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Australia's Growth Solution— More Australians

Sydney, Australia.
Sydney, Australia.

For a modern developed nation, Australia is taking a less-traveled path to prosperity. It wants more Australians.

An overlooked aspect of the Pacific nation's economic outperformance has been the ability to attract a quarter of a million migrants every year, underpinning demand for everything from homes to cars, schools and hospitals.

"Provided population growth is planned for by government, it represents power to the economy," said Craig James, chief economist at stockbroker and fund manger CommSec. "Businesses are in business because they want to grow and solid population growth assists in that."

(Read More: Australia Labor Market Surprisingly Resilient in May)

New South Wales, the country's most populous state, plans to splurge A$60 billion ($55 billion) on infrastructure in just the next four years to meet growing demand.

For sure, having more people is hardly a panacea and clearly entails all sorts of environmental challenges. But again Australia is better placed than many to cope.

(Read More: What Bust? Australia Set for Huge Boom, Report Says)

While much of the hinterland is bush, there is plenty of living room on its 26,000 kilometres of fertile coastline. Its cities are among the least densely populated on the planet, despite holding the vast bulk of the nation's 23 million residents.

Water has been a perennial problem, but several years of widespread rain have filled the dams and reassured policy makers that drought is not a permanent state of affairs.

A Lot More of Us

A strong economy and low unemployment have helped Australia attract and keep well educated and skilled settlers, many of which have already lined up employment before they arrived. There's a clear path to permanent residence and, five years after getting that, to citizenship.

Around 129,000 migrants entered on skilled visas in the year to June just passed, with a similar number planned for 2013/14. The biggest sources of recent migrants are China, India, UK and New Zealand.

(Read More: Whats Aussie Earnings Season Says About the Economy)

In all, net overseas migration totaled 236,000 for the 2012 calendar year, a 17 percent rise on the previous year, according to figures from the Australian Bureau of Statistics. New arrivals accounted for no less than 60 percent of population growth in the year, and they all need to be housed.

While inflows of migrants and money have pushed up home prices in some nations, central bank governor Glenn Stevens on Wednesday said Australian ones are rising gently and don't pose a problem. He said investment in houses has been low for an unusually long time, and with population growth picking up, "if anything, we will need to build more dwellings than we have been over recent years".

Annual population growth has popped up to 1.8 percent, twice the pace of the United States, three times that of the UK and nine times faster than Germany. In 2002, Australia's population grew only 1.1 percent.

(Read More: Australia Happiest Place to Live for a Third Year: OECD)

The inflow of people gives Australia a big advantage in the developed world, where population growth has all but stalled.

Shrinking Population Elsewhere

New forecasts from the United Nations predict there will be 50 percent more Australians by 2050, compared to 67 million fewer Europeans (a decline of 9 percent) and 26 million fewer Japanese (a 20 percent fall).

Forecasts from the Australian government suggest the increase could be even bigger, with a population of 40 million possible by 2050 at current growth rates.

That should make it easier for Australia to stay ahead of its rich world peers in economic growth.

If your population is expanding by 1.8 percent, even if output per head stays static the economy should still expand by a similar amount. Add on average productivity of around 1.5 percent, and economic growth should handily top 3 percent.

For a country with a shrinking population like Japan, all the growth has to come from productivity, a tall order for a mature economy.

(Read More: Asia Caught Off Guard by Its Aging Population)

It also helps that a focus on younger skilled migrants means their average age is lower than for the current population.

Government incentives for families have helped boost the birth rate, so that a record number of babies were delivered in 2012.

Combined that means there should be more taxpayers around to help cope with perhaps the greatest fiscal challenge of the next few decades - funding the retirement of the baby boomers.

Politicians in Favor, So Far

Unlike immigration in the United States, the influx has so far generated little controversy, in part because skilled labor was vital to Australia's mining boom. The landing of a few thousand boat people is a hot subject, but the arrival of far greater numbers of approved, skilled migrants has not been.

Now with mining investment peaking and unemployment creeping higher, migration could become more contentious. Much the same happened in 2009 as the global financial crisis pushed the jobless rate higher.

(Read More: Australia Coal Firms Dig in for Years of Mine Closures, Job Cuts)

Yet the leaders of the major political parties are for it.

The center-right Liberal National opposition is widely expected to win a national election in the next few months and it is close to the business community which strongly favors high levels of skilled migration.

Just last month opposition leader Tony Abbott floated a proposal to greatly expand the population of the Northern Territory, a chunk of Australia twice the size of Texas but with only 237,000 inhabitants.

The ruling Labor party has been more ambivalent, with then-Prime Minster Julia Gillard coming out against rapid population growth back in 2010.

(Read More: Rudd Sworn in as Australian Prime Minister After Overthrowing Gillard)

Yet she was ousted by her party last week and replaced by Kevin Rudd, himself a former prime minister who has long supported the idea of a "Big Australia".

"We are a multicultural miracle to the rest of the world and as a result there is a huge dynamism in this country brought to our shores by successive waves of migrants over multiple decades," Rudd told parliament on the first day of his return. "We are proud inheritors of that."

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