Analysing the costs and benefits of immigration. Photo: Getty
Show Hide image

Yes, EU immigrants do have a positive impact on public finances

The academics behind a study that shows EU migrants make a net contribution to our economy on the positive impact of recent immigrants.

The impact of immigration on Britain’s tax and welfare system is perhaps the most important economic issue in the debate over the country’s relationship with the EU and its principle of free movement. There are claims that immigrants from Europe take advantage of the UK’s benefit and health system. This has led to political pressure to limit immigrants' access to benefits and public services and even restrict immigration from the European Economic Area countries.

But, despite the controversy surrounding this issue, evidence for how much immigrants take out of and contribute to the public purse in Britain is surprisingly sparse. Our new research published by the Royal Economic Society in the Economic Journal aims to fill this void.

Based on the UK Labour Force Survey and a multitude of government sources, we calculate the overall fiscal contribution of native Britons and immigrants. Our findings show that European immigrants to the UK have paid more in taxes than they received in benefits, helping to relieve the fiscal burden on UK-born workers and contributing to the financing of public services.

To do this, we assign individuals their share of cost for each item of government expenditure. We then identify their contribution to each source of government revenue. We distinguish between immigrants from the European Economic Area (EEA), and those from outside Europe. Additionally, we break down the EEA group into immigrants from the Eastern and Central European countries that joined the EU since 2004 (known as A10 countries), and immigrants from the rest of EEA.
 

Positive net contribution

Our findings show that immigrants to the UK who arrived since 2000, and for whom we observe their entire migration history, have made consistently positive fiscal contributions regardless of their area of origin. Between 2001 and 2011 recent immigrants from the A10 countries contributed to the fiscal system about 12 per cent more than they took out, with a net fiscal contribution of about £5bn.

At the same time the overall fiscal contributions of recent European immigrants from the rest of the EU totalled £15bn, with fiscal payments about 64 per cent higher than the value of public services they used. Immigrants from outside the EU countries made a net fiscal contribution of about £5.2bn, thus paying into the system about 3 per cent more than they took out.

In contrast, over the same period, native British people made an overall negative fiscal contribution of £616.5bn. The fiscal balance of overall immigration to the UK between 2001 and 2011 amounts therefore to a positive net contribution of about £25bn, over a period in which the UK has run an overall budget deficit.

Our analysis thus suggests that immigrants arriving since the early 2000s from Europe have made a net contribution to Britain’s public finances. This is a reality that contrasts starkly with the view often maintained in public debate that immigrants are a drain on the economy.
 

State benefits

This conclusion is further supported by our evidence on the degree to which immigrants receive tax credits and benefits compared with natives. Recent immigrants are 43 per cent (17 percentage points) less likely to receive state benefits or tax credits. These differences are partly attributable to the fact that immigrants are generally working-age men and coming to the UK to work. However, even when compared with natives of the same age, gender composition and education, recent immigrants are still 39 per cent less likely than natives to receive benefits.

Additionally, our research points at the strong educational background of immigrants. For instance, while the percentage of natives with a degree was 24 per cent in 2011, that of EEA and non-EEA immigrants was 35 per cent and 41 per cent, respectively. Similarly, about one in two British born individuals fall into the “low education” category (defined as those who left full-time education before 17), while only 21 per cent of EEA immigrants and 23 per cent of non-EEA immigrants do so.

Most immigrants arrive in the UK after completing their education abroad, and thus at a point in their lifetime where the discounted net value of their future net fiscal payments is positive. If the UK had to provide each immigrant with the level of education they have acquired in their home country (and use productively in the UK, as natives do), the costs would be substantial.

Our estimates indicate that recent immigrants endowed Britain with productive human capital between 2000 and 2011 that would have cost £6.8bn in spending on education. This aspect is often neglected in the debate about the costs and benefits of immigration.
 

Christian Dustmann is director at the Centre for Research and Analysis on Migration (CReAM) at University College London; Tommaso Frattini is assistant professor of economics at the University of Milan

Christian Dustmann receives funding from European Research Council (ERC). Tommaso Frattini 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.

 

The Conversation

Getty
Show Hide image

Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation