What's the impact of migration on the UK economy? Photo: Getty
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Are migrants good for the UK economy?

Analysing two apparently contradictory studies that have been published about the impact of migration on the UK economy.

Two studies about the impact of migration on the UK economy have been published which – if media reports are to believed – appear to contradict one another. A closer reading of these reports, however, shows that in fact they come to very similar economic conclusions. Even so, from reading them it is possible to suggest very different approaches to migration policy.

One study by Professor Robert Rowthorn led to headlines such as: “Further proof of damage created by immigration” and: “How mass migration hurts us all”.

The second study is a paper published by Lineskova and others in the latest issue of the National Institute Economic Review which led to headlines such as: “Reducing immigration would slow UK economy and lead to tax rises” and: “Cameron’s migration cap would leave Brits poorer and taxes higher

So clearly the two reports have created space for some news outlets to pick their own truth. But what should we make of these different studies – and what do they contribute to our understanding of the impacts of migration on the economy?

Long-term impact on GDP

Both studies look at different annual net migration scenarios in the future to provide a picture of the long-term impact of migration on GDP and GDP per capita. The future level of net migration (that is, the difference between immigration and emigration) determines the size and age structure of the UK population.

As shown in Figure 1, if all other things remain equal, a higher level of net migration is expected to lead to a larger UK population (see complete explanation here).

But migrants also tend to be younger than the overall UK population and net migration is also likely to decrease the “dependency ratio” – an assessment of the number of people of working age compared to the number of people of retirement age. For instance, Rowthorn suggests that the dependency ratio will be 3.5 percentage points lower with annual net migration of 225,000 compared to an annual net migration of just 50,000 (Rowthorn defines the dependency ratio as the number of people 65 years of age and above per 100 persons aged 15-64). Figure 2 presents the 15-64 years old population of the UK under different assumptions about net migration.

Rowthorn suggests that, given a set of assumptions about employment rates and labour productivity: “GDP per capita is 3% higher in 2087 with high migration than with very low migration”.

The paper by Lineskova and others looks at two scenarios: net migration of 200,000 and a lower migration scenario, which assumes that net migration is reduced by around 50% – close to David Cameron’s migration target of less than 100,000. They find that by 2060 GDP per capita would be 2.7% lower under the lower migration scenario.

Given the impact of net migration on the size and age structure of the UK population it comes as no surprise that both studies conclude that higher net migration will be associated with a higher level of GDP and GDP per capita.

Long-term fiscal impacts

The two studies also look at the long-term potential “fiscal implication” – the impact on UK government finances – of migration to the UK. Rowthorn also looks at the short-term fiscal impact of migration. Rowthorn scrutinises previous analysis from the Office for Budget Responsibility which suggests that lower levels of net migration will lead to higher public sector net debt to GDP (see Figure 3). While Rowthorn does not contest the validity of the OBR estimates, he underlines the high levels of uncertainty related to these estimates.

The paper by Lineskova and others suggest that under the lower migration scenario to “keep the government budget balanced, the effective labour income tax rate has to be increased by 2.2 percentage points”. Again, this refers to estimates for 2060.

Both studies come to similar conclusions – that lower levels of net migration will impose greater pressure on national debt over GDP. This effect is just the result of faster ageing of the population with lower levels of net migration, and corresponds with standard economic thinking.

Why the different implications? There is agreement on the general economic effects of higher net migration in both studies: that conclusion is that higher levels of net migration lead to higher GDP per capita and lower net debt as a share of GDP. Where there is disagreement is about the need or desirability of higher net migration.

Social impacts

The Lineskova makes a straightforward economic argument from this about the benefits of migration in maintaining an age structure which supports economic growth. They do not venture into providing policy prescriptions and accept that their analysis does “not take into account the potential social impacts of higher migration”.

Rowthorn, however, emphasises that it may be preferable to have lower levels of migration even at the expense of faster ageing. He suggests that the levels of migration required to increased GDP per capita or lower future public debt are so high that their social impacts may outweigh the positive economic benefits. He points to potential problems such as overcrowding of public facilities (including schools, hospitals, roads), limited supply of housing and strain on natural resources (for example water) as additional reasons for preferring lower levels of migration.

This goes back to the essence of the migration debate in the UK. Economic estimates are important, but limited in that they cannot resolve important judgements about the type of society people want. These preferences over the “sort of place we want to live in” can drive people’s views and choices on migration just as much as the “pure” economic factors.

Carlos Vargas-Silva does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

This article was originally published on The Conversation. Read the original article.

Carlos Vargas-Silva is a Senior Researcher at the Migration Observatory at the University of Oxford.

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Stability is essential to solve the pension problem

The new chancellor must ensure we have a period of stability for pension policymaking in order for everyone to acclimatise to a new era of personal responsibility in retirement, says 

There was a time when retirement seemed to take care of itself. It was normal to work, retire and then receive the state pension plus a company final salary pension, often a fairly generous figure, which also paid out to a spouse or partner on death.

That normality simply doesn’t exist for most people in 2016. There is much less certainty on what retirement looks like. The genesis of these experiences also starts much earlier. As final salary schemes fall out of favour, the UK is reaching a tipping point where savings in ‘defined contribution’ pension schemes become the most prevalent form of traditional retirement saving.

Saving for a ‘pension’ can mean a multitude of different things and the way your savings are organised can make a big difference to whether or not you are able to do what you planned in your later life – and also how your money is treated once you die.

George Osborne established a place for himself in the canon of personal savings policy through the introduction of ‘freedom and choice’ in pensions in 2015. This changed the rules dramatically, and gave pension income a level of public interest it had never seen before. Effectively the policymakers changed the rules, left the ring and took the ropes with them as we entered a new era of personal responsibility in retirement.

But what difference has that made? Have people changed their plans as a result, and what does 'normal' for retirement income look like now?

Old Mutual Wealth has just released. with YouGov, its third detailed survey of how people in the UK are planning their income needs in retirement. What is becoming clear is that 'normal' looks nothing like it did before. People have adjusted and are operating according to a new normal.

In the new normal, people are reliant on multiple sources of income in retirement, including actively using their home, as more people anticipate downsizing to provide some income. 24 per cent of future retirees have said they would consider releasing value from their home in one way or another.

In the new normal, working beyond your state pension age is no longer seen as drudgery. With increasing longevity, the appeal of keeping busy with work has grown. Almost one-third of future retirees are expecting work to provide some of their income in retirement, with just under half suggesting one of the reasons for doing so would be to maintain social interaction.

The new normal means less binary decision-making. Each choice an individual makes along the way becomes critical, and the answers themselves are less obvious. How do you best invest your savings? Where is the best place for a rainy day fund? How do you want to take income in the future and what happens to your assets when you die?

 An abundance of choices to provide answers to the above questions is good, but too much choice can paralyse decision-making. The new normal requires a plan earlier in life.

All the while, policymakers have continued to give people plenty of things to think about. In the past 12 months alone, the previous chancellor deliberated over whether – and how – to cut pension tax relief for higher earners. The ‘pensions-ISA’ system was mooted as the culmination of a project to hand savers complete control over their retirement savings, while also providing a welcome boost to Treasury coffers in the short term.

During her time as pensions minister, Baroness Altmann voiced her support for the current system of taxing pension income, rather than contributions, indicating a split between the DWP and HM Treasury on the matter. Baroness Altmann’s replacement at the DWP is Richard Harrington. It remains to be seen how much influence he will have and on what side of the camp he sits regarding taxing pensions.

Meanwhile, Philip Hammond has entered the Treasury while our new Prime Minister calls for greater unity. Following a tumultuous time for pensions, a change in tone towards greater unity and cross-department collaboration would be very welcome.

In order for everyone to acclimatise properly to the new normal, the new chancellor should commit to a return to a longer-term, strategic approach to pensions policymaking, enabling all parties, from regulators and providers to customers, to make decisions with confidence that the landscape will not continue to shift as fundamentally as it has in recent times.

Steven Levin is CEO of investment platforms at Old Mutual Wealth.

To view all of Old Mutual Wealth’s retirement reports, visit: www.oldmutualwealth.co.uk/ products-and-investments/ pensions/pensions2015/