An honest debate about migration must include long-term fiscal considerations


 

Earlier this month the House of Commons debated the motion that the government should take “all necessary steps” to ensure the UK’s population remains “as close as possible to its present level”. However, the meat of this debate lay not in population number-crunching, but in the underlying issue of immigration - in particular, cutting net migration.

UK-Border-ForceDebates of this nature serve as free publicity for the government’s pledge to reduce net migration to less than 100,000 a year. But despite the support of groups such as Migration Watch, the latest figures show that the government is unlikely to meet its unrealistic target. This is good news.

The policies that would be needed to achieve this restrictive target (e.g. a drastic reduction in the number of legitimate international students coming to the UK) would impose significant economic costs in both the long and short term.

But figures from the Office for Budget Responsibility also illustrate that zero net migration would itself (independent of the policies needed to achieve it) have negative fiscal consequences in the short and long term. Under a zero net migration scenario it estimates that within the next five decades public debt would double to nearly 200 per cent of GDP compared to the expected level of debt under current policy (see Figure 1).

By contrast, in a high migration scenario the OBR predicts that the long-term health of the public finances would dramatically improve, without the need for reforms to either taxation or public spending. A similar outcome could also be achieved by higher fertility rates.

Figure 1:

Public-sector-net-debt-Variant-population-projections
Under current policy, public debt is projected to climb to nearly 90 per cent of GDP by 2060, an increase of over one quarter on today’s debt burden. This presents a long-term fiscal challenge to current and future governments. However, changes in the UK’s demographic composition could drastically improve fiscal outcomes over the long term.

Essentially, the type of population we have determines the rate of economic growth, the demand for public services and the amount and type of tax revenues we collect. Table 1 shows different projected growth rates under variant population projections. Therefore it is crucial any debate or policy likely to influence the UK’s demographic structure is informed not only by short-term political interests but long-term economic and social concerns.

Table 1:

Annual-GDP-growth-Variant-population-projections

In order to assess what type of policies could lead to the desired population outcomes we need to look at historical and future population trends. One thing about the UK’s demographics is fairly certain: we have an ageing population, resulting from baby boomers ageing, increased longevity, and the past long-term decline in the number of babies being born (excluding the recent increase in fertility over the past decade).

However, there is still uncertainty about what the demographic mix will look like in the future because it is impossible to know for certain what will happen to rates of longevity, fertility and net migration - some of which can be influenced by political choices.

Migration is the most controversial aspect of any policy discussion of demographic trends and change. Migration policy is often made in light of short-term political pressure, but political and policy decisions about migration can have significant implications for the public finances over the longer term.

Policies that encourage high net migration will likely be met with resistance and may be politically unfeasible. But this is not just a political problem - high rates of net migration can pose challenges, for example for social integration and the provision of local public services and housing. As an alternative, policies that foster higher fertility rates may be more realistic and politically viable.

Evidence suggests that certain state benefits targeted at families with children had a role in supporting higher fertility rates during the mini-fertility boom in the 2000s. It might be worth looking into policy options along similar lines. In any case, the UK needs to have a long-term debate about population and the implications of demographic change.

IPPR’s new report (pdf) reiterates the need for policymakers to think far ahead. Whatever the policy solution, it is imperative we do not lose sight of the long-term picture; political decisions based on short-term interests are not long-term solutions.

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  • LB

    But figures from the Office for Budget Responsibility also illustrate that zero net migration would itself (independent of the policies needed to achieve it) have negative fiscal consequences in the short and long term. Under a zero net migration scenario it estimates that within the next five decades public debt would double to nearly 200 per cent of GDP compared to the expected level of debt under current policy (see Figure 1).
    By contrast, in a high migration scenario the OBR predicts that the long-term health of the public finances would dramatically improve, without the need for reforms to either taxation or public spending. A similar outcome could also be achieved by higher fertility rates.

    ================

    So what’s the error in this article.

    It’s the usual suspect. Namely debt is just government borrowing. By excluding all the really big debts, you can manipulate alsorts of things.

    So no mention of pensions. Ho hum. 6,000 bn wiped off the debt figures, all to make it look affordable.

    Next, the right sort of migrant.

    What we need is benefit claimants to leave the country, and high tax paying migrants to come in. Pretty blunt, but that’s the requirement to make things more affordable.

    Now benefit claimants won’t leave, so that means we have to make sure we get in migrants who pay more tax than the government spends on them, whilst they are here. (More if you have to carry on paying them after they have left – pensions).

    High fertility rates doesn’t work either, unless the children pay more tax than they receive in government spending.

    Until you face up to the off the book fraud, you will delude yourself into thinking there is a solution.

  • 1Tony111

    No mention here that immigration policy must be decided democratically, not by some tiny elite of technocrats deciding it would be “good” for the country, “good” for fiscal policy etc etc if migration was encouraged.

    None of the post-war immigration is legitimate because none of it (absolutely none of it) has the consent of the majority.

  • ivandenisovich

    I find it rather disturbing that some people seem to believe that Britain cannot be financially or otherwise successful without continuously importing large numbers of people from elsewhere. Set outside the context of the politics surrounding race and diversity, it does seem a bit of an odd idea.

  • theProle

    I’m generally not fussed about immigration levels (I’m a free marketeer, and that includes in labour).

    That said, this argument is spurious – all immigration (or increased birth rates for that matter) does is keep the pensions ponzi scheme going longer by putting more people in at the bottom of the pile. The fundamental problem of the government spending more over an average person’s lifetime on that person than it gets (on average) from that person in tax can only be solved for the long-term by either cutting spending or increasing the tax take…

  • LB

    Bar the odd isolated vote that applies to everything.

    For example, where is the vote on tax levels?

    If we get to vote on taxes, the electorate have to take the consequences in terms of services. They will be cut.

    At some point, they will equal out. Taxes will be set at a level that the electorate is happy with.

    What we are going to get instead is the Greek scenario. Lots of taxes and no services.

    Why?

    The debts that matter are off the books. 7 trillion of debts, on taxes of 0.57 trillion. 0.7 trillion of spending as well. Hmmm not going to work, ever.

    So if you rely on the state for your retirement income, its obvious. You will be screwed. There won’t even be welfare as the alternative. It doesn’t matter. What every label you put on it, pension/welfare, the state can’t afford to pay its debts. It can’t tax its way out, because it requires more than GDP to pay.

  • sazzle123

    Selective as always…the OBR goes on to say that “higher
    migration could be seen as delaying some of the fiscal challenges of an ageing
    population rather than a way of avoiding them.” So…basically just passing debt on to our grandchildren.

  • http://twitter.com/WestIndep Western Independent

    ‘baby boomers ageing’ – this is the misinterpretation of UK demographics in the middle of the last century that so often arises. It is much more approriate for the US where the term originated than the UK where we had a brief ‘post-war bulge’ – for evidence see http://bit.ly/QfwiD3

  • Newsbot9

    Yes, your cynical theft is the problem, calling well known debt invisible and throwing a tantrum when someone suggests you pay tax.

    And of course you support murdering the poor.

  • Newsbot9

    When the government is crushing the higher educational system, why is this surprising?

  • Newsbot9

    Then all your Tory actions are also illegitimate.

  • Newsbot9

    Of you argue that the 99% should pay all the tax for your 1%’s welfare. Of course you can’t admit that actual work has a value rather than your leeching, and your policy of genocide against the old rolls on.

  • Newsbot9

    So basically you’re a Corporate Capitalist claiming to be a free marketeer. Making sure that retirement is only possible for the 1%, and calling for eugenics.

  • Gary Burgess

    This whole idea of using immigration to resolve the economic issues of an aging population was completely shot down by the Lords 2008 report on immigration and the economy. I’m surprised anyone is still using this argument. It is just a Ponzi scheme solution.
    The only real (and unpopular) solution is to raise the age of retirement. Increasing the retirement age by a year roughly creates an extra half a million people in the workforce and reduces the amount that would otherwise need to be paid by the government. Unfortunately,If we are living longer then we need to work longer before retirement. We need policies and restructuring to allow and encourgae people to work longer and retire later.
    It is probably also flawed to assume that high net immigration can be achieved while expecting migrants to pay high taxes to support retirees that they have no connection to. If retirees are an unproductive burden, then we will have less inwards migration and more outward migration as workers vote with their feet.

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