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The £6bn-a-year cost of cutting immigration

Cutting numbers will adversely affect the public finances.

Theresa May has an immigration problem. This will not come as a surprise to many - the Prime Minister has been grappling with the question of how to reduce immigration since she became Home Secretary in 2010. But if the Office for Budget Responsibility (OBR) is to be believed, her problem might soon be a different one. Because the reduction in migration to the UK following the referendum on the UK’s European Union membershipforcing the Treasury to borrow more and more.

In its latest forecast, the OBR has estimated that the UK economy will be 2.4 per cent smaller in 2020 due to the decision to leave the European Union. The economic impact of the decision to leave is based on a number of factors, such as falling productivity growth, less trade, and reductions in investment in research and development. But an important contributing factor is reduced migration to the UK.

Under these forecasts, net migration will reduce by around 80,000 people per year, trending down to 185,000 a year by 2021. This will significantly and adversely affect the public finances. By the end of the Parliament, the Treasury will have to borrow around £6bn more in every year than it would need to if net migration did not fall. The impact of reductions in net migration on the public finances is almost three times greater than the impact of higher inflation (£2.2bn) and almost as great as the impact from falls in productivity growth (£7.2bn).

The referendum result can be considered, in large part, a vote against current migration policies. Yet a crude focus on reducing the numbers of migrants will do little to allay public concerns on the issue. It is the type of migration that matters more to the public. Currently, formal study is one of the main reasons why migrants move to the UK. In order to reduce net migration to 185,000, the number of international students will likely need to be reduced. Yet, Bright Blue’s own research has found that an overwhelming majority of the public does not want a reduction in the number of international students. More recently, a ComRes poll found that just 25 per cent of Leave and 23 per cent of Remain voters said that they even consider international students to be immigrants.

But it’s not only international students to whom the public are more sympathetic. Bright Blue’s research has shown that opinions vary significantly for different types of migrants: workers, students, asylum applicants and refugees, and family migrants. If the Government developed individual targets for these different types of migrants, it could minimise the economic impact of leaving the EU while restoring public confidence in the immigration system.

The Government should use the considerable benefits to the exchequer that come from migration to pay for the challenges that do arise. At the Conservative party conference, the Home Secretary announced that the Government would reintroduce the migration impact fund. Yet a TUC report, released on Monday, showed that the new fund would provide all English local authorities with just £25m a year to split between them. Considering the OBR’s estimated £6bn cost of a reduction in net migration, the Treasury should be allocating much more money to the fund. As Bright Blue has advocated before, the Treasury could partially fund this by increasing visa and Citizenship Test fees year on year at a rate above inflation.

The Government also needs to reconsider its pledge to reduce net migration to the tens of thousands. The OBR estimates that net migration will fall to around 185,000 by 2021. This is still almost double the tens of thousands pledge. It seems highly unlikely that net migration will be reduced to tens of thousands any time soon and, if it were, the cost to the Exchequer would likely be in the tens of billions. The consistent failure to meet the target (which has been missed in every year since its introduction) is eroding public faith in the capability of our government to control migration.

The OBR’s forecasts suggest a gloomy outlook for the UK economy over the next few years due to the vote to leave the EU, but the Government has a chance to soften the negative effects of that decision. Ensuring that Brexit is an economic success is in everyone’s interest. If the Government chooses to address the type of migrants who come to the UK rather than crudely focusing on the numbers, it could alleviate public concern whilst ensuring the UK continues to reap the many benefits of migration.

James Dobson is a Researcher at Bright Blue

Photo: Getty
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Scotland's vast deficit remains an obstacle to independence

Though the country's financial position has improved, independence would still risk severe austerity. 

For the SNP, the annual Scottish public spending figures bring good and bad news. The good news, such as it is, is that Scotland's deficit fell by £1.3bn in 2016/17. The bad news is that it remains £13.3bn or 8.3 per cent of GDP – three times the UK figure of 2.4 per cent (£46.2bn) and vastly higher than the white paper's worst case scenario of £5.5bn. 

These figures, it's important to note, include Scotland's geographic share of North Sea oil and gas revenue. The "oil bonus" that the SNP once boasted of has withered since the collapse in commodity prices. Though revenue rose from £56m the previous year to £208m, this remains a fraction of the £8bn recorded in 2011/12. Total public sector revenue was £312 per person below the UK average, while expenditure was £1,437 higher. Though the SNP is playing down the figures as "a snapshot", the white paper unambiguously stated: "GERS [Government Expenditure and Revenue Scotland] is the authoritative publication on Scotland’s public finances". 

As before, Nicola Sturgeon has warned of the threat posed by Brexit to the Scottish economy. But the country's black hole means the risks of independence remain immense. As a new state, Scotland would be forced to pay a premium on its debt, resulting in an even greater fiscal gap. Were it to use the pound without permission, with no independent central bank and no lender of last resort, borrowing costs would rise still further. To offset a Greek-style crisis, Scotland would be forced to impose dramatic austerity. 

Sturgeon is undoubtedly right to warn of the risks of Brexit (particularly of the "hard" variety). But for a large number of Scots, this is merely cause to avoid the added turmoil of independence. Though eventual EU membership would benefit Scotland, its UK trade is worth four times as much as that with Europe. 

Of course, for a true nationalist, economics is irrelevant. Independence is a good in itself and sovereignty always trumps prosperity (a point on which Scottish nationalists align with English Brexiteers). But if Scotland is to ever depart the UK, the SNP will need to win over pragmatists, too. In that quest, Scotland's deficit remains a vast obstacle. 

George Eaton is political editor of the New Statesman.