10 years to around 5 million, while it has already grown by a million in the past 10 years.

To justify his assumption of real economic growth of 2.6 percent, the treasurer will indicate his assumed return to productivity growth of 1.5 percent per year the average of the past 30 years. But why would Australia’s productivity growth mirror the average of the past 30 years when in the developed world it has been anemic once nations’ older populations grow faster than their labor force?

Finally, Frydenberg will highlight the expected rapid increase in net migration to an average of 235,000 per year. This compares to Joe Hockeys ‘2015 IGR forecast of 215,000 per year and Wayne Swans’ 2010 forecast of 180,000 per year, when we had the great Australia debate under Kevin Rudd.

A higher level of net migration would certainly help slow the rate of aging, especially as Frydenberg has finally given up on any hope that Australia’s fertility rate would rebound to 1.9 births per woman. He now uses a more plausible assumption of 1.62 births per woman.

The projected rapid and sustained increase in net migration raises a series of questions that the 2021 IGR largely ignores.

To forecast net migration, the Treasury resorted to averaging for a period immediately before COVID, again a lazy approach.

This is a period when the Abbott government stimulated permanent migration but delivered low net migration due to a weak economy; Malcolm Turnbull and Scott Morrison cut permanent migration to reduce congestion; enabled a boom in failed asylum seekers who are still in Australia, working mostly on farms; stifled independent, employer-sponsored and qualified visas; illegally limited the number of partner visas; promoted a massive increase in the number of foreign students before tightening student visas from India and Nepal, and waged an ongoing diplomatic battle with China, our main source of foreign students.

Remember that students have, in recent years, accounted for over 40 percent of immigration levels net of migration largely goes where student visa policy goes.

Which of these policies does the Treasury expect to continue or change over the next 40 years? The Treasury takes so little interest in the make-up and consequences of its net migration forecast that, when asked what the higher level of net migration means for the number of temporary immigrants to Australia in the future , the Treasury said the matter was under the Home Affairs Ministry.

Loading

Yet, in evidence in the Senate Estimates in May of this year, Home Secretary Mike Pezzullo said he was not even aware of the Treasury’s projected increase in net migration or the supposed increase in permanent migration.

While the department primarily responsible for delivering the projected increase in migration is unaware of the forecast, how the many Commonwealth / State government service delivery agencies, as well as the many industries and businesses affected, are doing will they prepare for it?

It would appear that the government is blindly stealing its net migration forecast. Achieving these forecasts would require both a still strong labor market and major (unspecified) changes in immigration policy.

Loading

The combination of this uncertainty with the super-optimistic forecast for productivity growth makes the forecast for real economic growth of 2.6% implausible.

This in turn makes Josh Frydenberg’s argument that the budget is on a sustainable path a fantasy and tax cuts for top incomes are unaffordable.

Abul Rizvi was a senior official in the Immigration Ministry from the early 1990s to 2007. He is a former deputy secretary of the ministry.