The Australian Economy: A Stinging Critique
In a recent analysis, Alan Kohler delivered a compelling critique of the Australian economy, labeling it a “basket case.” His observations paint a picture of an economy struggling under the weight of several interconnected issues.
Declining Productivity and Housing Affordability
Kohler points to declining productivity, stating that economic growth hinges almost entirely on government spending and immigration. The figures are stark: by 2025, private business investment’s contribution to GDP growth has reportedly fallen to zero, while real per capita income growth has stagnated. The housing market has become increasingly out of reach, with the average home costing eight times the average income—an alarming rise from three times the average income in 1985.
The Immigration Dilemma
One significant driver behind these stark statistics is immigration. While a higher birth rate may contribute positively to the economy, Australia’s population growth has doubled from 1% to 2% per year over the past decade. However, this influx is not matched by adequate planning, leading to pronounced structural changes in the economy. Kohler suggests that the costs associated with housing and overburdened infrastructure are sapping productivity and contributing to a lower quality of life.
Capital Shallowing: A Key Problem
Central to Kohler’s critique is the concept of “capital shallowing.” This term refers to a decrease in the amount of capital available for workers, which leads to diminished productivity. Economists increasingly recognize this phenomenon as a significant contributor to Australia’s declining productivity. The focus on record immigration has not been balanced with necessary increases in infrastructure and business investment, resulting in a stagnant economic environment.
Voices from the Economists
Prominent economists have echoed Kohler’s concerns, further illuminating the challenges ahead. Former Treasury Secretary Ken Henry emphasizes that productivity has two main drivers: capital deepening—which augments labor with technological and physical capital—and multifactor productivity growth, which remains poorly understood. Henry illustrates that Australia has experienced capital shallowing over the last decade due to a plummet in investment rates, which hampers overall productivity.
Similarly, Michael Plumb, the RBA’s head of economic analysis, acknowledges that the immigration policy has resulted in reduced productivity. He notes that slow growth in labor productivity reflects both sluggish multifactor productivity (MFP) and the decreasing amount of capital available for each worker.
Depressed Investment
Phil Lowe, a former RBA governor, has also raised concerns about the lack of business investment in the context of growing immigration. He argues that as overall capital stock continues to stagnate, the ratio of capital to labor has flattened since 2015. The stark reality is that the government has poorly managed the influx of new residents, failing to create an environment conducive to increased business investment that would build a capital stock capable of supporting the new workforce.
Economic Growth vs. Living Standards
Ross Gittins highlights the paradox of high immigration promoting economic growth without a corresponding increase in living standards. The underlying message is that without providing sufficient capital—whether in the form of machinery or infrastructure—immigration can lead to a decrease in the overall capital-to-labor ratio, ultimately affecting productivity negatively.
Mapping the Challenges
Independent economist Gerard Minack provides further analysis, detailing how net investment spending has fallen to historical lows, reminiscent of the 1990s recession. Minack points out that the rapid population growth, coupled with declining investment, has caused a collapse in the growth of per capita capital stock. Consequently, as the country has expanded economically, the lack of infrastructure and business investment has resulted in sluggish productivity and income growth.
The Population Surge
Australia has witnessed some of the fastest population growth in the developed world over the past two decades. According to the ABS Population Clock, the country’s population has surged by 8.7 million since the turn of the century—a staggering 46% increase. The federal government’s immigration policy, which permits high annual net migration, continues to outpace investments in business, infrastructure, and housing, exacerbating economic strain.
Future Projections
Looking ahead, the Treasury’s Centre for Population projects that Australia will grow by an additional 13.5 million people in the next 40 years—an increase that would require substantial infrastructure and investment. This anticipated growth translates to a need for extensive resources to maintain, let alone boost, productivity rates.
The Need for Balanced Approach
In light of these findings, many economists argue for a reconsideration of immigration policy. There’s a growing chorus advocating for a reduction in immigration levels that aligns with realistic investment rates. Otherwise, the country risks enduring stagnant productivity growth and declining living standards long into the future.
The ongoing dialogue surrounding the Australian economy underscores the urgent need to reassess strategies for population growth, investment, and productivity to ensure a vigorous economic landscape for future generations.
