On the fiscal costs of immigration

Are immigrants a drain on the tax-payer? It's a silly question.

Are immigrants a drain on the public finances? A good answer is: no. A better one is: it’s a silly question.

Shabana Mahmood recently claimed that the lifetime cost to the taxpayer of low-skilled migration will be £10 billion.

This is doubtful. As Colin Yeo points out, these costs will be incurred mostly in decades’ time when today’s young migrants get state pensions and healthcare. If, on the other hand, they return home or move to a more hospitable country, they will make a net positive contribution to the exchequer. We cannot of course predict people’s behaviour in decades’ time, and so Mahmood’s forecast is very uncertain.

Right or wrong, it doesn’t justify extending indefinite leave to remain. For one thing, as Jonathan Portes says, making migrants less secure will deter them from training or from sticking in a particular job, thus reducing their earnings potential. Also, in signalling that the UK is hostile to migrants, the measures might deter higher-skilled migrants who do make (pdf) a positive net fiscal contribution.

And overall, migration is good for the exchequer. The OBR has estimated that immigration raises aggregate GDP and so reduces government borrowing.

All this, however, misses a vital point.

To see it, imagine we had a much more advanced economy with a greater capital stock and technology and hence much more productive and high-earning workers. Imagine further that we had sloughed off our ideological prejudice of identifying women’s work as low-skilled and so paid carers what they merit. Imagine too that we had full employment and hence strong demand for such highly productive workers. Imagine further that the capital stock was growing quickly with the result that the government was running a consistent fiscal surplus - such a surplus being, by identity, the counterpart to an excess of private sector investment over savings.

In this economy all workers are making a positive contribution to the exchequer (on reasonable assumptions about the tax system). The only people who are a cost to the exchequer are those who don’t work and/or have expensive healthcare needs. And, because of that fiscal surplus people are on average making a lifetime net contribution; taxes exceed what they get in public services, state pensions and healthcare.

If you find this thought experiment implausible, that’s because of an exaggerated form of capitalist realism; not only can you not imagine an alternative to capitalism, but you can’t even imagine a better capitalism than the one we have.

In such an economy, the question “do immigrant workers make a net fiscal contribution?” would, obviously, be: Yes.

The question therefore only arises because our economy isn’t so advanced. We have low-wage migration because we have a high demand for low-wage jobs, which is a function of our low capital stock, technology and productivity. Immigrants earn little from washing cars by hand because we have hand car-washes rather than just automated ones.

My point should be obvious. One’s contribution to the exchequer is not merely a product of personal characteristics. It is also a product of wider economic factors, of the state of development of the economy. We British have much higher incomes than the people of sub-Saharan Africa or than our Victorian ancestors not because we are smarter or harder-working or have greater moral fibre than them, but because our economy is more developed. Insofar as we have more skill than them, it’s because we’ve had more opportunities for education and training.

The very question of whether migrants contribute to the exchequer therefore misunderstands economics. It treats incomes as the result of individuals’ characteristics rather than as what they actually are - the result of the level of economic development, something that is the emergent product of past decisions.

In this sense, worrying that some migrants won’t pay their way is a displacement activity - an attempt to blame migrants for the failings of British capitalism.

And it’s in bad faith. If it could be shown that migrants did make a net positive contribution to the exchequer, would opposition to immigration disappear?

No. Talk about migrants being a drain on the exchequer is a pseudo-technocratic cover for disliking immigration on other grounds.

Unlike many, I’d concede that some of these grounds are reasonable. It’s reasonable to feel uncomfortable about rapid changes, and the 2.7 million of net immigration we’ve seen in the last five years is indeed a rapid change in society. But it is of course not the only one. There are also, for example, the swathe of pub and shop closures that have worsened many towns. Politicians who were serious about mitigating unsettling changes would give these a priority at least as great as that given to immigration. That they do not points to some less pleasant motives.

And there’s the problem. When we take seriously professed concerns about the exchequer cost of immigration, we are paying too much of a compliment to opponents of immigration.

What’s more, we are conceding defeat in an important battle - that for the agenda. Every good general since Sun Tzu has known that it is important to choose the right terrain on which to fight. The problem for the left (and also for those centrists who are reality-based) is that it is the right that chooses the battleground. It wants to discuss immigration because it doesn’t want to discuss capitalism. We should not let it.