Immigration and the EU Referendum

In my last blog post (Thoughts on the EU Referendum) I quickly skated over some of the immigration issues and was accused by some of not doing justice to the arguments. So let's look a little deeper.

I should start by being clear that my direct personal experience of EU migration has been overwhelmingly positive. As an employer I see the positive side of immigration: young productive people who come here to work, earn money, pay taxes and - in many cases - ultimately return home. The EU migrants that I see couldn't be further from the benefits tourists of tabloid mythology.

I'm well aware that I'm not somebody who is ever likely to perceive myself as competing with migrants for a job and I live in an area that nobody could describe as being "over-run with migrants". Both morally and practically I'm broadly in favour of  migration and my personal circumstances are such that that's a reasonably easy position to adopt.

The point I'm making here is that I'm aware that I risk being guilty of confirmation bias, of seeking evidence that supports my preconceptions. So with that potential bias declared, let's look at some practical realities.

First of all we should be clear that the refugee crisis has nothing to do with our EU membership. The UK was able to opt-out of the Schengen free travel area, so we have border controls and passport checks on immigrants coming from EU countries. That’s why there are refugee camps in Calais; the nature of the UK’s membership of the EU is such that we can prevent non-EU migrants from moving to the UK. Remain or Leave makes no difference to that - it won't stop there being asylum seekers desperate to reach the UK and it won't stop us being able to refuse them entry if that's what we choose.

Secondly a vote for Leave is not necessarily a vote to put a brake on EU migration. Both Switzerland and Norway – who are outside the EU – have far higher levels of EU migration (as a proportion of their populations) than the UK. They comply with the EU’s free movement rules, presumably because they consider this a price worth paying for free trade agreements with the EU.

Thirdly - as covered thoroughly by Full Fact - despite the growth in EU migration in recent years, the majority of migration to the UK still (just) comes from outside the EU.

The EU doesn’t stop us addressing non-EU migration, that is fully within our control.

Which brings me to the final point: the net economic impact of migration.

We’re living longer which means there’s upwards pressure on age-related spending such as pensions, healthcare and social care costs. Migrants tend to be younger people of working age who consume goods and services, pay their taxes and are net contributors to the UK’s public finances. Migrants from the EU are far more likely to have a job or be seeking work than those from outside the EU, so are of the "more likely to contribute" kind.

That's the logic, but what about the research to back it up? I've tried to avoid my own confirmation bias and done a trawl of available research which I summarise below (with links to the full reports in case you want to check if I've been selective with my quotes).

The bottom line is that there seems to be unanimity that EU migration specifically (as opposed to immigration overall which includes less economically productive non-EU migrants) is net positive to the UK's public finances. That's not to say that the freedom to fully control our immigration policies with respect to EU countries might not allow us to make immigration even more beneficial to us, but it shows up the argument that EU migrants damage the UK economy to be the populist nonsense that it is.

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The Strongly Positive

• The IFS: Immigration Limits Won't Lift Britain (June 2016)

"immigration from the EU is good for the public finances. Young people in work contribute, on average, much more in taxes than they take out in benefits and public service spending. [...] Without high net immigration the public finances would be in a worse state. If we were significantly to reduce the number of EU migrants, we would have to borrow more, raise taxes or spend less."

• The Economic Journal: The Fiscal Effects of Immigration to the UK (2014)

"Our findings indicate that, when considering the resident immigrant population in each year from 1995 to 2011, immigrants from the European Economic Area (EEA) have made a positive fiscal contribution, even during periods when the UK was running budget deficits, while Non-EEA immigrants, not dissimilar to natives, have made a negative contribution. For immigrants that arrived since 2000, contributions have been positive throughout, and particularly so for immigrants from EEA countries. Notable is the strong positive contribution made by immigrants from countries that joined the EU in 2004."

•  Centre for Economic Performance, LSE: Brexit and the Impact of Immigration on the UK (May 2016)

"EU immigrants pay more in taxes than they take out in welfare and the use of public services. They therefore help reduce the budget deficit. Immigrants do not have a negative effect on local services such as crime, education, health, or social housing"

• Office for Budget Responsibility: Fiscal Sustainability Report (June 2015) 

"The migration scenarios illustrate that migration reduces upward pressure on debt over our 50-year projection period"

• University College London: Positive economic impact of UK immigration from the European Union (November 2014)

"European immigrants to the UK have paid more in taxes than they received in benefits, helping to relieve the fiscal burden on UK-born workers and contributing to the financing of public services"

• The IPPR: Europe, Free Movement and the UK (April 2014)

"The IPPR is clear in saying that free movement within the European Union brings great benefits to all of its member states, including the UK."

The More Nuanced 

• The OECD: Is Migration Good For The Economy (May 2014)

"Immigrants are thus neither a burden to the public purse nor are they a panacea for addressing fiscal challenges. In most countries, except in those with a large share of older migrants, migrants contribute more in taxes and social contributions than they receive in individual benefits."

• The NIESR: The Long-term Economic Impact of Leaving the EU (May 2016)

"there is evidence that EU migration has net fiscal benefits for the UK, and these might counterbalance any positive fiscal impact from repatriating the UK’s net contributions to the EU.26 At the same time, it is at least conceivable that if the freedom to set migration policy were used optimally, then this might have some positive impact on productivity."

• The NIESR: The Treasury's Brexit analysis and immigration (April 2016)

"... if post-Brexit the UK chose to adopt a restrictive migration policy  - that if it chose to use the newly won flexibility afforded by Brexit to significantly reduce migration – that this would significantly damage the UK economy. However, if the UK adopted a relatively liberal policy – that is if we allowed a substantial increase in non-EU migration to partly counterbalance any reduction in EU migration – that any negative impacts would be mostly mitigated and indeed, if sufficiently liberal, there would even be economic gains"

• The Migration Observatory, University of Oxford: The Fiscal Impact of Immigration in the UK (March 2015)

"The evidence suggests that the fiscal impact of migration in the UK is small (less than +/-1% of GDP) and differs by migrant group (e.g. EEA migrants vs non-EEA migrants, recent migrants vs all migrants)."

• Migration Watch: The Fiscal Effects of Immigration to the UK 2014/15 (May 2016)

negative contributions by immigrants from the EU A10 group of countries and countries outside the EEA outweighing a positive contribution by immigrants from the EU15/other EEA countries [...] Estimates for the whole immigrant population residing in the UK in the fiscal year to end-March 2015 are that immigrants from EEA countries made a negative contribution of £1.2 billion in the year while those from non-EEA countries made a negative contribution of £15.6 billion, compared to an overall negative fiscal contribution by the UK-born population of £88 billion.

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It's worth looking at the Migration watch figures a little more closely as it stand out as being the only analysis to suggest a negative contribution for EEA countries (i.e EU + Iceland, Liechtenstein & Norway).

A quick read of the report shows these figures are based on the "average cost" method - that is public expenditure costs are allocated to migrants whether or not the presence or absence of migrants affects these costs. For example, defence costs are attributed to migrants on a population share basis as are things like medical research and street lighting. Clearly (unless you think we'd cut these budget if we had less migration) this is at best a rather dubious way to look at the figures. Migration Watch deal with this themselves in their own Appendix B where they state

where these expenditures will not vary directly in proportion to the size of the population, a different approach is to say that the cost to be allocated to migrants should be reduced to take account of the fact that the increase in population resulting from migration does not increase these costs to the same extent. This is the marginal cost method.

They say "different", I say "better".

Below is a table summarising Migration Watch's  own analysis on both a marginal and average cost basis and - lo and behold - on this more meaningful basis even Migration Watch show EEA Immigrants making a net positive fiscal contribution.

*** UPDATE ***

I'm indebted to Jonathon Portes of NIESR for highlighting the distorting assumption Migration Watch make about business taxes. They use the incredibly pessimistic assumption that immigrants don't make any contribution to business taxes (corporation taxes, business rates, capital gains tax) until they have been in the UK for more than 10 years. As UCL have pointed out, this is counter to their own peer-reviewed, evidence based assumptions. We can safely say that Migration Watch have gone out of their way to paint the worst possible picture of the impact of migration - and even they struggle to show EU-Migrants being anything other than positive contributors to the UK's finances

*** UPDATE ENDS ***

EU migration is not one of the causes of the economic challenges we face, it’s one of the solutions to them.

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Have we paid £8bn more in than we've had out?

When I initially made this post I wrote: "No.  The First Minister lied."  Since then I have received two helpful clarifications (see comments at the foot of this post) and am happy to apologise and retract the accusation of lying.

I think however that you'll agree - if you wade through the following logic - that the First Minister's statement was intentionally misleading.  While appearing to say we paid £8bn more to the UK than we got back over the last five years he was effectively suggesting that over the last five years Scotland should have been running an even higher deficit than we were to the tune of £8bn. Remarkable.

[A briefer summary o this logic can be found here > £8.3bn better off?]

To elaborate:  there was a statement made by Alex Salmond in the STV debate that bugged me; I managed to source the exact wording and Mr Salmond is quoted as saying

• "In each one of the last 33 years, Scotland has paid more in tax per person than the average of the UK. Over the last five years we have [paid] 8 billion pounds more into the Treasury than we have had out of it, in relative terms. That is 1,500 pounds a head for every man, woman and child in Scotland."

Now I think I known the GERS numbers pretty well by now and I simply couldn't see how on earth that statement could be justified.

Taking first of all what most people watching will have thought he was referring to: in fact

• In the last 5 years public expenditure in Scotland (what we've "had out of" the Treasury) exceeded our tax receipts (What we have "put in" to the Treasury) by £51.3bn¹ .. or over £9,000² a head for every man woman and child in Scotland.

These figures of course assume we keep "our" geographic share of oil using the Scottish Government's most favourable definition of geographic share.  We run a deficit.  The UK runs a deficit. Of course we get more back from the Treasury than we put in.

Of course the subtlety in our First Minster's statement comes in the use of the phrase "in relative terms".  The BBC suggested this explanation:

• "Alex Salmond said Scotland had contributed £8bn to UK finances. According to Scottish government figures, Scotland has contributed more to the Treasury per head than the UK average, if you assume a geographic share of North Sea revenues. In 2011-12, it was £1,500 more per head (the figure Mr Salmond quoted) and, if you multiply that by the Scottish population, you come to £8bn"

With apologies to the BBC: whilst that explanation fits the numbers unfortunately it bears no relation to the First Minister's words.

• The figure quoted is for 2011-12 - not the last five years
• The figure represents tax contribution (what's "put in") and takes no account of the public expenditure received (what's "taken out") - the First Minister said the figure represents an amount "more into the Treasury than we have had out of it"

So I turned to the raw data.  I chose to go back 7 years (there is normally a reason why a figure is quoted over a particular time period so I wanted to check the sensitivity to longer as well as shorter periods). As well as comparing Scotland to UK total (as GERS and IFS do) I compare to rUK (the rest of the UK excluding Scotland) which would seem to me a more helfpul comparison.  I show the full table of data below for those who (like me) prefer to see an audit-trail of the figures.

Before I received the steers as to how the figure was arrived at I applied the implied BBC methodology (grossing per capita differences to full year figures by multiplying by the Scottish Population).

To correctly describe the figures the BBC use to explain the First Minister's statement (highlighted in yellow in data table);

• In 2011-12 (the year before last): assuming a full geographic share of oil (and using the Scottish Government's definition of geographic share) Scots contributed £1,500 more per capita to the treasury than the the UK average (before taking account of how much more we received back in the form of public expenditure).  In absolute terms that is equivalent to £8bn

To fill in the figures for the statement our First Minister made as I would interpret them (highlighted in light green)

• "Over the last five years we have [paid] £1.4bn pounds more into the Treasury than we have had out of it, in relative terms. That is £270* a head for every man, woman and child in Scotland."

* Using 5 year average and multiplying by 5

To make what I might humbly suggest is a more fairly representative statement (figures in green)

• In recent years Scotland gets more back from the Treasury than we put in, even applying the most favourable assumptions around keeping "our" geographic share of oil revenue.
• If you want to be precise in the numbers; looking at this on an average annual per capita basis relative to rUK;
• Over the last 7 years on average we've paid £2(!) pa. more in than we've had out
• Over the last 5 years on average we've paid £54 pa. more in than we've had out
• Over the last 4 years on average we've received £156 pa. more out than we've put in
• Last year we received  £512 more out than we put in to the Treasury

So we can see why the 5 year time period was chosen; take a longer or shorter time period and the picture changes dramatically.  I have neither the time nor the inclination to go back even further than 7 years - we should really be discussing the future after all.

But hold on; we still haven't explained the £8bn figure.  It was at this point that I initially concluded our First Minister and his script writers must have simply lied - I accept now that I was wrong and am happy to put the record straight.  I'm indebted to Ivan McKee of Business for Scotland (and another Anonymous contributor) for giving me a steer on this.

The figure can be arrived at if you assume over the 5 year time period Scotland should have received the same share of expenditure as its share of tax contribution.  Sure enough you can get to the £8bn figure on that basis (highlighted in blue).  There is a massive and - once you've thought it through - fairly obvious problem with this approach; it would mean our share of the deficit would become the same as our share of tax contribution - we would be disproportionately responsible for the deficit and the debt associated with it.

Let me offer a narrative interpretation of the figures (figures not already quoted above are highlighted in the table in orange.)

Assuming Scotland keep "our" oil money on a geographic share basis (and taking the Scottish Government's most favourable definition of geographic share);

• The higher levels of public spending we currently receive mean we run a very similar per capita deficit to the rest of the UK (although in recent years Scotland has been running a significantly higher per capita deficit)
• Over the last 7 years £2(!) per capita per annum lower
• Over the last 5 years £54 per capita per annum lower
• Over the last 4 years £156 per capita per annum higher
• Last year £512 per capita higher
• If our share of expenditure was the same as our share of tax contribution (the First Minister's hypothesised case) we would run a higher deficit (as our share of deficit would become the same as our share of tax contribution).  
• Over the last 5 years Scotland's share of deficit generated (8.2%) is very similar to our population share (8.4%); over the last 7 years its identical (8.4%) and over the last 4 years its higher (8.9%)
• Under the hypothesised case we would have spent an extra £8.3bn; of course that means our deficit would also have been £8.3bn greater
• Under the hypothesised case Scotland's 8.4% of the UK population would have been responsible for 9.5% of the deficit (i.e. debt requirement) - that's an additional £1,332 of debt for every man woman and child in Scotland

So what can we conclude from all of this number crunching?  Funnily enough the same as when I looked at these figures nearly 3 months ago here > Oil & Gas Part I: For Richer for Poorer;

• Scotland receives back in higher expenditure about the same amount as we contribute in higher tax if you assume we get to keep "our" oil and gas
• On this basis Scotland historically runs a similar deficit/capita as the rest of the UK (although last year it was £470/capita higher)
• A corollary of this would be that we are (at least over the period I've analysed here) responsible for our per capita share of debt even if we are allowed to retrospectively  keep "our" historical oil & gas revenues

To account for the First Minister's statement we can add;

• If we decided that Scotland should have produced a higher per capita deficit than rUK because we contributed a higher share of tax (assuming we keep "our" oil) then we would indeed  have needed to receive an extra c.£8bn over the last five years ... and our deficit (and hence implicit share of debt) would be £1,332 per capita higher than our per capita share

1. 5 year average deficit of £10.3bn x 5
2. 5 year average per capita deficit of £1,949 x 5