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A federal push to slash the annual migration intake could have significant ramifications for the Victorian economy, which has for more than a decade been powered by booming population growth fuelled by overseas migration.

Victoria’s precarious budget forecasts – built on the assumption that the state’s population would swell by almost half-a-million people over the next four years – could be derailed if the plan goes ahead.

Andrew Giles and Clare O’Neil announce the new migration strategy in Canberra on Monday.Credit: Alex Ellinghausen

The federal government has announced plans to halve national net migration within two years by imposing tougher tests on overseas students and turning away workers with low skills.

Premier Jacinta Allan on Monday warned the federal migration program must continue to focus on bringing skilled workers and international students to Victoria, suggesting this was critically important to the state economy.

“There are many vacancy areas where skilled migrants play a big and important role in our community but also, too, supporting industry and business with the attraction of skilled migrants,” Allan said.

“It’s also part of our ongoing cultural relationships with countries, and particularly … countries like India and China [with] whom we have existing important cultural ties. Having international students study here builds on that relationship.”

Premier Jacinta Allan at Williamstown High School on Monday.Credit: Jason South

State Treasury has predicted Victoria’s population will grow from about 6.7 million in June this year, to about 7.2 million by mid-2027 – or an increase of about 492,000 people.

That followed an extraordinary 1 per cent decline in 2020-21, when the pandemic sent hundreds of thousands of foreigners home and triggered an interstate exodus of people seeking to escape Victoria’s strict lockdowns.

Treasury has singled out future overseas migration levels as a key source of uncertainty for the state budget and the state economy more broadly. In the May budget, it predicted “strong”, above-average population growth over the medium term.

“The ongoing recovery of international migration, including the return of international students, will underpin solid population growth that will support overall spending and activity,” it said.

Forecasts released by the Australian Bureau of Statistics last Friday suggested Victoria’s population would continue to surge by between 0.7 per cent and 1.5 per cent a year – above the annual average for the nation as a whole. It predicted Victoria’s population would reach between 9.3 million and 13.8 million by 2071.

But to hit that level, the state will increasingly require huge numbers of overseas migrants. By 2056, according to the bureau, the number of deaths each year in Victoria will exceed births under a medium scenario, or by 2043 under a low scenario.

The state budget is expected to return to narrow surplus by 2025-26, although net debt is likely to continue to rising, hitting a level roughly equivalent to one-quarter of the state economy the following year.

Independent economist Chris Richardson said population growth tended to act as a drag on the state budget over the medium term, largely because of the extra infrastructure spending required to service the extra people.

Richardson said the focus should not be on the quantity of new migrants, but on the quality. “If there is a sharpened focus on skills, it will be incredibly valuable for productivity,” he said. “I don’t think [the new migration policy] will damage the budget because it eases pressure on infrastructure and although it might slow growth, it also improves the quality of that growth.”

Independent economist Chris Richardson.Credit: Alex Ellinghausen

Victorian Chamber of Commerce and Industry chief executive Paul Guerra said while prioritising high-skilled workers in critical fields was a positive set, an abrupt halving of net migration raised concerns for businesses relying on lower-skilled workers.

“Tightening tests for overseas students and low-skilled workers might hinder sectors like hospitality and agriculture, [and] impact labour availability,” Guerra said. “The expedited visa process for specialists is welcomed, but the broader implications demand a careful balancing act to ensure sustained economic growth and workforce diversity.”

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