5.5 Trade liberalisation as an aggregate supply policy

Name of tax Outline of key tax reforms Top rate in 2021–22 Historical top rate

Tariffs Tariffs are an indirect tax added onto the price of imported goods making them dearer and protecting local industry. Over the last 40 years or so, these have been reduced. • 1996–97 — by 1996, the general tariff rate on most manufactured imports had been dramatically reduced from 38 per cent in 1968–69 to only 5 per cent, where it has remained. • 2010–11 — the tariff rate on imported cars was cut from 10 to 5 per cent, and the tariff on textiles and clothing came down from 15 to 10 per cent. • 2015–16 — the tariff on textiles and clothing was reduced to the general rate of just 5 per cent or less. Average rate of less than 1 per cent (general tariff rate) 38 per cent (general tariff rate, 1968–69)

The carbon tax The carbon tax was levied between July 2012 to late 2014, on Australia’s 500 environmentally dirtiest companies, starting at $23 per tonne of CO2. It was seen as a way of internalising costs or negative externalities associated with carbon emissions and climate change. • 2014 — this tax was abolished partly because of concerns about its effectiveness and the unintended consequences that reduced the international competitiveness and expansion of some Australian industries. 0 per cent (now abolished) The starting rate was $23 per tonne of carbon emissions

Other tax changes

Some multinational companies have been able to shift their tax liability from Australia to a lower tax offshoot overseas, reducing the revenue collected by the government. To counter this, a Diverted Profits Tax of 40 per cent was applied starting in 2017–18. In 2021, 130 OECD countries agreed to a minimum corporate tax rate of 15 per cent to help ensure transnational firms better meet their responsibilities and share the tax burden. Nominal rate of 40 per cent

Nominal rate of 40 per cent Other possible tax reforms that have may be reviewed in upcoming years: • changes to franking credits from share dividends • negative gearing and capital gains discounts • superannuation tax concessions for salary sacrificing. Note: These tax reforms were substantially announced in the 2018–19 budget but were modified in 2019 and again in 2020, and are now legislated (rates quoted exclude the 2 per cent Medicare levy). Source: Data derived from many sources including the Treasury’s Economic Roundup, winter 2006; budget papers 2008–09 to 2021–22; the ATO and media reports. Tables 5.1 show that the two most important tax reforms have involved changes to personal and company taxes, as outlined below: • Cutting PAYG rates. Overall, significant cuts have been made to some marginal rates applied to personal income tax (Pay As You Go or PAYG) in recent budgets to 2021–22 with further reductions and reforms currently scheduled through to 2024–25. These should help to grow Australia’s productive capacity and UNCORRECTED PAGE PROOFS aggregate supply. Reductions in income tax may work in various ways: • They may help to encourage greater personal effort and motivation to work hard, seek longer hours, gain extra skills or training, pursue promotion, participate in the labour force and stay in Australia rather than go overseas where disposable incomes are often higher. Failure to cut tax rates would have diminished

the quantity and quality of our human capital, lowered efficiency and eroded Australia’s productive capacity and living standards. • They help to reduce the disincentives of bracket creep (also called fiscal drag) as individuals move into higher tax brackets when their incomes rise, that otherwise would cause the average tax burden to increase over time and act as a supply-side disincentive. • Cutting company tax rates. There have been significant reductions in tax rates for small and medium-sized companies over recent years, taking the rate from 30 to 27.5 per cent for 2019–20. A further reduction to 26 per cent occurred in 2020–21, decreasing to 25 percent in 2021–22. Furthermore, recent budgets to 2021–22 also provided tax relief through instant tax write-offs for small to medium-sized businesses purchasing capital equipment. The 2020–21 budget allowed businesses with an annual turnover of up to $5 billion to be able to deduct the full cost of improvements in eligible depreciable assets, and this was extended in the 2021–22 budget to June 2023. Company tax reforms like these have been used to grow Australia’s productive capacity and promote aggregate supply: • Lower corporate rates create powerful incentives for businesses to expand through investment in new plant, equipment and technology. This boosts technical efficiency and capacity. In turn, higher efficiency helps keep production costs down and causes after-tax profits to be stronger. As a result of better returns, profit-hungry firms and individuals supposedly become more willing and able to expand production and capacity, increasing aggregate supply. • Lower company tax rates in Australia relative to those overseas have helped to make local export and import-replacing firms even more internationally competitive. This has led to business expansion and the growth of aggregate supply. (Even so, Australia’s company tax rates are still much higher than those in many countries in our region.) • In addition, relatively lower company tax rates here should help to attract foreign investment that would help to grow efficiency, productive capacity, employment, incomes and living standards. How tax reform as part of the budget can affect, domestic macroeconomic goals, international competitiveness and living standards Many economists argue that the government’s tax reforms, mostly involving reductions in various tax rates, have ramped up the positive incentives to encourage higher levels of business investment, reward greater effort, increase participation in the work force and hard work by individuals, all of which can help improve efficiency in our use of resources. Through greater incentivisation, reforms have made Australia’s aggregate supply conditions for businesses and individuals more favourable, thereby growing our productive capacity. Yet again, it is handy to refer to the AD–AS diagram shown in figure 5.6 (Pxxx). Here, for example, lower personal and company tax rates create stronger incentives to grow capacity and increase AS (the rise from AS1 to AS2). In turn, this increases the non-inflationary, potential rate of economic and employment growth (the rise from GDP1 to GDP2), while prices actually fall (the drop from P1 to P2), thereby also improving our international competitiveness. Over time, domestic macroeconomic conditions can be strengthened, supporting better living standards. With this in mind, let us now take a closer look at the likely impact of tax reform on Australia’s domestic macroeconomic goals, international competitiveness and living standards. Tax reforms in the budget can increase the non-inflationary rate of economic growth The government seeks to have the highest sustainable rate of economic growth that does not add to inflation (namely, when chain volume GDP rises by an average of around 3 per cent a year). Budgetary tax reforms can work to expand productive capacity, and increase aggregate supply and the potential rate of economic growth, in several ways: • Lower personal income tax rates (e.g. 2018–24) can create greater rewards or incentives, and motivateUNCORRECTED PAGE PROOFS individuals to work harder, work longer hours and gain promotion. They can also encourage higher rates of participation in the labour force (helping individuals avoid the welfare trap). Together, these outcomes may help to increase access to labour resources and grow productive capacity, elevating Australia’s potential

GDP.

• Cutting company tax rates (2018–21) incentivises domestic and foreign investment and promotes business expansion by increasing rewards and after-tax profits. Cuts therefore help to increase both technical efficiency and intertemporal efficiency. They help to grow the economy’s productive capacity and potential rate of economic growth.

Tax reforms in the budget can slow cost inflation and strengthen international competitiveness The RBA and the government want to promote the goal of low inflation (an average rise of between 2–3 per cent a year in consumer prices over time). Reforms involving reductions in tax rates have helped to slow Australia’s rate of cost inflation: • Lower company tax rates allow firms to gain stronger after-tax profits. They can sell more competitively at a lower price. Furthermore, with better profits, firms are more able to afford new technology, boosting their technical efficiency, suppressing cost inflation pressures, and enhancing international competitiveness. • Lower rates of personal income tax increase disposable incomes and might help to slow demands for higher wages. This reduces cost pressures. In addition, lower rates can act as an incentive to work even harder and gain new skills, thereby lifting labour productivity, again slowing cost inflation. • Lower tariffs, especially since 2015, have forced local firms to restructure their operations and specialise in areas of comparative cost advantage. This enhances allocative and technical efficiency, and eases cost inflation pressures. • The abolition of the carbon tax increased the after-tax profits of some businesses, allowing them to sell competitively at lower prices (although this had adverse impacts on CO2 emissions and the environment).

Tax reforms in the budget can reduce structural unemployment Another government goal is full employment, where the unemployment rate is relatively low (rate of around 4.0–4.5 per cent of the labour force that doesn’t accelerate inflation). Lower tax rates and changes to the tax mix can help reduce some aspects of natural unemployment (they can lower structural unemployment especially in the long term): • Lower rates of personal income tax (e.g. 2018–24) can strengthen incentives to work and get a job (assuming these are available), lowering voluntary unemployment. Importantly too, lower rates may lift worker productivity, slow business costs and make local firms more competitive at home and abroad. This can reduce the number of business closures, encourage expansion and cut structural unemployment. • A reduction in the company tax rate (2018–21) for small and medium businesses who are now able to improve their after-tax profits, reduce company closures by making local firms more internationally competitive, encourage investment and expansion, and cut structural unemployment.

Tax reforms in the budget can increase living standards Tax reform can help maximise Australia’s living standards in several ways: • By slowing cost inflation and growing the international competitiveness of local firms, tax reform has helped to grow the purchasing power of incomes, consumption and material living standards. • Tax reform has increased financial incentives to work hard and invest. These probably strengthened efficiency and lifted our potential GDP per capita. In turn, this should lead to higher real incomes and consumption per head, and hence material living standards. • In helping to keep structural unemployment lower through greater efficiency and competitiveness, tax reform has generated higher real disposable incomes for individuals (because earnings from paid work have been higher than welfare benefits), improving our material wellbeing. In addition, lower unemployment is beneficial to the general happiness and health of families, and potentially may have helped to keep crime rates lower. This strengthens non-material living standards.

Weaknesses of tax reform in the budget as an aggregate supply policy UNCORRECTED PAGE PROOFS

We have seen that tax reform involving lower tax rates offers the potential of greater efficiency and productive capacity, boosting aggregate supply. However, the use of this microeconomic policy has weaknesses: • Inconclusive evidence: The evidence that lower rates of personal income tax boost efficiency and grow our productive capacity might be surprisingly weak. In fact, some economists claim the opposite: that higher tax rates will create an increased incentive and necessity to work even harder in order to get ahead and have

higher incomes, especially if over-generous welfare is not an option. Lower PAYG rates might simply allow middle- and upper-income earners to use their lower tax rate to enjoy more leisure time without adding to the availability of labour resources or productive capacity. • Financial constraints: Currently, there is concern over large budget deficits, the rise in government debt and the burden on future generations. This acts as a financial constraint limiting the extent to which further cuts in tax rates are affordable. This reduces their beneficial impacts on aggregate supply. Indeed, figure 5.13 shows that despite reductions in rates of company tax for small to medium firms to 25 per cent from July 2021 with 30 per cent for large firms, this still leaves our company tax rates well above the OECD average of 20.7 per cent, and well above that for Asian countries where it is just 21.4 per cent. This places Australia at a distinct competitive disadvantage in trade and investment, and discourages the growth of new firms and aggregate supply. Furthermore, if generally lower tax rates do not significantly boost efficiency and productive capacity, the danger is that there may be little addition to real incomes. All that might happen is that tax cuts will lead to structural budget deficits. In addition, by reducing budget receipts, governments will not have sufficient resources to maintain the quality and affordability of public goods and services, a problem that we are now seeing in Australia. It could become a race to the bottom for the public sector (jeopardising the provision of infrastructure, education, health, transport, communications and housing), eroding future economic growth and living standards. To help minimise this risk, tax reforms should only reduce rates for those taxes that clearly deter effort and the growth of capacity, while generating adequate finance to strengthen the sustainability of the budget. FIGURE 5.13 International comparisons of Australia’s rate of company tax against rates in other nations. International comparison of company tax rates (percentage of profits) Cayman Islands Bermuda Ireland Hong Kong Singapore UK Thailand Vietnam Taiwan OECD average Asia average USA Global average NZ Malaysia China India NZ Germany Australia (large companies) France Brazil Japan 0 5 10 15 Company tax rate (percentage of profits) 20 25 30 35 34 30.6 26.5 30 30 28 25.2 25 24 28 23.6 21 21.4 20.7 20 20 20 19 17 16.5 12.5 0 40 South Korea 25 Australia (small & medium companies) 25 Sources: Data derived from KPMG, https://home.kpmg/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online/ corporate-tax-rates-table.html; Trading Economics, see https://tradingeconomics.com/country-list/corporate-tax-rate. 0 UNCORRECTED PAGE PROOFS • Trade-offs exist: Tax reform involving lower tax rates to increase efficiency is seen by some as conflicting with the government’s pursuit of an equitable distribution of income. To them, lower tax rates on companies, superannuation and capital gains mostly help the wealthy, and the supply-side idea that benefits will eventually ‘trickle down’ to those on lower incomes, only allows the rich to become even better off.

• Political constraints: Another weakness of Australia’s recent attempts at tax reform is the huge political constraint or obstacle faced by governments who lack the numbers in the upper house or Senate, sufficient to pass the necessary legislation. In addition, voter reactions must be considered. As a result, difficult reforms have been deferred or abandoned. Over recent years, various attempts to more aggressively reform

Australia’s tax system, have been patchy, partly because of their highly political nature - their effect on voters, and the obstacles of getting legislation approved in the Senate. For instance, further debate is likely over the fairness or equity of the Stage 3 of the current income tax reform plan scheduled for July 2024.

On the one hand, some middle-income earners may be better off when the 32 and 37 per cent marginal tax rates are abolished to become a single 30 per cent bracket. In addition, those in the highest marginal tax bracket will also gain when the entry income level is pushed out to incomes over $200 000 from the current $180 000 per year. This raises a question about equity, given that currently, there is no proposed rise in the tax-free threshold for low-income earners who struggle to maintain living standards and be incentivised to participate in the labour force! • The tax mix is not optimal: Other commentators point to Australia’s over-reliance on direct income taxes that discourage the growth of investment and efficiency, and our under-reliance on indirect taxes on goods and services that encourages consumption. They feel there should be a more effective tax mix. Resourceseses Resources Weblinks Why tax reform? Taxes on housing Tax reform — online quizzes Indirect tax How company tax impacts living standards Labour market reforms How the minimum wage creates unemployment Labour market The labour market Minimum wage consequences Understanding supply-side economics 5.3 Activities

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Track your results and progress Find all this and MORE in jacPLUS 5.3 Quick quiz 5.3 Exercise 5.3 Exercises 1. Define the term, aggregate supply budgetary policies. 2 marks 2. From the following, select one budgetary policy measures that can be used to affect aggregate supply: • Outlays on infrastructure • Outlays on education and training UNCORRECTED PAGE PROOFS • Budget subsidies • Financial support of R&D • Tax reforms.

a. Describe the main features of the selected budget measure. 2 marks b. In general terms, explain how the policy can be used to affect aggregate supply. Illustrate this using a fully labeled AD–AS diagram showing the before and after situations for an economy. 4 marks c. Giving reasons, explain how, over time, the selected policy could be used to help achieve each of the following domestic macro goals: i. The goal of a strong and sustainable rate of economic growth 2 marks ii. The goal of low inflation and international competitiveness 2 marks iii. The goal of full employment 2 marks iv. Improvements in living standards. 2 marks d. Identify and explain two important weakness or limitations of using your selected policy to improve general living standards. 4 marks 5.4 Encouragement of skilled immigration as an aggregate supply policy

KEY KNOWLEDGE • the effect of skilled immigration policy on population, productivity and participation and the subsequent effect on productive capacity, aggregate supply, international competitiveness, the achievement of domestic macroeconomic goals, and living standards.

Source: VCE Economics Study Design (2023–2027) extracts © VCAA; reproduced by permission In this section of the course, we will study the Australian government’s strategy of encouraging skilled immigration as another aggregate supply policy. In particular, we will investigate the impacts of this skills policy on Australia’s population, worker productivity, and the labour force participation rate, and investigate how this strategy affects Australia’s productive capacity, international competitiveness, the achievement of domestic macroeconomic goals, and living standards. Impacts of the skilled immigration program as an aggregate supply policy

Effect of the policy on the size and age distribution of the population Effect of the policy on the labour force including size, productivity, wages and the participation rate Effect of the policy on productive capacity and aggregate supply Effect of the policy on international competitiveness and domestic macroeconomic goals

Effect of the policy on living standards, material and non-material By way of background, this skills program is just one element making up the overall immigration target that is currently capped at a total 160 000 till 2023–24 when it will again rise to 190 000 permanent entry visas issued each year. This broader target is broken down into four main categories or streams: • The Skill Stream normally makes up around 70 per cent of permanent visa holders and seeks to fill skill shortages in the labour market. UNCORRECTED PAGE PROOFS • The Family Stream is for Australian citizens or permanent residents to reunite with family members from overseas. • The Special Eligibility Stream for those in particular circumstances. • The Child Stream is driven by demand.

Target levels for each of these entry categories can be varied to reflect changing domestic conditions (e.g. in the labour market and broader economy) and international developments(e.g. COVID-19 with border closures meant targets were not reached and there was actually net emigration, where more people left Australia than entered).

FIGURE 5.14 By using these immigration policies, the Australian government hopes to grow the size and skills of our labour force, partly reversing the effects of an ageing population. It also hopes that this policy will reduce labour bottlenecks and increase the nation’s productive capacity. This could allow for a faster potential rate of economic growth and improved material living standards. In arriving at our immigration policy today, decisions have been driven by two factors. • Firstly, back in the years following the end of World War II (1945), Australia was seen as a vast underpopulated country with massive natural resources just waiting to be exploited. With this attitude, immigration was needed for economic and political reasons. ‘Populate or perish’ was the slogan of the time. During the 1950s and 1960s, the federal government even offered to pay the cost of the boat passage to Australia, to boost European migration numbers. • More recently, however, we recognise that Australia has an ageing population with a growing proportion of the population in older age groups nearing or beyond retirement. This is partly due to smaller families and a falling birth rate. The extent of Australia’s ageing population can be seen in figure 5.15, which compares population pyramids (showing the age–sex distribution of a population) at two points in time: 1950 and 2023 (projected). Notice that by 2023, instead of a relatively wide base on the population pyramid like in 1950 (i.e. young people make up a higher percentage of the total population), the pyramid base has become relatively narrower, and UNCORRECTED PAGE PROOFS instead of inward sloping walls with lots of people in younger age groups, moving upwards the sides have become almost vertical. This shows that there is now a higher proportion of the population in older age groups. We have an ageing population with more nearing retirement age and leaving the labour force, creating labour and skills shortages.

FIGURE 5.15 The changing shape of Australia’s population pyramid between 1950 and 2023 (projected), showing our ageing population.

100+ Male Female 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 10%

Populationpyamid.net 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.1% 0.2% 0.3% 0.5% 0.6% 0.8% 1.0% 1.2% 1.6% 1.7% 2.1% 2.2% 2.4% 2.6% 2.7% 2.7% 3.1% 2.8% 3.5% 3.2% 3.9% 3.7% 3.8% 3.7% 4.2% 4.0% 4.0% 3.8% 3.4% 3.3% 3.6% 3.5% 4.4% 4.2% 5.6% 5.3% 8% 6% 4% 2% 0% 2% 4% 6% 8% 10% Australia - 1950 Population: 8,177, 348 100+ Male Female 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 10% 8% 6%

3.3% 3.3% 3.3% 3.1% 3.1% 3.3% 3.6% 3.6% 3.4% 3.1% 3.1% 2.9% 2.8% 2.4% 2.1% 1.6% 1.0% 1.2% 1.8% 2.2% 2.6% 2.9% 3.0% 3.1% 3.1% 3.4% 3.6% 3.5% 3.2% 3.0% 3.0% 3.1% 3.1% 3.1% 0.6% 0.8% 0.2% 0.4% 0.1% 0.1% 0.0% 0.0% 4% 2% 0% 2% 4% 6% 8% 10%UNCORRECTED PAGE PROOFS Populationpyamid.net Australia - 2023 Population: 26,343, 073

Source: Graphs copied directly from PopulationPyramid.net, see https://www.populatio npyramid.net/australia/1950/ and https://www.populationpyramid.net/australia/2023/.

So, our immigration policy that consists of around 80 per cent of people aged less than 30 years, is now seen as one way of easing serious problems caused by our ageing population. These include: • our worsening labour shortages (especially those with special skills required to fill shortages) • our relatively high wage costs (caused by labour shortage which makes local production less internationally competitive) • the erosion of the government’s financial position (caused by the need to increase outlays on aged pensions and health, because there is now a relatively smaller proportion of younger taxpayers in the labour force).

These less favourable conditions act as barriers, limiting Australia’s productive capacity, aggregate supply, international competitiveness, and ultimately, living standards — problems that have been well documented in various government Intergenerational Reports (latest in 2021).

5.4.1 Definition and features of Australia’s recent skilled immigration policy As an aggregate supply policy, Australia’s encouragement of skilled migration is closely geared to meeting the needs of our labour market in growing the economy size with an ageing population. As the government states, “the Skilled Stream of the Migration Program, is designed to attract migrants who make a significant contribution to the Australian economy and fill positions where no Australian workers are available. Skilled migrants have very high participation rates in the workforce, helping to stimulate economic growth, which results in more jobs … It also plays an important role in regional development through providing skills and labour which can’t be sourced locally, as well as encouraging investment and promoting local spending in regional areas.” (See Australian government, Home Affairs, see https://immi.homeaffairs.gov.au/what-we-do/ skilled-migration-program). As an aggregate supply policy, this skills program has several key features: • It sets annual targets to manage the overall number of people allowed visa entry. This affects the size and growth of both the general population and our available labour force, expanding Australia’s productive capacity and aggregate supply. • The policy allows flexibility since the annual intake target can be varied to reflect changing domestic conditions and overseas circumstances. • It gives priority to immigrants who have special types of skills and talents (technical and other skills including English language) where we have current labour shortages. This helps to remove a barrier to expanding capacity and output. It also helps to grow productivity or the quality of our human capital or labour resources available, again boosting capacity and aggregate supply. • It encourages those in younger age groups (around 80 per cent of all entrants are aged less than 30 years) who are more likely to make a valuable and ongoing economic contribution to the Australian economy for many years to come, temporarily slowing the effects of our ageing population. Over the medium-term, this helps to ensure that our productive capacity and aggregate supply can continue to grow. The general skills migration program is based on a points system reflecting how likely the migrant is to make the greatest economic contribution according to criteria like work experience, age, and education. • There are three possible categories for skills entry: • There is the employer-sponsored migration program. Here, an employer can recommend people who have the special skills they seek. • The distinguished talent program, for attracting those who are internationally recognised in their field of expertise. • Finally, there is the business innovation and investment program. This is to attract those with financialUNCORRECTED PAGE PROOFS backing and a previous good track record of running successful businesses. Figure 5.16 provides a quick snapshot of the Australian government’s policy of encouraging skilled immigration: • Part 1 shows that in most recent years prior to COVID-19 border closures, skilled immigrants made up nearly 70 per cent of all permanent visas issued.

• Part 2 identifies some of the key areas of skills shortages recently targeted by the skills program — for instance, health care professionals, partly reflecting the impact of COVID-19 and our ageing population. • Part 3 shows the occupations where employment and jobs are forecast to rise most and least up till 2025.

This affects the future priority areas for the skills program. Notice the relative faster growth of health and accommodation, but the decline in manufacturing.

FIGURE 5.16 Snapshot of the Australian government’s policy of encouraging skilled immigration.

2,00,000 1,80,000 1,60,000 1,40,000 1,20,000 1,00,000 80,000 60,000 40,000 20,000 1984–85 1986–87 1988–89 1990–91 1992–93 1994–95 1996–97 1998–99 2000–01 2002–03 2004–05 2006–07 2008–09 2010–11 2012–13 2014–15 2016–17 2018–19 2020–21 2022–23

Total skilled stream permanent visas Source: Data derived from Australian government, Department of Home Affairs, see https://data.gov.au/data/dataset/ australian-migration-statistics Total of all permanent migrant visas

Total permanent visas per year

Part 1-Changes in Australia's number of skilled as opposed to all permanent visas issued under our migration program Some recent shortages targeted by the skilled migration program Health care and health professionals Education and training Accommodation and food services Social assistance providers Professional and scientific including engineers Computer and software development Part 2- Key areas of skills shortages recently targeted by the migration program 0 UNCORRECTED PAGE PROOFS Source: Information derived from Australian government, National Skills Commission, see https://www.nationalskillscommission.gov.au/chapter-4-skills-workers-todays-labour-market

Part 3-The contribution of key occupations to Australia’s projected employment growth for the five years to November 2025, showing likely areas of skills shortages

Employment level change contribution (’000) 1,000

47.3 28.8 21.7

36.8 36.7 20.6 13.5 11.7 8.9 4.1 2.9

–5.9 –7.5

800

600 400 139.9

200

249.5 Health care and social assistance Accommodation and food services Professional, scientific and technical services Education and training Construction Retail trade Transport, postaland warehousing Administrative and support services Public administration and safety Financial and insurance services Mining Arts and recreation services Rental, hiring andreal estate services Electricity, gas, waterand waste services Other services Agriculture, forestryand fishing Wholesale trade Manufacturing Information media and telecommunications All industries Source: Australian Government, NSC, 2020 Employment Projections, five years to November 2025, see https://www.nationalskillscommission.gov.au/five-year-employment-projections

118.6 131.1 80.7

52.5 991.6 5.4.2 The impact of the skilled immigration program on Australia’s population As previously mentioned, our immigration policy has been generally shaped by two drivers. Firstly, given our many resources, it was felt that Australia was underpopulated, so an increase in numbers was seen as the answer. Secondly, we have an ageing population (i.e. a rising percentage of the population in older age groups nearing or already in retirement). This is largely due to our declining birth or fertility rates, resulting in growing labour shortages. If not addressed, this slows our sustainable rate of economic, employment and income growth, and puts the government’s finances under greater pressure due to increased outlays and reduced tax revenues. Again, this is the rationale behind the government’s encouragement of immigration, with its focus on attracting those with skills! Figure 5.17 part 1 shows that recently, net immigration (the excess of immigrants over emigrants) normally accounts for around 60 per cent of our total population growth, of which skilled migrants make up the majority. The remaining growth in population has come from natural increase (i.e. the excess of births over deaths), although COVID-19 and border closures recently changed this normal pattern. Part 2 of figure 5.17 clearly shows that most immigrants are young, with 80 per cent aged less than 30 years. This is how immigration has helped to slow our ageing population — well at least temporarily, since of course further down the track, immigrants also get old! Part 3 of figure 5.17 reveals that most migrants chose to live in Melbourne and Sydney where there are more opportunities for employment in the labour market. 0 UNCORRECTED PAGE PROOFS