This blog outlines the economic consequences of limiting migration as proposed in the Conservative Manifesto. What it shows is 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, writes Douglas McWilliams

McWilliams, Douglas

LSE Research Online

2017-5-30Economic consequences of limiting migration are shockingblogs.lse.ac.uk /brexit/2017/05/30/economic-consequences-of-limiting-migration-will-be-alarming/This blog outlines the economic consequences of limiting migration as proposed in the ConservativeManifesto. What it shows is the extent to which the UK economy has become dependent on migrantlabour for growth and for tax revenues and the potential adjustment cost if the economy has to beweaned off migrant labour. If this does happen, both the growth and the fiscal consequences arealarming, writes Douglas McWilliams.The Manifesto PromiseThe precise text from the Conservative manifesto is set out below:‘Britain is an open economy and a welcoming society and we will always ensure that our Britishbusinesses can recruit the brightest and best from around the world and Britain’s world-classuniversities can attract international students. We also believe that immigration should be controlledand reduced, because when immigration is too fast and too high, it is difficult to build a cohesivesociety.Thanks to Conservatives in government, there is now more control in the system. The nature of theimmigration we have – more skilled workers and university students, less abuse and fewer unskilledmigrants – better suits the national interest. But with annual net migration standing at 273,000,immigration to Britain is still too high. It is our objective to reduce immigration to sustainable levels, bywhich we mean annual net migration in the tens of thousands, rather than the hundreds of thousandswe have seen over the last two decades.We will, therefore, continue to bear down on immigration from outside the European Union. We willincrease the earnings thresholds for people wishing to sponsor migrants for family visas. We willtoughen the visa requirements for students, to make sure that we maintain high standards. We willexpect students to leave the country at the end of their course unless they meet new, higherrequirements that allow them to work in Britain after their studies have concluded. Overseas studentswill remain in the immigration 55 statistics – in line with international definitions – and within thescope of the government’s policy to reduce annual net migration.Leaving the European Union means, for the first time in decades, that we will be able to controlimmigration from the European Union too. We will, therefore, establish an immigration policy thatallows us to reduce and control the number of people who come to Britain from the European Union,while still allowing us to attract the skilled workers our economy needs.’The Flat White EconomyThe Flat White Economy is the new digitally-based economy heavily based in the East End of London that isdescribed in the eponymous book. The economy has emerged from the mix of the creative economy that wasalready prevalent in East London and the tech economy that has emerged. Key elements are online retail (wherethe UK leads the world by some distance) and online marketing.I describe the emergence of the Flat White Economy as the fortuitous accident of three phenomena – the UK’sstrong lead in online retail and marketing, the maturing of online technology and the availability of very large1/5amounts of digitally skilled relatively cheap labour as a result of Southern Europe’s economic weakness. ‘They can’tget jobs in their own countries, so they come to London, partly for fun and partly in hope of a job. Once there, theyrealise how expensive it is to stay in London and so are very keen to find work even if they have to live abackpacker’s existence in London.’ This very elastic supply of labour is a key element in the success of the FlatWhite Economy.Chapter 7 of The Flat White Economy (Immigration, Britain’s Secret Economic Weapon) argues ‘To understand thefull impact of immigration on economic growth, one needs to treat it as a dynamic process that not only has a directeffect, but a substantial enabling effect to boost other economic processes that are taking place at the same time.Image (from Wikipedia) licenced under (CC BY-SA 4.0).‘My analysis of the economic impact of immigration suggests a threefold effect:First: migration alleviates skill bottlenecks and hence removes barriers to faster growth.Second: migration boosts diversity and also boosts creativity which enhances productivity with both directand indirect effects on economic growth.Third: migration makes business more profitable, enhancing investment and hence growth. Even if the initialimpact is to place downward pressure on wages through the enhanced supply of labour relative to demand,the secondary effect is to boost wages through faster growth’.Because our analysis takes account of these dynamic effects of immigration, which are well supported by academicanalysis, it suggests the effects of cutting immigration are greater than those estimated by conventional analysis.2/5Source: ONS data for ONS Index of Services Components 58-60, 62 and 63The latest data from the ONS Index of Services (using components 58-60, 62 and 63) show that the sector grew by9.8% in 2016 to reach 9.7% of GDP, a strong acceleration from even the buoyant figures for the previous four years(see chart). Since 2011, this sector’s share of GDP has increased by a fifth, and it is now, other than construction,the largest single sector of the whole UK economy. As the economy adjusts to take account of its increasingdependence on this digital economy, there are implications.Had it not grown in 2016 and everything else had beenunchanged, GDP growth would have been 0.9% rather than the 1.8% recorded.The conventional analysisThe conventional analysis is best described in an excellent paper by Jonathan Portes and Giuseppe Forte in Vox.This assumes ‘our scenarios imply that net EU migration to the UK could fall by up to 91,000 on the central scenario,and up to 150,000 on a more extreme scenario. This is comparable to other estimates that employ differentmethodologies (Vargas-Silva 2016, Migration Watch 2016)’.The conventional analysis assumes that a reduction in migrants would be associated with higher productivity for theremaining population. ‘Boubtane et al. find that migration in general boosts productivity in advanced economies, butby varying amounts; for the UK, the estimated impact is that a 1 percentage point in the migrant share of the workingage population leads to a 0.4-0.5% increase in productivity.’They argue that the central estimate of the impact of Brexit in leading to reduced migration on GDP 2020 is 0.63% to1.19%. Their analysis suggests that the central impact for 2030 is 0.92% to 3.38% for GDP per capita. The OBR inits fiscal sustainability reports has also drawn attention to the positive impact of migration on the economy and hencethe fiscal position.To quote the Migration Observatory, ‘The Office for Budget Responsibility (OBR, 2016) forecasted fiscal aggregates—such as net government borrowing and debt as a percentage of GDP—under alternative scenarios of netmigration. In their central forecast, they use the ONS principal population projection, which assumes net migration of329,000 in 2015 and 256,000 in 2016, declining to 185,000 in 2021. In the ‘high migration’ scenario, net migration3/5falls to 265,000 by 2021. In the ‘low migration’ scenario, net migration falls to 105,000 by 2021.The OBR estimates suggest that the government budget surplus in 2020-2021 would be higher under the highmigration scenario and lower in the low migration scenario: it projected a £16.9bn surplus in 2010-2021 under thehigh migration scenario, compared to £5.2bn in the low migration scenario. Debt as a share of GDP would also belower under the high migration scenario (73.3% vs. 76.1% by 2020-2021).’Cebr’s analysisThe 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 slowlyover 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 EconomicModel UKMOD9. One of its weaknesses is that it is linear, whereas in the real world this is clearly unlikely to be thecase for the relationships that are being modelled. But it gives a rough and ready set of estimates that probably getas 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 wouldexpect some creaming off with the bulk of the restriction on migrants being restrictions on low-skilled migrants, whichwould imply an intention of using migration restrictions to boost productivity. However, certainly for the Flat WhiteEconomy, the migrants tend to come into the UK without a job and then get one. It would be difficult to cherry pickthese migrants.When The Flat White Economy was updated in 2016, it was calculated that just under 40% of the increase inemployment in the sector since 2008 had reflected EU migrants compared with 28% for the City of London, the othermain 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 onmigrants. For sectors, computer programming and consultancy with 26% of its workforce being migrants is the 7thmost migrant intensive sector. The proportions in London would be substantially higher – 36% of all migrantemployees and 45% of all migrant self-employed worked in London in 2015.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 reduce it because of the loss of creativity from the loss of diversity in theworkforce and for the other reasons listed above. On the other hand, outside the City of London and the Flat WhiteEconomy, many of the migrant workers are working in relatively low-skilled jobs such as the hospitality sector. In thecircumstances, our calculations only allow for a minor net increase in productivity from a reduction in migration of0.05% per 1% increase in the share of migrants in the labour force.The resultsThe 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 reductionscenario.By 2030 GDP is reduced by 4.1% on the slow reduction scenario and by 5.7% on the faster reductionscenario.By 2040, although one should be very cautious about numbers from an extrapolation that goes so far, GDP is4/5reduced 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 by1.5% 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 reductionscenario.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 financesOf course reductions in GDP on this scale have a knock-on effect on tax collection. The analysis of the slowreduction 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 forpublic services would be reduced. Assuming public spending would be scaled to the population, the net impact onthe 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 2030and £109.3 billion in 2040. Allowing for the reduced need for public services the net impact on the deficit is £20.0billion in 2025; £36.3 billion in 2030 and £64.5 billion in 2040.ConclusionThe numbers here are quite shocking – they display the extent to which the UK economic model has become basedon migration and show the scale of the potential negative consequences if migration slows to a very small amountcompared with the current pace. The numbers themselves should be seen as illustrative. It is highly unlikely thatchanges in migration on this scale would take place without major adjustments elsewhere which would, of course,change the numbers. But what they do show is that if the UK cuts off migration without making adjustments to boostproductivity, especially productivity in the public sector, the scale of the economic damage could be huge.This article is based on the CEBR SPECIAL REPORT – ECONOMIC CONSEQUENCES OF LIMITINGMIGRATION and it gives the views of the author, and not the position of LSE Brexit, nor of the London School ofEconomics.Douglas McWilliams is Cebr President and the author of the bestselling book on the new digital economy ‘The FlatWhite Economy’.Copyright © 2015 London School of Economics5/5

Economic consequences of limiting migration are shocking

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