‘Migration won’t save UK from debt crisis’

OBR executive says bill for benefits must be cut and claimants brought back into work

RISHI SUNAK must slash the benefits bill and get more people working instead of relying on immigration to reduce Britain’s debts, a senior official at the UK’S budget watchdog has said.

David Miles, an executive member of the Office for Budget Responsibility (OBR), said waves of new migrants would not solve Britain’s fiscal crisis and were likely to pile pressure on public services. It comes amid growing expectations that the OBR will hand the Treasury a war chest of up to £23 billion for tax cuts when they revise up migration projections in line with official estimates.

However, the former Bank of England rate-setter warned that a migrantdriven upgrade to the UK’S population may not provide a long-term boost to the public finances.

Writing for The Telegraph, Mr Miles described welfare reforms that encouraged more people back to work as “unambiguously beneficial” for the economy, adding that a drive to increase employment was “particularly great” for younger people suffering from mental health issues. By contrast, the Imperial College professor said it was “much less clear that persistently high levels of net immigration to boost the labour force can generate sustained fiscal improvements”.

He suggested that relying on public investment or a sharp rise in productivity were also unlikely to quickly reduce Britain’s debt burden, which has climbed from just under 40pc 20 years ago to around 100 per cent of the economy today. Mr Miles did not call for individual benefits to be cut. However, he argued that reform would be beneficial if it brought people back into work, reducing the cost to the taxpayer at the same time. There are 9.25 million people aged between 16 and 64 who are not working nor looking for work, according to the Office for National Statistics (ONS) – a figure that it revised up by 400,000 this week. About 2.8 million of this group have dropped out of the jobs market because of their health.

The OBR has been repeatedly accused of overstating the economic benefits of migration, with recent analysis suggesting it has previously exaggerated the impact by as much as £8billion.

The Telegraph has reported that the Prime Minister delayed announcing a clampdown on legal migration because he feared it would result in the OBR reducing his headroom ahead of the Autumn Statement in November.

Mr Miles described a bigger, healthier labour force as “fiscally highly advantageous”, adding: “Not only do these sorts of rising employment generate more incomes and tax revenues they can also reduce the welfare bill”. He also suggested that Britain’s soaring tax burden, which is at its highest in peacetime, was doing more damage than ever before to work and investment incentives.

The ONS had previously estimated net migration – the difference between the numbers arriving and leaving the UK – would be around 245,000, but now predicts that it will be 315,000 a year, 28 per cent higher.

While Mr Miles has said in the past that migrants have a similar overall profile to other UK workers, he added that it was “much less clear that persistently high levels of net immigration to boost the labour force can generate sustained fiscal improvements.”

Mr Miles said: “Even if the new ONS projections of higher long run net immigration prove accurate, they cannot be assumed to improve the long run fiscal situation. New immigrants, particularly if they come on work visas, may generate a favourable balance of extra tax revenue relative to extra public spending for some years. But immigrants who stay grow older and have children, so the favourable tax to spending balance does not persist.

“And even when the favourable fiscal effects persist, they may do so largely because government spending on public services [particularly on health and education] falls in per capita terms and the quality of those services is eroded as population rises.”

There is growing concern about the impact of rising immigration. A survey l ast month commissioned by the Onward think tank showed almost nine in 10 UK parliamentary constituencies want to see levels reduced.

Here is an unwelcome fact. Most estimates of the long-term trajectory of UK government debt relative to GDP, assuming unchanged policies on tax and that public services and welfare payments evolve in line with a plausible estimate of demand, suggest that the fiscal situation will become unsustainable.

Long-term forecasts by the Office for Budget Responsibility show that 50 years ahead, the debt to GDP ratio could have tripled and be rising at an ever-increasing rate so that debt repayments would likely become unaffordable. While much better productivity growth than has been seen over the past 20 years – if sustained over decades – could prevent ever-increasing debt to GDP ratios, it would be a risky strategy to rely on that happening. In its absence, the balance between taxation and spending does not look as if it can continue as it is.

To a large extent, the deterioration in the longer-run fiscal outlook over the past 20 years reflects the large decline in the levels of income generated in the UK (GDP) relative to what had seemed likely. Before the global financial crisis, the UK seemed to be on a trajectory that would have taken its GDP to a level of around 25pc above where it now is. But expectation about the provision of public services and of welfare support has not adjusted downwards to the same extent – perhaps even at all. The debt to GDP ratio in the UK has risen from under 40pc, 20 years ago, to around 100pc today.

Something needs to change. If all the longer-run adjustments that are needed to maintain fiscal sustainability come on the tax side, then tax revenues relative to total incomes are likely to need to rise further. The distortions that such continued tax rises generate are likely to become substantial. That is because a well-known result in the economics of taxation is that a rising tax take, with tax rates rising within a broadly unchanged structure of taxation, would mean that distortions would plausibly rise at increasing rates. Such distortions are more likely to rise with the square of tax rates rather than with its level. That would mean that whatever extra damage is done to incentives to work, save, invest and innovate by a rise in overall tax rates from 35pc to 40pc would be about 15pc greater than a rise from 30pc to 35pc. A rise from 40pc to 45pc would bring costs that are 13pc greater than that again.

Such damage might be offset if the overall structure of taxation, and not just tax rates within an unchanging structure, can be improved so as to reduce distortions. But it is unlikely that there can be an ever-improving set of structural changes in the tax system that can keep up with the exponentially rising costs of increasing tax rates.

So it is likely that the path to a more sustainable fiscal stance will be one on which some combination of three factors are at play: faster growth in productivity; a more favourable trajectory for labour supply; a fall in the rate of growth of government spending so that it rises less fast than demand for public services and for welfare payments and does not increase consistently in excess of GDP.

More rapidly rising productivity is the almost pain-free route to fiscal sustainability. But it is also hard to see what government policies would reliably put the UK on a faster productivity path. Higher public sector investment might boost growth for a while but only if returns on that investment are strong. Higher public spending to accelerate the path to net zero would be a source of greater public sector capital investment but it should probably be seen more as a means to produce GDP in a less environmentally damaging way rather than a way of producing more GDP. Faster growth in the labour supply would boost GDP growth. A greater supply of labour from the population in the UK, particularly if it reflected fewer people not participating because of health issues and fewer people under-employed (or not employed at all), is fiscally highly advantageous. Not only do these sorts of rising employment generate more incomes and tax revenues, they can also reduce the welfare bill.

It is much less clear that persistently high levels of net immigration to boost the labour force can generate sustained fiscal improvements.

So even if the new Office for National Statistics projections of higher long-run net immigration prove accurate, they cannot be assumed to improve the long-run fiscal situation. New immigrants, particularly if they come on work visas, may generate a favourable balance of extra tax revenue relative to extra public spending for some years. But immigrants who stay grow older and have children, so the favourable tax-to-spending balance does not persist. And even when the favourable fiscal effects persist, they may do so largely because government spending on public services (particularly on health and education) falls in per capita terms and the quality of those services is eroded as population rises.

In contrast, welfare reform that generates a rise in labour supply and a smaller benefits bill is likely to be unambiguously beneficial and fiscally very helpful if as well as boosting labour incomes it allows those who would benefit from being in employment to find paid work. Those benefits may be particularly great for those who have mental health problems, a group whose numbers have grown greatly in recent years and largely among the young, for whom finding jobs may create long-lasting gains in wellbeing.

David Miles is professor of financial economics at Imperial College Business School and a member of the budget responsibility committee at the Office for Budget Responsibility