Can cutting immigration crash the economy? Canada may have the answer for Australia

Will deep cuts to net immigration "destroy the economy" or deliver the population "reset" needed to restore Australia's stagnating living standards? That is the question dividing the country's politics, as Labor and the rising One Nation party offer increasingly opposing visions of an immigration program that serves the national interest.

In September, One Nation leader Pauline Hanson unveiled a plan to cut more than 750,000 temporary migrants over three years, targeting international students and the relatives of skilled workers. To achieve that reduction, the party argues net overseas migration (NOM) would have to turn negative for three years before a cap of 130,000 people a year is imposed.

That figure contrasts with Labor's long-term NOM target of 225,000, and with the latest official estimate of nearly 292,000 in the year to March.

Home Affairs Minister Tony Burke declared that One Nation's plan, if implemented, would "destroy public services and the Australian economy". Hanson hit back, quickly blaming Australia's high population growth in recent years for its economic problems. In a social media post, she said that "interest groups are warning Australia could face a technical recession if immigration is cut", but "Australians have been living in a per-capita recession for years. Their lives have gotten worse because of immigration. Canada has shown living standards improve when immigration is cut".

Canada has long been seen as Australia's "sister" country – similar in size, culture and economy. And the North American nation is going through a sharp immigration adjustment that has brought population growth to a near standstill.

Unlike Hanson, Canadian policymakers are not targeting a specific level of net immigration. Instead, they are rolling out a series of policies aimed at reducing the share of temporary migrants in the population from a 2024 peak of 7.6% to 5%. Canada is now about halfway there. Its government is reducing the intake of new temporary residents, especially international students, tightening extensions of stay and granting permanent residency to some temporary migrants.

Canada's annual population growth has fallen from 3.1% in early 2024 to just 0.5% now. So how has the Canadian economy coped? And what does its experience say to Australia about how to respond to growing calls for a tougher immigration line?

In May, the CD Howe Institute, a leading Canadian think tank, published a report on the country's economy in the "era of lower immigration", titled "Resetting Expectations". The modelling by authors Don Drummond and Parisa Mahboubi forecasts that employment in Canada could fall this year and next. Real GDP growth in 2026 may be no more than 0.5%, and "not much higher" than 1% on a long-run average basis.

Falling employment is usually a worrying sign, but Drummond and Mahboubi argue it is actually "what a normally functioning labour market produces, against the backdrop of ongoing demographic shifts". They stress: "This is not a sign of an economy struggling. The Canadian economy isn't broken. It's adjusting. Understanding that adjustment is the precondition for the right policy in the years ahead."

Nathan Janzen, deputy chief economist at Royal Bank of Canada, agrees with that assessment. He says: "Demographic changes have changed how we need to interpret economic data." The university sector has been hit especially hard by tighter immigration rules. The government has also carved out exemptions for migrants working in labour-shortage areas such as agriculture and the care economy.

Overall, Janzen argues that "the Canadian economy has been relatively resilient". He explains: "If our population estimates are right, we could have negative employment growth while the unemployment rate still falls. And the per-capita economy does appear to be improving."

Economists warn, however, against assuming Canada's experience will repeat itself in Australia. Jonathan Kearns, chief economist at Challenger, notes that Canada's post-pandemic immigration wave was far larger than Australia's. He says: "Even if people here were excited about our post-COVID immigration, those numbers were nothing compared with theirs."

Even now, Canada's population is more than 5% above the level projected based on pre-COVID trends. By comparison, Australia's population is just 0.2% above its pre-pandemic trend line. "So the decline [in Canada's population growth] has to be put in the context of the enormous increase before it," Kearns says.

Canada also began tightening immigration at a time of high unemployment after a series of sharp interest rate hikes by the Bank of Canada. By contrast, if Australia were to sharply restrict immigration, it would be doing so with a tight labour market, an unemployment rate of 4.6% and widespread labour shortages.

Luci Ellis, chief economist at Westpac, says: "I don't think you can just point to Canada and say 'They were fine'. There are cyclical factors that help explain Canada's resilience to tighter immigration. It's also because they are recovering from a downturn."

Although Canada's economy has so far coped with tighter immigration policies, there appears to be little appetite to make them a permanent feature in a country that remains open to immigration. Canada, like Australia, has an ageing population, meaning a shrinking share of taxpayers is funding pensions, aged care and health services for the elderly.

CD Howe Institute analysis shows that if the current era of low population growth were to become permanent, Canada's economy would be about 11.5% smaller in 2060 than the government's official forecasts. The authors write: "The implications for fiscal sustainability are significant. This gap translates into structurally weaker revenue and a higher debt ratio."

Janzen says that without immigration, "labour shortages would be a structural feature of the economy". He argues: "The view is that this will be a temporary adjustment, before we return to immigration levels close to historical rates."

And while Australia may not want to copy Canada's dramatic immigration reset exactly, there are still legitimate questions about how to better manage the temporary immigration program that has swelled in recent years.

Ellis argues that Australian employers have become too dependent on foreign labour, from chefs to rural workers, and that this has sidelined training and hiring of locals even when higher wages are on offer. She says: "By choosing high population growth with a large temporary component, we made it easy for employers to find foreign workers whenever they needed to hire. Some industries have certainly become dependent on that. This undermines your ability and willingness to train the local workforce."