Amid the intensifying debate about migration, the government’s plan to reform points-tested visas hasn’t attracted much attention. Yet, it could end up being the most consequential change of all.

Migrants contribute greatly to Australia’s prosperity and shape our diverse society. Skilled migrants in particular lift the productivity of local workers, raising Australians’ incomes, and boost government budgets.

Points-tested visas, which are allocated based on applicants’ characteristics such as age, education, work experience, and English language proficiency, account for nearly two-thirds of all permanent skilled visas issued each year. On current trends, Australia will offer 800,000 points-tested visas over the next decade.

But points-tested visas are not working as well as they should.

The first problem is that the points test does not sufficiently reward the most skilled applicants.

Permanent visas grant people the right to stay in Australia indefinitely. Therefore, points-tested visas should be granted to migrants who are likely to make the biggest economic contribution to Australia, proxied by their lifetime earnings once here, not used to tackle short-term skills shortages.

Our analysis shows that education level, English language proficiency, occupation skill level, and high prior earnings in Australia matter most for a migrant’s long-run earnings. Yet, these characteristics account for just 70 of the 130 points available under the points test.

Instead, the points test is bloated with unnecessary points for characteristics that are poor predictors of a migrant’s long-term success in Australia.

Applicants receive five points if they have an approved Australian qualification, and an additional five points if they studied outside of Sydney, Melbourne and Brisbane. But skilled migrants who studied in Australia tend to earn 10 per cent less than migrants with equivalent qualifications earned abroad, in part because the bar to getting a permanent visa is lower for applicants who studied in Australia.

Migrants are also granted five points for completing a “professional year”, which means that many of them end up paying as much as $15,000 for qualifications that do not appear to make them more employable.

And permanent points-tested visas are limited to applicants qualified in skilled occupations deemed in shortage, which cuts out prospective migrants working in more than 200 high-skill, highly paid occupations.

The second problem is that separate state and regional points-tested visa programs, which now account for two-thirds of points-tested visas, do not select the most skilled migrants.

State and regional points visas are nominated by state and territory governments. Yet, 57 per cent of successful applicants for a regional visa score 65 points or less on the points test, compared to 30 per cent for state points visas, and just 12 per cent for independent points visas (after subtracting the points on offer for a state or territory nomination).

Unsurprisingly, the typical regional points-tested visa-holder earns $24,000 less each year, and state points-tested visa-holders $6500 less than migrants selected by the federal government for skilled independent visas.

Pushing migrants to the regions often also harms their long-term career prospects, and especially those of their spouses. And many regional points-tested visa-holders do not stay in the regions for long.

Two ideas for reforming the points test

Two changes are needed. First, the points test should be reformed to better reward the most skilled applicants.

More points should be offered to highly educated applicants and those with strong English language skills. Migrants trained in any high-skilled occupation should be eligible to apply, and points should be offered for any skilled employment experience, and particularly for high-paying Australian work experience. Extra points should not be offered for studying in Australia or in a regional area, or for undertaking a professional year.

Second, state and regional points-tested visa programs should be abolished, and more skilled independent visas offered in their stead. Abolishing these visas would help select more highly skilled migrants overall, and give those migrants the best chance to thrive in Australia.

These changes would boost our flagging rate of productivity growth, driving up Australians’ living standards in the long term. They would still allow governments to staff essential health and education services, including in regional areas, since the points test would better reward those applicants’ qualifications and work experience.

Modelling shows that reforming the points test as we recommend would provide an $84 billion boost to Australian government budgets over the next 30 years. Replacing state and regional points-tested visas with a single points-tested visa program would provide a further $87 billion budget boost. These gains would be invaluable for governments grappling with the debt overhang from the pandemic, and the long-term budgetary costs of an ageing population.

Reforming points-tested visas may not dominate the headlines, but it’s a crucial step for Australia’s long-term prosperity. When it comes to selecting skilled migrants for permanent visas, even small changes really add up.

Trent Wiltshire

Economic Prosperity Deputy Program Director
Trent Wiltshire is the Deputy Program Director of Grattan Institute’s Economic Prosperity program. He previously worked at the Victorian Department of Treasury and Finance, as Domain Group’s economist, and at the Reserve Bank of Australia