Coalition must dump Treasury’s Three-Ps framework

By Unconventional Economist in Australian Economy

at 12:10 am on November 22, 2019 | 22 comments

After spending four years calling on the Australian Treasury to dump its Three Ps framework, MB has finally received support from Crikey:

[In his speech to CEDA this week, Josh Frydenberg] went back to that faithful stand-by of treasurers all the way back to Peter Costello — an ageing population… [and] to invoke the mantra of successive governments and their Treasury officials: the three Ps — participation, population and productivity…

On productivity, of course, we’ve performed pretty shabbily, with the labour productivity surge under Labor giving way to years of flat or falling productivity under the Coalition…

On population and participation, however, we’ve performed brilliantly, at least from Treasury’s perspective. Australia’s population has grown far more rapidly than the Howard government projected back when it first began producing intergenerational reports…

Problem is, we’ve been too successful on population, in particular, and participation…

In fact, unemployment is stubbornly stuck above 5% when many other developed economies have unemployment below 5% and even below 4%. There are too many temporary workers, and too little enforcement of industrial relations laws to ensure they are paid the right wages. As a result, business uses them to undercut the wages of permanent workers (not to mention the impact on infrastructure and housing affordability).

More and more older workers — healthier and more active than previous generations — continue working into their 60s and even 70s…

In light of six years of wage stagnation (which Treasury has endlessly forecast was about to end), it might be time we updated, or at least seriously reconsidered, whether the three Ps are still working for us.

Growing Australia’s population via immigration to ‘solve’ an ageing population is a fools errand and self-defeating in the long-run.

The reasons why Australia’s population is ageing is because of: 1) Australian’s living longer (a good thing); and 2) the mass immigration program ran in the post-war period (i.e. 1950s and 1960s):

These migrants (which include my parents) have now grown old, thus adding to Australia’s current ‘ageing problem’.

Therefore, the policy prescription of running a strong immigration program to counter population ageing is misguided, because today’s migrants will grow old, thus creating further ageing ‘problems’ in 40 year’s time.

Furthermore, the standard rigid definition of 15-64 years old for the working-aged population ignores the increasing labour force participation by older Australians:

Since the mid-2000s, the labour force participation rate of over-65s has more than doubled. And there is obviously further scope for increases in participation given older Australians are remaining healthier for longer, as well as the legislated lift in Australia’s pension eligibility age to 67 by 2023.

Regardless, the ABS’ own demographic projections show that immigration is next to useless in ‘younging’ Australia’s population. That is, if we apply a more realistic definition for the working aged population of 19 to 70 (given more kids are staying in school and older Australians are working longer), then running annual net overseas migration (NOM) of 200,000 to 280,000 delivers only 3% more working-aged Australians by 2101 than zero NOM:

This tiny ‘benefit’ will only be transitory and comes at the expense of adding 150% to 200% more people to Australia’s population versus zero NOM:

Such a massive increase in population will obviously take a massive toll on Australia’s natural environment and general liveability. It will require massive investment in infrastructure and services, thus raising costs for the Budget and households, and more than offsetting any benefit from extra tax receipts.

Growing the population so strongly will also damage Australia’s productivity by crush-loading our major cities, causing both rising congestion costs and rising infrastructure costs (e.g. water desalination and tunnelling), as well as encouraging growth in low productivity people-servicing industries and debt creation, rather than higher productivity tradables.

Allowing employers to pluck cheap migrants in lieu of granting wage rises to local workers discourages companies from innovating and adopting labour saving technologies, while also preventing creative destruction by enabling low productivity companies to remain in business.

Mass immigration also makes no sense when technology’s rapid change has given rise to worries that automation will replace predictable and routine jobs—or even put many of us out of work.

It’s time to put Treasury’s Three-Ps framework to bed once and for all, along with the snake oil solution of mass immigration. Policy makers should instead focus first and foremost on boosting productivity, followed by labour force participation.

Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.