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Impact of ageing population on economic outcomes

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Australia's ageing population and lower net overseas migration policy will make it impossible to deliver economic growth forecasts after international borders are opened, writes Abul Rizvi.

AUSTRALIA and Japan are demographic polar opposites.

While Australia boosted immigration to slow its rate of ageing from around the Year 2000, Japan maintained very low levels of immigration. Combined with lower fertility, low immigration has led to Japan ageing quickly. Its working age to population (WAP) ratio has fallen almost ten percentage points since this peaked around 1990. Australia’s WAP ratio over the same period declined only marginally (see Chart 1).

Source: UN Population Division

Japan’s working age population fell by 10.5 million between 1990 and 2018 while Australia’s working age population increased 4.9 million.

The last available estimate of the portion of foreign-born in Japan was 1.02% in 2001 — one of the lowest in the developed world. That compared to Australia at 23% in 2001 and 29.6% in 2019 — one of the highest in the developed world.

The median age in Japan in 2017 had increased to 46.7, one of the highest in the developed world, compared to Australia’s 37.5, one of the lowest in the developed world.

In 1990, the 65-plus population in Japan was 12.1% while Australia’s was 11.1%, a difference of 2%. By 2018, Japan’s 65-plus population had increased to 28.1% while Australia’s was 15.7% — a staggering difference of 12.4%.

While there are many factors impacting different economies, the extent of demographic difference between Japan and Australia will tend to highlight any differential impact from population ageing.

Japan entered its demographic burden phase (that is, WAP ratio in decline) almost two decades earlier than Australia which entered its demographic burden phase from 2009. All things equal, Australia’s economy should have performed more strongly than Japan’s from 1990 onwards. As Australia has aged much less since 2009, it should have maintained that advantage, including in per capita terms. Table 1 (below) shows that is exactly what has happened.

Table 1: Australia and Japan Compared: 1990-2018

Source: World Bank unless otherwise indicated 
*Purchasing power parity

The weakness in the Japanese economy since 1990 when its WAP ratio peaked is also reflected in its inflation rate which has generally been close to or often below zero. While Australia’s inflation rate has also fallen, since 1990 it has been around two percentage points higher than Japan’s. Despite rapid population growth, Australia’s real per capita GDP in constant U.S. dollars increased 58.5% between 1990 and 2018, while Japan’s increased by almost half that rate at 28.5%.

Labour compensation/household disposable income

Labour compensation per hour worked in Australia from 1996 to 2017 increased 80.2%, while in Japan this increased by only 4%. (See Chart 2). This runs counter to the argument immigration puts downward pressure on wages. Household disposable income in Australia also grew more rapidly.

Source: OECD

Higher wages and higher household disposable income led to household consumption expenditure increasing in Australia by 68.2% between 1990 and 2018, while in Japan it increased by only 28.7%.

Australia’s participation rate increased from 63.9% in 1990 to 65.6% in 2018 due to an increase in female participation, participation of elderly Australians and an increase in participation of new migrants.

While Japan also increased female and elderly participation, ageing meant its overall participation rate fell from 63.4% in 1990 to 61.5% in 2018.

Australia’s employment to population ratio increased from 57.1% in 1991 to 62.2% in 2018. By comparison, Japan’s fell from 62.5% in 1991 to 60% in 2018.

Government budgets

Australia’s gross government debt as a portion of GDP increased from 12.3% in 1990 to 66.1% in 2018. During the period Japan’s WAP ratio fell ten percentage points, its government debt increased from 52.9% of GDP in 1990 to 196.4% in 2016.

In Japan, general government consumption expenditure increased from a relatively low 13.5% of GDP in 1990 to a relatively high 19.7% of GDP in 2017. For Australia, this increased much more slowly from 17.2% in 1990 to 18.8% in 2018. With the populations of both countries now in their post WAP peak (or demographic burden) phase, government consumption expenditure as a portion of GDP can be expected to continue to rise. This will be driven in particular by pressure to increase government spending on health, aged care and social support for the elderly.

Population ageing outlook

And what of the future for Japan and Australia given projected further ageing after 2030?

Source: UN Population Division

Chart 3 (above) shows that the rate of ageing in Japan in the decade of the 2020s is projected to slow due to a projected increase in deaths of the elderly. According to the UN population projections, increased deaths will increase the rate of decline in the total population from negative 0.09% per annum in the period 2010-2015 to negative 0.53% per annum in the period 2025-2030.

But rapid ageing is projected to resume after 2030 due to Japan’s low fertility rate and limited immigration. Both ageing and population decline have already made many ghost towns in rural Japan as younger Japanese have continued to move to the Tokyo-Osaka conurbation.

Over the next 20 years, ageing and decline will increasingly impact Japan’s larger cities.

Muto, Odea and Sudo (2016) find 

'Japan’s population ageing as a whole adversely affects GNP growth by dampening factor inputs. It also negatively impacts on GNP per capita and fiscal variables, especially in the future, mainly due to the decline in the fraction of the population of working-age.'

Colacelli and Corugedo (2018) note that

'a rapidly shrinking and ageing population and labour force constitute severe demographic headwinds to future productivity and growth.'

In response, Japan is moving gradually to increase immigration.

A new "Highly Skilled Foreign Professional" visa was introduced in 2012. The proportion of overseas students in the foreign-born population increased from 6.3% (131,789) in 2006 to 11% (257,739) in 2016. Japan is starting to recruit low skill workers although The Economist magazine argues the 'rules are too woolly and too onerous and support for new arrivals is too scant'.

The pressure for Japan to get its immigration settings right will continue to grow as its rate of ageing again accelerates after 2030 and its rate of population decline continues accelerating.

While Australia moved early to use immigration to slow the rate of ageing, Japan is moving very late — perhaps too late to prevent a rapid decline in living standards associated with resumption of rapid ageing and decline.

But Australia will also now age rapidly over the next ten to 20 years with the likelihood of a further decline in its fertility rate as well as lower net overseas migration under current policy settings after international borders are opened. This is projected at almost 100,000 per annum less than forecast in the 2019 Budget.

That would make it impossible to deliver the 2019 Budget forecast of average real economic growth at 3% per annum during the 2020s, or the forecast of continuously increasing budget surpluses.

The Australian Government will need to explain how it will manage this ageing in its 2020 Budget and in its 2021 Intergenerational Report more clearly than it did in its ten-year budget plan in the 2019 Budget.

Abul Rizvi is an Independent Australia columnist and a former Deputy Secretary of the Department of Immigration, currently undertaking a PhD on Australia’s immigration policies. You can follow Abul on Twitter @RizviAbul

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