The cost of cutting immigration

May 22, 2017

So how big is the bill for the Government’s “objective” to reduce immigration to “tens of thousands”? The Office of Budgetary Responsibility’s (OBR) long term projections on the apparent fiscal benefit of high immigration are being used to beat ministers over the head in the election battle. Meanwhile, enthusiasts for continuing high levels of immigration, such as George Osborne’s Evening Standard, have described the Government’s approach as “economically illiterate”; whilst a slightly hysterical polemic from an organisation called Global Future called it “catastrophic” — and even predicted the “collapse” of whole sectors of the economy.

My own sympathies are for a return to more moderate levels of immigration, but mainly for cultural reasons: too many people coming too quickly into a society makes it difficult to retain a sense of cohesion and stability.

The economic arguments have always been more evenly balanced: on the one hand the dynamic effect and fiscal benefit of highly skilled/highly paid immigrants versus the congestion and displacement effects especially of lower skilled/lower paid immigrants.

When I wrote a book about post-war immigration to Britain (The British Dream) a couple of years ago I read most of the economic literature, and the literature on an ageing society, and was surprised to discover how little difference to economic and ageing trends even quite large scale immigration makes. On almost all economic indicators—wages, employment, per capita growth, fiscal contribution—the impact is small, though tends to be somewhat regressive.

This is reflected in the fact that most economists who focus on immigration issues, and most are friends of large scale immigration, are expert at refuting naive economic arguments against immigration such as the “lump of labour fallacy” (the belief that immigrant employment is a zero-sum game with native employment). They are much less good at making convincing economic arguments in favour of large-scale immigration.

Yet the OBR does make an apparently worrying point about the impact of reducing immigration on the public finances. On closer examination, this turns out to be rather mild too. On a no immigration assumption UK debt as a percentage of GDP rises from 75 per cent in 2012 to 175 per cent in 2057. But no one is proposing or would be able to achieve zero immigration. On a more plausible low immigration scenario of 140,000 net immigration a year, not much above the Government’s objective, the debt to GDP ratio is just over 100 per cent in 2057 which is hardly a disaster.

In any case the OBR assumptions about migration and fiscal contribution are fuzzy and disputed (though politicians do not like to attack the OBR). The OBR assumes that migrants have the same economic characteristics as people of the same age and gender in the existing population (though generally not needing state support when young or old). This leads them to assume an overall positive fiscal contribution, paying more in tax than taking out in public services, that may or may not be there.

Yet the recent past does not correspond to the OBR’s projected future. The most comprehensive academic research to date (by Christian Dustmann and Tommaso Frattini) found that immigrants overall (including all routes such as family reunion and refugee) made a significantly negative fiscal contribution between 1995 and 2011 as do a large minority of existing UK citizens. By contrast EU immigrants, and especially more skilled west Europeans, made a positive contribution. EU citizens from central and eastern Europe who tend to be in low paid jobs are more borderline and may even be mildly negative.

This is the crucial point as Migration Watch and others have pointed out. If the Government continues with its current policy of encouraging higher skilled immigrants and discouraging lower skilled immigrants, especially from the EU after the end of free movement, then it should be possible to reduce numbers without reducing the high fiscal contribution from French and German bankers.

And the OBR seems to take no account of the possibility that lower immigration might mean higher wages and more automation increasing productivity, incomes and thus the fiscal contribution of the average worker.

We also need to keep the bigger picture in mind on the link between economic growth and immigration. Immigration and the rising population drives up headline GDP increases but per capita GDP increases have been much less impressive in recent years – indeed per capita GDP, which is really the only one that matters, has been running at roughly half the level of headline GDP. Last year the headline increase was 1.8 per cent but the per capital increase was just 1.1 per cent.

Also it is not so long ago that economic growth was rolling along very healthily with much lower levels of immigration—in the 1990s for example when average immigration was just 87,000 a year over the decade average per capita growth was markedly higher than in the subsequent 16 years of much higher net immigration.

And what about the claim that we have full employment of the existing population so any future growth in output must come from newcomers? It is true that employment rates are at an all-time high but that is substantially driven by female employment, much of it part time, and by older women workers having to work for longer as the retirement age rises. The male employment rate at 79 per cent is still well below the 1971 rate of 92 per cent and surveys show a considerable appetite for full-time work among part-timers. The Government is also trying hard to get more disabled people into work.

There will be some difficult adjustments to be made as the Government tries to bring immigration down to more comfortable levels and some sectors could face a labour squeeze. But in areas like agriculture and horticulture it is possible to revive seasonal worker schemes that have worked well in the past and do not impact on the immigration numbers as they involve people coming for less than a year.

And after many years of the return to capital rising and to labour falling some pressure in the other direction is no bad thing.

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