Update On The Fiscal Impact Of Immigration

1. Professors Dustmann and Frattini from the Centre for Research and Analysis of Migration at University College, London have commented (see here) on our paper on the Fiscal Impact of Immigration to the UK published earlier this year (see here).

2. This blog picks up on their key points

3. They note:

MW [Migration Watch] emphasise in their study mostly their results for the entire resident immigrant population in the UK in 2014. As we have made repeatedly clear, in our paper and in other comments, this is a figure that is extremely difficult to interpret, and it is not clear what question it answers. It reports the contribution at one point in time of a very heterogeneous population of immigrants, many of whom have entered several years or even decades ago, and any contributions they may have made earlier is ignored. Moreover, a substantial fraction of immigrants who arrived at some time in the past have returned to their home countries by 2014, after possibly spending their most productive years in the UK and contributing to the fiscal coffers. We believe that this figure is therefore not very informative.

4. We feel that it precisely the heterogeneity of the migrant population in the UK that is key to an understanding of the fiscal impact of immigration, and Professors Dustmann and Frattini agree that migrants to the UK are indeed a heterogenous group. That is, migrants from different parts of the world tend to have very different economic characteristics in terms of how much they work, what work they do, how much they earn, and what benefits they claim [link to Economic Characteristics paper]. In this context, the question our paper answers is what, in this year, is the fiscal impact of different sub-population groups whose immigration to the UK has occurred over previous years. The answer for the year 2014/15, as also in every one of years 1995/6-2011/12 observed by Dustmann and Frattini, is a net cost to the Exchequer. That is a question that can, and perhaps should be, answered each year so that the evolution of any trend can be observed. Even if over time a fiscal benefit had accumulated (which over the period 1995 to 2011 it clearly had not) past performance is no guide to the future, particularly where the origin and thus characteristics of immigrants are changing. This is important for policy because while it might be arguable from a previous contribution by Germans that more Germans would have a positive impact, it cannot be inferred from this that Romanians would have a similarly positive impact. This is a key reason why we believe it is not appropriate for official forecasts made by Office for Budget Responsibility either to assign ‘average’ economic characteristics to migrants or to assume that the new migrants in the future will continue to have these characteristics as the actual outcome will clearly be sensitive to the mix of arrivals from different areas of origin.

5. In relation to what this means for policy, Dustmann and Frattini say:

What MW did was just choosing one year only – 2014. This tells us the rate at which the cumulated contribution of immigrants is growing in 2014 only.  This is certainly a less interesting question than the question we pose. For that particular year, they show that EEA immigrants who arrived since 2000 make a roughly neutral net contribution.  It would remain true that the cumulative contribution over the last 15 years must be positive.  It should also be noted that the net fiscal contribution of EEA immigrants even for that one year is still higher than that of natives. In fact, MW estimates that in 2014 natives contribute to the Exchequer about 85% of what they cost, thus making a substantial negative fiscal contribution….We believe that [our] calculation answers the key policy question, which is “What is the net fiscal contribution of immigrants who arrived in the UK since year 2000 up until today”, or “What is the net fiscal contribution of immigrants who arrived in the UK since year 2000 up until today, relative to natives”.

6. However, we think it is plain that any cumulative net contribution over time is certainly not the key policy question, as that would imply that for so long as that figure was positive, continued immigration was a benefit – even if this involved a fiscal cost – and that continued immigration would only cease to be a benefit once all previous contributions had been eroded to nil. That is obviously in policy terms absurd. Further, fiscal year 2011/12 is no longer the present day and again it could not possibly be appropriate to rely for evermore on observations made for one period (even one of a decade) as it receded further and further into the past. As to the relative contribution of the UK-born and migrant groups, we point out in our paper that the UK-born working-age population is in fiscal credit and pushed into a substantial negative contribution only be the costs of the elderly whereas the migrant population makes a negative contribution even without these costs.

7. Bearing in the mind the change in both volume and type of immigration since the expansion of the EU from 2004 onwards, we do agree it is informative to distinguish a cohort that includes more recent arrivals from longer term residents. We thus made the same distinction in our own work, taking those in the UK who had first arrived in the UK after 2000. The fiscal contribution of these more recent arrivals was estimated by Dustmann and Frattini as positive in the years to 2008, and negative in subsequent years. As this might have been due merely to cyclical factors associated with the recession, it is informative to examine whether the contribution made by more recent arrivals has returned to the positive levels seen before the recession. The answer is that it has not, with a negative fiscal contribution of over £2bn by this group, even on Dustmann and Frattini’s preferred scenario for business taxes.

8. It is reasonable of course to consider what impact on the fiscal balance might have arisen from immigrants who had arrived at some time in the past but subsequently returned to their home countries by 2014/15. But if they were no longer in the UK in 2014/15 then they contributed nothing but conversely nothing was spent on them, so the answer is necessarily that there was no impact. Any contribution they made while possibly spending their most productive years in the UK will have been credited to the appropriate sub-population group in the years during which they were in the UK. But Dustmann and Frattini’s findings were that in every previous year, overall, the fiscal contribution attributed to migrants fell short of the expenditures attributed to migrants, and that even in relation to more recent arrivals, the net cost increased over time. As there are now higher numbers of immigrants in the UK than ever before, with record annual levels of net migration, the implication would be that those who have remained in the UK combined with the most recent arrivals are contributing less to the fiscal coffers in this year than an earlier cohort (who are no longer here) did in previous years.

9. It might be no fault of the authors, but they will know that their findings have been extensively used (and continue to be so) to support arguments for high migration on the basis that migration is and will continue to be a fiscal benefit for the UK. But their work and our further analysis show the same thing, that migrants overall were and are not a fiscal benefit for the UK.

10. In any given year, and indeed over time, there will be – at an individual level – net contributors and net recipients. The question for policy-makers is how they can be distinguished and what should

30th August 2016 - Economics, Policy

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