Working-age population growth is running at about 1.7% a year, while potential output growth is only around 2%, largely because productivity growth is close to zero.
That leaves remarkably little room for economic growth. The economy can grow at only around 0.5% per quarter before it begins to outrun potential and add to inflationary pressure. Yet about 1.7 points of that annual 2% is needed just to keep pace with the working-age population.
Here is the ugly arithmetic: above 2%, growth adds to inflation. Below 1.7%, output per working-age person falls. There is less than 0.1% per quarter between the two. To bring inflation under control we need to run below potential for a while, leaving almost no room to do so without falling real living standards.
We are already living it. Growth of 0.3% and 0.4% over the past two quarters was only just below potential, yet slow enough for output per working-age person to fall. And it is barely slow enough to reduce inflationary pressure. At that pace, closing the output gap takes years.
Faster growth risks more inflation. Slower growth means declining living standards. Lower migration eases one side of the equation but brings economic and fiscal trade-offs. Higher productivity is the clean way out, but Australia has conspicuously failed to deliver it.
The trade-offs are horrible however you resolve them. Doing nothing is its own trade-off: bouncing between inflation and falling living standards.
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