In Annex A of our 2013 Fiscal sustainability report, we reviewed the assumptions that we make about the fiscal effects of net migration. In this box from our 2014 Fiscal sustainability report we summarised the migration-related issues that we consider explicitly in our long-term projections, those that are implicit in the material we use to produce them, and, importantly, those issues we do not consider – either because of our modelling techniques or because they fall outside the remit that Parliament has set the OBR.
In last year’s FSR, we looked in detail at migration and the sustainability of the public finances. This prompted a number of questions from interest groups and the public. This box summarises the migration-related issues that we consider explicitly in our long-term projections, those that are implicit in the material we use to produce them, and, importantly, those issues we do not consider – either because they are beyond the scope of our modelling techniques or because they fall outside the OBR’s remit from Parliament.
The issue we address most explicitly in our projections is the effect of net migration on the dependency ratio and how that feeds through to the public finances over a 50-year horizon. To do this, we take the detailed ONS population projections and apply age-specific tax and spending profiles to track the effect of the change in population structure on the fiscal position. We use the ONS low migration variant as our central projection, which assumes net inward migration averaging 105,000 a year. This assumes that net inward migration will be lower on average than in recent years, which seems consistent with the international environment and with the Government’s declared efforts to reduce it. But it is not as low as the ‘high tens of thousands’ Ministers aspire to, reflecting the fact that net migration flows are not directly controllable by the Government and that their efforts to date have not been as successful as they hoped.
Implicit in the ONS population projections is that migrants, once in the UK, will on average exhibit the same fertility rates and probability of future emigration as the population at large. We considered the issue of fertility rates last year, concluding that while the evidence points to somewhat higher fertility rates among non-UK born women, the impact is likely to be small. Over a 50-year horizon, higher fertility rates support the public finances due to the effect on the dependency ratio; that would reverse over even longer horizons.
We need to make a number of other assumptions about the migrant population to produce our projections. For example, we assume that the age-specific tax and spending profiles underpinning our broader projections are also applicable to migrants and that migrants will on average have the same age-specific employment rates and productivity. We explored some of these assumptions last year, finding no convincing evidence to the contrary, but noting again that there was a lot of variation across migrants of different types.
The conclusion we draw from these projections is that because the age structure of inward migrants to the UK is skewed towards those of working-age, net migration reduces the dependency ratio over our 50-year horizon and thus reduces age-related pressures on the public finances. This finding is not unique to the UK; for example, the US CBO’s analysis of the economic impact of higher net immigration noted the effects on GDP via the labour force, among other factors.a
It is important to emphasise that just because we find that higher net inward migration is likely to improve the long-term fiscal position, that does not mean that we are recommending that the Government aims for more inward migration rather than less – this judgement lies outside our remit and for those that have to make it there are clearly other factors to consider beyond the impact of migration on the public finances via the age structure of the population.
It is also wrong to conclude from our analysis that the Government has to accept higher inward migration in order to put or to keep the public finances on a sustainable path. If a government succeeded in reducing net inward migration from what would otherwise occur then that would be likely to create additional fiscal pressures, but it could always choose to offset those pressures through additional spending cuts or tax increases.
Following last year’s report, a number of reasons were suggested as to why the results shown in our projections might not hold or why they might be misleading when considering the issue of migration more broadly. For example, we were asked:
- whether we took account of the fact that inward migrants will age. This is taken into account implicitly via the ONS population projections and the age-specific tax and spending profiles that underpin our projections. The long-term balanced migration variant, with positive net inward migration early in the projection falling to zero net migration thereafter, in effect illustrates the fiscal implications of the boost to the working-age population from net migrants diminishing while the resident population, both UK-born and foreign-born, continues to age;
- whether we considered the pressure on housing supply given the UK is a ‘small crowded island’. We do not consider this directly. Implicit in our projections is that the availability of housing will match needs. More generally, evidence suggests that restrictions on housing supply relate more to policy restrictions via the planning system than a genuine shortage of land for building;b
- whether we took into account the fact that immigrants increase pressure on public services and the resulting cost pressures. It is important to remember that in most areas of public services we assume that spending per person is held constant as a share of GDP. We assume that net inward migration increases GDP and therefore increases cash and real spending on public services proportionately. (Indeed we assume that net inward migration also modestly increases per capita GDP on average, as inward migrants are more likely to be of working age than the native population.) To illustrate, our projections imply that the UK public sector would spend an additional £33 billion in today’s prices on health in 2063-64 under the high migration scenario and spend £4 billion less under the ‘high tens of thousands’ variant. Our analysis, and that of a number of academics, suggests that across the whole economy inward migration adds more to revenue than to expenditure.c But does the revenue raised from more working-age migrants get spent in the places where they and their families use public services alongside the native population? This is an important policy issue, but lies outside the OBR’s remit; and
- whether we reflected on broader societal issues such as the assimilation of migrant communities. Again this is an important policy issue, but one that lies beyond the OBR’s remit. It is one of the issues that policymakers doubtless need to consider when they are developing migration policy, alongside the narrowly fiscal issues on which we are qualified to comment.
This box was originally published in Fiscal sustainability report – July 2014
a CBO (2013)
b See for example Cheshire (2014) and Hibler and Vermeulen (2014).