24 May 2017

CEBR special report: Economic consequences of limiting migration

The analysis shows the extent to which the UK economy has become dependent on migrant labour for growth and for tax revenues and the potential adjustment cost if the economy has to be weaned off migrant labour. If this does happen, both the growth and the fiscal consequences are alarming.

The Cebr analysis is carried out on two assumptions.

Both reduce net migration (operating only on inward migration) by 200,000 from the 273,000 figure. This is done either quickly over a two year period on the first scenario or slowly over an 8 year period on the second scenario. The period starts in 2019. Thus on the slow reduction scenario, migration only reaches its target level in 2027. On the fast reduction scenario it reaches its target in 2021.

The final level of migration at 73,000 per annum is assumed to be consistent with the pledge to reduce migration to ‘tens of thousands’.

We have built a small model to analyse the economic impact based on Cebr’s UK Economic Model UKMOD9. One of its weaknesses is that it is linear, whereas in the real world this is clearly unlikely to be the case for the relationships that are being modelled. But it gives a rough and ready set of estimates that probably get as close to reality as is easily feasible without excessive expenditure.

The key assumption is the impact on productivity. Comments from leading Conservatives indicate that they would expect some creaming off with the bulk of the restriction on migrants being restrictions on low skilled migrants, which would imply an intention of using migration restrictions to boost productivity. However, certainly for the Flat White Economy, the migrants tend to come into the UK without a job and then get one. It would be difficult to cherry pick these migrants.

When The Flat White Economy was updated in 2016, it was calculated that just under 40% of the increase in employment in the sector since 2008 had reflected EU migrants compared with 28% for the City of London, the other main high skill occupation associated with the employment of migrants.

This is backed up by the data from the Migration Observatory at the Oxford University. For occupations, the category ‘IT and telecoms professionals’ accounting for 3.1% of employed migrants is the occupation 9th most dependent on migrants[11]. For sectors, computer programming and consultancy with 26% of its workforce being migrants is the 7th most migrant intensive sector[12]. The proportions in London would be substantially higher – 36% of all migrant employees and 45% of all migrant self-employed worked in London in 2015[13].

The Cebr analysis suggests that, far from productivity rising if migration is reduced for knowledge intensive sectors, that there are plenty of factors that will reduced it because of the loss of creativity from the loss of diversity in the workforce and for the other reasons listed above. On the other hand, outside the City of London and the Flat White Economy, many of the migrant workers are working in relatively low skilled jobs such as the hospitality sector.

In the circumstances our calculations only allow for a minor net increase in productivity from a reduction in migration of 0.05% per 1% increase in the share of migrants in the labour force.

The results

The results show that both GDP and GDP per capita are significantly reduced.

By 2025, GDP is reduced by 1.5% on the slow reduction scenario and by 3.1% on the faster reduction scenario.

By 2030 GDP is reduced by 4.1% on the slow reduction scenario and by 5.7% on the faster reduction scenario.

By 2040, although one should be very cautious about numbers from an extrapolation that goes so far, GDP is reduced by 8.9% on the slow reduction scenario and by 10.4% on the faster reduction scenario.

Similarly, for GDP per capita, by 2025, GDP/capita is reduced by 0.9% on the slow reduction scenario and by 1.5% on the faster reduction scenario.

By 2030 GDP/capita is reduced by 1.9% on the slow reduction scenario and by 2.7% on the faster reduction scenario.

By 2040, although one should be very cautious about numbers from an extrapolation that goes so far, GDP/capita is reduced by 4.1% on the slow reduction scenario and by 4.9% on the faster reduction scenario.

Impact on public finances

Of course reductions in GDP on this scale have a knock on effect on tax collection. The analysis of the slow reduction scenario shows tax receipts down by £15.6 billion in 2025; £43.0 billion in 2030 and £93.3 billion in 2040. However these numbers exaggerate the impact on the deficit since with fewer people in the country the need for public services would be reduced. Assuming public spending would be scaled to the population, the net impact on the deficit is £9.5 billion in 2025; £25.9 billion in 2030 and £57.7 billion in 2040.

The analysis of the fast reduction scenario shows tax receipts down by £32.7 billion in 2025; £60.2 billion in 2030 and £109.3 billion in 2040. Allowing for the reduced need for public services the net impact on the deficit is £20.0 billion in 2025; £36.3 billion in 2030 and £64.5 billion in 2040.

Full analysis

© CEBR