Australia's demographic dilemma

Given the way the political winds are blowing, a migration slowdown looks to be an inevitability in Australia. That's largely because our political duopoly doesn't tend to stray too far from the views of the median voter, and those voters turn against migration in times of turmoil:

"Historical data shows that concerns about immigration levels can 'spike' during periods of economic instability—and the Treasurer has warned that there are tough times ahead for Australia. But will this minority opinion matter in the contemporary Australian context?"

That was written in 2022, just prior to the most recent migration backlash. A survey published the other week by Resolve Strategic found that the median voter probably thinks even a migration level around the long-term annual average is now too high.

A key reason people claim to dislike migration isn't the migrants themselves, but the pressure they put on other inadequately addressed problems. Add migrants to a cost of living crisis, a housing crisis, and generally inadequate infrastructure, and things will get worse in the short-run.

But cutting migration isn't the Band-Aid solution to crises caused by government failures in monetary policy, taxation, land-use regulation, and infrastructure provision that the median voter might think it is. Sometimes, such as when it's a shortage of labour causing the issue, they can even be the short-run solution. In the longer run, taking in fewer migrants raises even bigger issues, such as how to deal with a more rapidly ageing population.

Of course, there's always a chance the migration backlash is just temporary. Politicians tend to target migration during election years but once all is said and done, they may not be able to resist higher rates of migration. That's partly because most of the fiscal cost of migration is initially borne by our state and local governments (the GST's horizontal fiscal equalisation helps even this out over time), while the federal government collects most of the benefits. And as a double bonus, most of those fiscal benefits accrue in the earlier years of a migrant's arrival, with the costs occurring out beyond 40 years.

If you're a politician and you want to spend on something without making cuts elsewhere, a higher rate of migration is a good way to 'find' a bit more cash in the budget. According to Treasury:

"All other things equal, a permanent migration program with a positive fiscal impact allows taxes to be lowered, government debt to be reduced or spending to be increased across the population."

Australia relies heavily on migrants to offset its ageing population and fix the fiscal problems that have come from governments borrowing against the future to spend in the present. I fully agree that this is a far from ideal method of dealing with these issues. But absent fiscal rules, tax and entitlement reform, and a complete change to how land-use regulation is done, it's the cheapest, easiest, short-term fix for our problems. That's why for our political class, it has been on rinse and repeat for many decades.

But for the sake of argument, let's just say Australia does permanently slow down its rate of migration. How might that change our future?

Rethinking entitlements

Australia is ageing, even at current rates of migration. Treasury's most recent Intergenerational Report used a long-run annual net migration assumption of 235,000, a number opposition leader Peter Dutton wants to "bring back... to a figure of about 160,000", or a cut of around 30%. But even with Treasury's higher number, the outlook was for an older Australia: