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Monday, 19 March 2012
Page: 3473


Mr KELVIN THOMSON (Wills) (21:29): I want to draw to the attention of the parliament what I believe is a really important piece of economic analysis by the University of Queensland academic Jane O'Sullivan titled 'The burden of durable asset acquisition in growing populations'. I know it sounds dull, but for anyone who seriously wants to understand the challenges facing governments in Australia today and understand why governments of all persuasions struggle to meet people's needs and expectations it is a must-read.

The problems and disadvantages of population growth have been overlooked by contemporary economic analysis. Instead of talking about population size, we should examine the economic impacts of population growth and population growth rate. The ability of a society to meet its population's needs depends on its stock of durable assets, infrastructure, plant and equipment and skilled workers. A certain proportion of total economic capacity must be used for asset acquisition to maintain services to the community. A society only acquires a fraction of its total stock of durable assets in any given year. The longer a class of assets lasts, the smaller the proportion that is replaced annually. Different items of infrastructure have differing life spans, but a cost-weighted average is likely to be at least 50 years. That would mean a society with a stable population needs to replace two per cent of all infrastructure annually. But if a population is growing at one per cent per annum, for example, the society needs to expand its entire stock of infrastructure by one per cent per annum; otherwise we build up an infrastructure deficit. This increases the burden of infrastructure creation by 50 per cent compared with a stable population: the two per cent replacement plus the one per cent for population growth.

The same principle applies to the skilled workforce and to human capital formation. Training is an upfront cost incurred before working life begins. Australian graduates have an average working life of 37 years. In a stable population with even age cohorts, annual retirements would be 100 divided by 37—that is, 2.7 per cent per year. Therefore, the annual training requirement of a stable population with even age cohorts would be to graduate 2.7 per cent of the workforce. But if population is increasing by one per cent annually then graduations need to be 2.7 per cent plus one per cent—that is, 3.7 per cent, which is 37 per cent greater than the stable population training requirement. Skilled workers in this matter are no different from hospitals, power stations, transport infrastructure et cetera.

While some factors can reduce the increase in the asset acquisition burden, others can increase it. For example, if the capacity of an existing installation cannot be easily expanded on site, it might have to be relocated to or rebuilt at another site. If the average effect were to reduce life span of infrastructure from 50 years to 40 years, this would add around 25 per cent to the annual acquisition burden. In addition, diseconomies of scale and costs associated with retrofitting upgraded utilities in already built-up areas increase the costs of growth. For example, moving from locally dammed, largely gravity-fed water supply to regionally pumped, desalinated or recycled water greatly increases the unit cost. So does moving from simple road and rail structures to major freeways and underground subways.

An increase in population tends to increase economic activity and tax revenue in proportion to population increase—that is, a one per cent increase in population is likely to increase GDP and tax revenue by approximately one per cent. Studies show that the effect of population growth on per capita GDP is small to zero. Yet the previous discussion shows that the cost of acquiring durable assets simply to maintain service levels increases at a much greater rate. One per cent more GDP or tax cannot pay for 25 to 50 per cent more public infrastructure, 50 to 100 per cent more housing construction, 20 to 37 per cent more training places et cetera. So economic activity gets diverted to the task of capacity expansion and consequently is withdrawn from other provision of goods and services. It is like walking on a treadmill: you are going faster but not getting anywhere.

It is estimated that the cost of keeping up with the infrastructure needs of Australia's population growth rate of 1.4 per cent is around 10 per cent of GDP. Why is such a big burden not noticed and commented on more? Probably the biggest reason is the misconception that all spending on durable assets is investment. In fact, the spending on infrastructure, equipment and training needed to maintain the same level of services for a growing population is capacity expansion. Capacity expansion is not investment in the sense of current sacrifices for future gain. There is no gain when people who get electricity when they flick on a switch or water when they turn on a tap continue to do so. If people continue to receive prompt and high-quality medical care or if average commuting times and school class sizes remain the same, that is not a gain. Capacity expansion in a growing population is not an investment; it is a recurrent cost. It should not be shown in the accounts as an investment or funded by borrowings. It is a bad idea to take out a loan to buy this week's groceries. It is also a bad idea not to distinguish between asset acquisitions which are adding to per capita utility—getting ahead—and those which are merely maintaining per capita utility, treading water.

Giving it the label 'investment' is the key reason why the costs of population growth have been rendered invisible. But there are others. Firstly, there is GDPism: focusing on growth at the expense of goals. If it is better to avoid an expense than to respond to it then avoiding it is a better outcome. Bushfires and tsunamis boost GDP, as the rebuilding activity is measured as economic activity, but this activity diverts capacity from activity which would improve people's lives. Population growth creates a need for activity to retain or regain a previously existing quality of life in exactly the same way as do natural disasters. Secondly, there is ignoring factors such as increasing personal debt levels, decreasing national savings and increasing dependence on foreign capital, with accompanying foreign debt repayments and repatriation of profits to foreign investors. Thirdly, costs are disbursed across many sectors and all levels of government—for example, school buildings in the education budget, hospitals in the health budget and prisons elsewhere. Telecommunications are federally funded; railways are state funded; rubbish tips are council funded; and electricity facilities and toll roads, once publicly funded, are now privately funded, but the money still comes from residents' pockets. Nowhere is there a comprehensive accounting of capacity expansion. Population stabilisation would greatly diminish the burden of capacity expansion, increasing the proportion of total economic activity available to serve current people—less treading water and more getting ahead.

The past decade has seen a dramatic increase in the cost of living, together with a rapid expansion of both public and private debt. Utility and rates charges have approximately doubled and are anticipated to rise steeply in coming years to address capacity shortfalls. Congestion of roads, public transport, ports and hospitals has become a dominant issue in public discourse, testifying to capacity shortfalls. Public perception of gross neglect of infrastructure provision was instrumental in the defeat of the New South Wales government in 2011. If population surges, infrastructure and skills deficits quickly erode productivity and services, and costs escalate. Conversely, slowing population growth rates allows capacity for capital formation to get ahead, improving service access and quality. There can be snowball effects on productivity and poverty alleviation. This is largely the story behind East Asia's economic rise. With the exception of a few oil-rich countries, no country has lifted itself out of poverty without first reducing its fertility rate.

Nations which chose to prioritise population stabilisation have shown that rapid fertility reduction can be achieved without coercive or punitive measures and that has been followed by economic progress. This progress is partly explained by the lifting of the burden of durable asset acquisition. The negative impact of population growth in least developed countries is obvious to seasoned observers. They describe the burden of expanding capacity of schools and health services as 'running hard to stand still'. Economists have not really explained this or had much to say about it over the years. They have focused on measuring economic activity and have neglected the difference in cost structure imposed by population growth. Understanding the cost burden of durable asset acquisition in a growing population enables us to better understand what is going on in both developing countries and developed ones, such as Australia, and causes us to rethink whether population growth is a good idea for the economy, let alone the society.