Record migration boosts growth short term, but will it make NZ richer?

Tuesday, 24 November 2015

Net migration to New Zealand is running at record levels, driven in large part by Kiwis coming home from Australia.

New Zealand's population is growing at the fastest rate in more than 40 years, sparking a debate about the impact of immigration.

Fuelled by record numbers coming to live in New Zealand - largely on the back of Kiwis ditching Australia - New Zealand's population grew by 2 per cent in the year to the end of September.

According to Statistics NZ that was the highest since the 2.21 per cent the population grew back in 1974, not long after New Zealand's population reached 3 million.

The rate of growth could be higher for 2015 as a whole, with New Zealand seeing net inward migration of 6100 in October alone, amid signs arrival numbers are still increasing.

Prime Minister John Key told reporters on Monday that inward migration from Australia was a reason for celebration 'in a way' as it underlined New Zealand's economic strength and attractiveness as a place to live.

Back in 2012 New Zealand was losing close to 40,000 people a year to Australia, but in the year to October 31, arrivals from across the Tasman outnumbered departures for the first full year since 1991.

'What it shows you is we're doing something right in this country,' Key said.

But the growing population comes with pains, from the need to increase infrastructure spending to added pressure on the housing market, especially in Auckland where prices have surged.

While economists largely agree that a rising population boosts short term demand, some warn it shifts resources away from investment which will boost long term prosperity, towards simply coping with the pressures of a growing population.

Others claim though that in the long term, a larger population will allow New Zealand to enjoy the benefits of 'economies of scale' which other countries enjoy.

In the short term, most economists now say that because the economy is producing fewer new jobs, record immigration could push unemployment towards 7 per cent.

Finance Minister Bill English said migration had been stronger for longer than the market or the government had expected, and this was adding to demand for services.

'Government needs to pay for more kids at school, more people turning up in the health system,' English said on Tuesday.

Previously English has described the added strain as the 'kind of problem you like to have' and on Tuesday he said it was not yet close to creating headaches.

'I wouldn't think [it would be a problem] for a while yet. It creates some strain but it's the right sort of strain.'

He acknowledged there were differences in opinion on the benefits of immigration, but believed a bigger population was good.

'There's no doubt it [population growth] needs resource. It happens to be pretty job rich resource,' English said.

'In the longer term, we build our economy around people and more of them in New Zealand is a good thing.'

FINELY BALANCED

Economists said the argument was more finely balanced than the Government has been portraying, and that the recent surge may be causing more problems.

Michael Reddell, a former special economics advisor to the Reserve Bank, said trying to use a growing population make Kiwis wealthier was 'flawed'.

'Nobody disputes that in the short term immigration boosts demand more than it boosts supply,' Reddell said.

However Reddell argues strong immigration led to higher interest rates and a higher exchange rate than it would otherwise be, making it more difficult to build exports.

'If you've got rapid population growth and you're a country that doesn't save very much…then you're going to crowd out a whole bunch of other stuff that you could be doing just to build the houses, the roads, the shops, the hospitals. Private and public infrastructure that a growing population needs,' Reddell said.

'You get a lot of investment, but it's not adding to the amount of capital per worker, it's just an increase in the number of workers.'

Key said yesterday that strong migration was a sign of success, with countries wanting to come to New Zealand because it was safer, and the economy stronger.

'In a very troubled international environment, as you've seen with the attacks on Paris and the likes, we're seen as very safe and a place where our environment for the most part is pretty clean. We've got a growing economy.'

Reddell said people wanting to come to New Zealand was not a reason to target population growth.

'People want to move to countries that are better off than their own countries, but that doesn't necessarily benefit us.'

BENEFITS OF SCALE

Eric Crampton, head of research at the New Zealand Institute said that stronger population growth would, long term, allow New Zealand to benefits of scale seen elsewhere.

'Larger cities simply do a better job of harnessing the division of labour and complementarities across industries; that makes them more productive,' Crampton said, adding that in the short term, strong immigration led to 'real' infrastructure costs.

The NZ Institute has battled for changes to council planning rules, to allow cities to grow in response to increasing demand, and Crampton claimed the current settings meant that 'many of the benefits of increased productivity that can come with increased population instead turn into higher land prices'.

'In a functional housing market, this increased demand for housing would mean more downtown apartments, more mid-rises, and more subdivisions. Instead, it's turned into small increases in the supply of housing and big increases in house prices.'

Craig Ebert, senior economist at Bank of New Zealand said the argument on the economic benefits of immigration were balanced.

'I don't think there's any right or wrong, it's simply that we need to recognise that part of the growth that we're seeing is simply based on population growth, not income growth, productivity growth [or] efficiency,' Ebert said.

Already growth has been falling, and Treasury expects it to drop below 2 per cent this year, the rate at which the population was growing.

Economic growth 'has slowed to a rate not much more than population growth, which tells you that, beneath the surface, productivity is falling,' Ebert said.