Karl Williams is Research Director at the Centre for Policy Studies.
A new report by the Government’s fiscal watchdog about the long-term outlook for tax and spending makes for deeply depressing reading – although it does at least cast official doubt on the last few remaining pro-mass migration shibboleths.
According to the Office for Budget Responsibility (OBR)’s latest Fiscal Risks and Sustainability report, the national debt is on track to reach 274 per cent of GPD in 50 years’ time, with public spending sucking up 60 per cent of national output. The main driver of this is an ageing population, and in particular spiralling NHS spending on the elderly.
This prognosis comes as no surprise. Last year the Centre for Policy Studies (CPS) published an essay collection on intergenerational fairness, ‘Justice for the Young’. I’ve highlighted some of our findings on ConservativeHome before, including my analysis that found the only way to keep public spending on the elderly steady in per capita terms over the long term – without increasing taxes or borrowing – would be to achieve sustained economic growth of 2.9 per cent. Given that economic growth has averaged just 1.6 per cent per annum since 2010, we have a problem.
Immigration has sometimes been put forward as the solution to the challenges posed by a rapidly ageing population, not to mention our economic woes more broadly. And certainly it’s true that some immigration is good for growth and the public purse, depending on who exactly is coming here and on what visa route.
But as the OBR has now made clear, government ministers and Treasury mandarins need to be thinking much more carefully about the fiscal downsides of immigration.
In Taking Back Control – a CPS report that I wrote with Neil O’Brien and Robert Jenrick earlier this year – we noted how the phenomenon of ‘capital dilution’ was all too often left out of official migration analysis. In essence, while a migrant can bring skills with them, they can’t being a mile of road, a new hospital, or a house. So if migration causes the population to grow at a faster pace than the capital stock, there will be fewer amenities per person to go around.
As the OBR notes, “the level of the public capita stock per person is an input into the quality of public services an individual is likely to receive”. And in its new baseline scenario, in which debt rises to 274 per cent of GDP, the public capital stock per person “is diluted by the increase in population” – which in turn is entirely down to immigration. In fact, “the level of capital stock per person is substantially lower, relative to a projection with no [net] migration”.
So the implication is that we’re on track for a truly staggering amount of debt, but even worse public services – unless we add yet more spending and launch debt up into the stratosphere.
While it has not yet extended its analysis to other forms of capital stock – crucially housing – this is a striking admission from the OBR. But it’s not the only one.
In the past, the OBR has modelled the effects of different overall levels of migration. But as I outlined in The Sunday Telegraph, it has at last begun to give really serious thought to what happens if you instead vary the composition of migration. (It does make some questionable assumptions in the new modelling, for example ignoring dependants – but it is a start.) One of the variables it tweaks is earnings, modelling three different types of legal immigrant arriving aged 25.
One of these is an ‘average-wage migrant worker’ and another is a ‘high-wage migrant worker’. According to the OBR, both will be net contributors to the public purse unless the live to be very old indeed. But then there is what the OBR calls a ‘low-wage migrant worker’, on 50 per cent less than the average UK wage. This migrant is a net fiscal drain from the moment they enter the country. By the time they reach, they will have cost the taxpayer a net £465,000.
For years, conventional wisdom has been that been that all migrant workers are contributors – conflating net and gross costs – and that the more who come, the better. So this new analysis is significant break from Treasury orthodoxy.
The problem, as we showed in Taking Back Control, is that if you look at what jobs migrants are doing, there is good reason to think the fiscal profile of the actual average migrant in recent years looks rather more like the OBR’s low-wage migrant than its notional average-wage migrant. And in the OBR’s low-wage migration scenario, public debt reaches not 274 per cent of GDP by 2074, but 351 per cent.
We could forestall this even more catastrophic scenario by improving our migration mix (the higher salary threshold introduced earlier this year should help). But even if we get to the point where our immigration mix is dominated by the OBR’s high-wage migrants, it still forecasts debt of 235 per cent of GDP by 2074. Indeed, it notes that changing the composition of migration “does not fundamentally change the long-run debt dynamics”.
There’s also the issue that even if we were taking in only high-wage migrants, the sheer numbers would pose challenges, not just for things like the housing stock, but for social cohesion and democratic legitimacy.
The OBR projections are based on net migration running at around 315,000 per annum in perpetuity – over 50 per cent lower than recent years, but 30 per cent higher than the 2010-19 average of 241,000.
As a result, by 2074, net migration between now and then would account for 26 per cent of a population of 82 million, with these migrants’ descendants accounting for another 5 per cent. In fact, when you apply official mortality and fertility rates to the existing population of people born outside the UK, it suggests that by 2074, roughly 30 per cent of the population will be first-generation immigrants, and another 10 per cent or so second generation. And debt will still be 235 per cent of GDP in the best case scenario.
Luckily, the OBR does offer a sliver of hope: there is a way to escape from a future of crushing debt. If we can boost average annual productivity growth by one percentage point, back to the pre-2008 trend, then debt will remain below 100 per cent of GDP as economic growth returns to more robust levels.
In other words, to escape the debt trap, we need to unleash the productive potential of the British people. In practice, that means sweeping planning reform so millions more homes can be built in the most productive parts of the country. It means new energy infrastructure so we have cheap and abundant energy to power growth. It means a tax regime that is fair for families and workers – and a business environment and tax system that attracts investors and wealth creators.
Ultimately, if we want to keep public spending commitments at anything like today’s levels, getting growth back is the only way to forestall the nightmare debt scenario outlined by the OBR. That’s why growth has to be at the absolute heart of the Tory agenda – now, and for the next 50 years.
