Introduction
As context for assessing the Brexit impact on immigration, the Migration Observatory assessed a wide range of studies and concluded that the fiscal impacts of migration represent less than 1% of GDP. It seems the economic importance of immigration may well be less than its political importance.
However, it’s not straightforward to assesses the Brexit impact on immigration and the economy because many factors are involved over a long period of time. This means that estimates are uncertain, for example:
- the impacts of migration on public finances depend on migrants’ age, skill levels and earnings, their level of education when they arrive and their use of public services;
- some groups, such as people with children, need to earn more to make a net positive fiscal contribution because they make greater use of health and education services
- are they workers or dependents? If they are dependents, will they become part of the workforce later?
- estimates also vary depending on the method used:
- static assessments over a short periods
- dynamic assessments over long periods
This useful chart from MAC and HMRC (Figure 6.9) shows how the fiscal contribution for UK citizens varies by age group. A similar pattern will apply to migrants to the UK.
Figure 6.9: Estimated Net Fiscal Contribution of UK residents by Age Group, 2022/23 (source: MAC)
Expected economic impact
Soon after the referendum, the Office for Budget Responsibility (OBR) and the Centre for Economics and Business Research (CEBR) flagged major risks to the economy and the public finances from reduced EU migration.
Their studies used simplifying assumptions, but the overall direction of impact was clear. Given the many EU citizens in the UK workforce and their positive fiscal contribution, the risks were not surprising.
Broad scenarios (not forecasts) indicated that reduced migration would have a negative impact on GDP, potentially approaching those resulting from reduced trade. By contrast, the increase in low-skilled wages resulting from reduced migration was expected to be, if anything at all, relatively modest.
The OBR forecast in late 2016 that reduced migration would reduce trend output growth by 0.3% per year, based solely on slower labour force growth. Separately, the Scottish Government’s assessment of the economic impact of Brexit said in January 2018 that Scotland required continued EU migration to support continued economic growth.
In the same vein, PwC published an economic assessment in November 2017 which demonstrated that restriction of future migration from the EU could have a marked effect on certain industry sectors and regions (for example, the London construction sector). PwC highlighted food manufacturing, hotels, restaurants and warehousing as sectors at risk.
Expected impact on public finances
Reduced migration from the EU was expected to have damaging effects on the UK’s public finances.
The OBR developed scenarios of net migration to assess the impact of reduced migration:
- ‘high migration’ scenario, net migration falls to 265,000 by 2021.
- ‘low migration’ scenario, net migration falls to 105,000 by 2021.
- a central forecast, assuming net migration of 329,000 in 2015 and 256,000 in 2016, declining to 185,000 in 2021.
The OBR projected a £16.9bn surplus in 2020-2021 under the high migration scenario, compared to £5.2bn in the low migration scenario.
The CEBR found the numbers were “quite shocking” (May 2017). Their analysis showed that if the UK cut off migration without improving productivity, especially in the public sector, the scale of the economic damage could be huge.
- In the slow reduction scenario (reducing inward migration by 200,000 p.a. over 8 years from 2019), the net impact on the deficit was £9.5 billion in 2025; £25.9 billion in 2030 and £57.7 billion in 2040 (assuming public spending would be scaled to the population).
- The fast reduction scenario (reducing inward migration by 200,000 p.a. in two years from 2019, showed tax receipts down by £32.7 billion in 2025.
- Allowing for the reduced need for public services the net impact on the deficit was £20.0 billion in 2025; £36.3 billion in 2030 and £64.5 billion in 2040.
Sources:
Office of Budget Responsibility, Economic and Fiscal Outlook, November 2016
Centre for Economics and Business Research, Special report: economic consequences of limiting migration, May 2017
NIESR, Portes and Forte, The Economic Impact of Brexit-induced Reductions in Migration, December 2016
OBR view
OBR forecasts estimate that net migration is economically beneficial because it lowers deficits and debt, mainly because migrants tend to be of working age and those of working age have been educated before they arrive.
The OBR estimated that a reduction in migration of 100,000 a year would increase the current deficit by about £7 billion a year, even after allowing for reduced spending on public services.
Given the uncertainty in estimates, the OBR uses scenarios to consider possible outcomes (Figure 6.10)
Figure 6.10: Borrowing and Public Sector Net Debt under migration scenarios (source: OBR)
Post-Brexit effects
The remarkable boost to Immigration post-Brexit has benefited the economy. As Professor Jonathan Portes notes:
“Since just before the pandemic, all job growth – and indeed such economic growth as the UK has had – has been driven by immigration. While the number of UK-born workers has fallen over the last five years, the number born outside the EU has increased by well over a million.
As well as health and social care, migrants coming on skilled work visas have driven job growth in the professional and scientific sector, while those arriving as dependents or students have filled vacancies in accommodation and hospitality.
With little sign that the post-pandemic increase in inactivity – largely due to sickness and disability – is going to reverse any time soon, it’s far from clear where any future labour force growth in any of these sectors will come from.”
This in turn has major implications for the public finances.
The OBR’s net migration forecast (November 2025) was that net migration is expected to fall further to around 262,000 in the year to mid-2026. This is driven by the tightening of visa rules in recent years and a rise in emigration, especially among students, which then falls away, leading to a rise in annual net migration to 340,000 by mid-2030 (Figure 6.11).
This tightening will reduce the tax revenue from migrants, increase pressure on key public services due to unfilled vacancies, and the deficit.
Figure 6.11: Net migration (source: OBR)
