ABUL RIZVI. Will Dutton’s high stakes gamble wrong-foot the Treasury?

Jun 20, 2018

Peter Dutton is gambling with a long-standing pillar of Australia’s economic and budget success. By making the biggest cut to permanent skilled migration since the recession of the early 1990s, combined with a throttling of skilled temporary migration, Dutton will significantly reduce net migration and therefore our population growth rate. The 1.6% per annum population growth assumption in the recent Budget could be too high by between 12% and 25%.

No government review or report has recommended the actions Dutton is taking. Indeed, a joint Treasury/Home Affairs Report in May 2018 lauded the contribution of skilled migration to Australia’s economy and budget, as did a 2016 Productivity Commission report on Australia’s migrant intake.

Despite advice to the contrary from Scott Morrison, Peter Dutton has acted to significantly reduce immigration. But how far will net overseas migration fall and what does that mean for the rate of population growth and the economy more generally?

In Budget Paper No.3, Treasury says Australia’s total fertility rate was 1.817 babies per woman in 2017 and that this will rise to 1.9 babies by 2020 and then remain constant. This may explain why Treasury expects natural increase will, after trending down for a decade, suddenly bounce up from 145,500 in 2016 to 186,600 by 2021.

Australia’s total fertility rate has declined since the ABS made its population projections in 2012. Given strong female participation rates, the high costs of childcare, slow wages growth and record levels of household debt, it is difficult to see why Treasury has assumed our fertility rate will rebound to 1.9 babies per woman by 2020.

Over the forward estimates, a safer assumption would be that natural increase remains around 150,000 per annum or declines slightly below that level with the annual number of deaths increasing at a slightly faster rate than the annual number of births.

Net Migration

Treasury is on slightly safer ground with net migration which it assumes will decline from 242,600 in 2017 to 221,400 in 2021.

While declining net overseas migration when the economy is forecast to grow strongly is highly unusual, actions Peter Dutton has taken will indeed ensure a strong decline. The real question is whether Treasury has underestimated the rate of decline in net overseas migration.

Permanent Migration

Home Affairs has confirmed the 2017-18 migration program will be delivered significantly below the “ceiling” of 190,000 (possibly 20,000 less).

In addition, net migration will decline further due to the new visas for New Zealand citizens who have been in Australia for at least five years (i.e. people who have already been counted in net migration). These visas will be included in the skill stream of the migration program. With around 10,000 such visas expected to be issued in 2017-18 (and most likely at this level or higher for a number of years to come), the effective cut to the program will be closer to 30,000.

The ceiling for the humanitarian program has increased in 2018-19 to 18,350. This is not very different, however, to the level in recent years due to the one-off intake of an additional 12,000 Syrian refugees.

Temporary Migration

The number of skilled temporary entrants (i.e. former sub-class 457s) in Australia has been in steady decline since it peaked at just over 200,000 in March 2014.  By March 2018, this had fallen to just over 150,000. While a strengthening economy would usually lead to an increase in such visas, the changes Dutton has made, which took full effect from March 2018, will not only significantly reduce the contribution these visa holders make to net migration but will also have a flow-on impact for overseas students and working holiday makers.

The number of overseas students in Australia has surged since implementation of the Knight Review in 2012. But growth in offshore overseas student visas slowed in 2017-18 due to a range of factors including the strong increase in fees charged by Australian education institutions and the narrowing of opportunities to extend stay in Australia.

As on-shore student visa grants continued to increase strongly in 2017-18, the stock of overseas students will continue to grow in the short-term. But the major narrowing of opportunities to extend stay will result in a substantial increase in departures of students over the next few years.

The number of temporary graduates in Australia (currently over 50,000) will continue to grow as many of the 500,000 overseas students in Australia complete their degrees and apply for a temporary graduate visa. As the number of people whose temporary graduate visa expires will also grow, departures on this visa will rise as they now have fewer options to extend stay.

There will be a similar impact on working holiday makers whose contribution to net migration was already in decline since 2012-13. This downward trend will continue due to the narrowing of opportunities to extend stay in Australia.

The above will be offset by an increase in people arriving on visitor visas and then applying for long-term temporary or permanent stay. This group has been growing in recent years and is likely to accelerate due to the large backlog of family stream and a further increase in processing times for employer sponsored visas.

New Zealand Citizens

When the New Zealand economy performs poorly, net movement of New Zealand citizens to Australia is a substantial part of net migration. As the New Zealand economy is forecast to remain strong, net movement of New Zealand citizens to Australia will continue to be subdued.

Australian Citizens

A relatively weak Australian economy can drive up emigration of Australian citizens to take up opportunities overseas. This was evident in the period 2011-12 to 2014-15 when the net movement of Australian citizens increased from minus 6,480 to minus 26,170.

While Australia’s stronger economy in 2016-18 may have attracted some of these expatriates back to Australia (and slowed departures), the stronger world economy would also be attractive to many ambitious young Australians. Unless there is a sharp downturn in the global economy, a high level of emigration from Australia will continue.

Overall Implications

Based on the above, there is little chance Australia’s population growth rate will average 1.6 % per annum as assumed.

Net migration in 2016-17 will be a one-off peak. The policy changes implemented by Dutton will ensure it averages less than 200,000 per annum over the next four years. The key swing factors will be the extent to which overseas students and temporary graduates delay departure, noting their options are now very limited, and the relative strength of the Australian economy.

If Australia’s economy does continue to strengthen over the next few years, net migration may only fall to around 200,000 per annum giving a population growth rate of around 1.4% per annum over the forward estimates.

But if Australia’s economy weakens or at least does not strengthen compared to the world economy and the New Zealand economy in particular, then Dutton’s gamble may drive net migration down further and along with it, Australia’s population growth rate. Net migration over the next four years of less than 150,000 per annum and a population growth rate closer to 1.2 % per annum is quite possible.

This would have serious implications over the forward estimates for Treasury’s assumptions for household consumption growth, GDP, jobs growth and tax revenue as these are significantly driven by the rate of population growth. Given the cuts target the skill stream and temporary entrants who themselves have high participation and employment rates, there will also be a negative impact on Treasury’s assumptions for participation and productivity.

This is a gamble Dutton should be explaining to the Australian public; to state/territory governments and to the business community given the decisions they will be making on the basis of the 1.6 % population growth assumption in the Budget.

Abul Rizvi was a senior official in the Department of Immigration from the early 1990s to 2007 when he left as Deputy Secretary. He was awarded the Public Service Medal and the Centenary Medal for services to development and implementation of immigration policy, including in particular the reshaping of Australia’s intake to focus on skilled migration. He is currently doing a PhD on Australia’s immigration policies.

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