Budget 2011 - Treasury Contents

Supplementary written evidence submitted by the National Institute of Economic and Social Research


There appears to be some risk that the set of policies towards the energy and low carbon sectors set out in the Budget and the Plan for Growth pull in different directions. The Plan for Growth states that "the Government is committed to using market-based approaches to simplify this policy landscape", which is commendable. But the specific measures appear in some areas both to move away from market-based mechanisms, and to make the policy landscape more complicated:

  • the impact of the "fair fuel stabiliser" will be to increase UK oil consumption, while certainly not increasing, and possibly reducing, domestic oil production. This will reduce energy security and delay the transition to a low carbon economy;
  • moreover, the reduction in fuel duty - and more seriously the signal it sends both to the car industry and car purchasers about the long term path of fuel prices - are likely to reduce incentives to invest in low carbon/low emission vehicles. Yet at the same time, the government is "funding £5000 incentives to reduce the up-front costs of ultra-low emission vehicles and supporting roll-out of charging infrastructure, making the UK a global front runner in the market for ultra-low emission cars"; and
  • the carbon price floor (to the extent it is binding) will increase costs for electricity consumers, both businesses and households. But at the same time, the Government is introducing a new framework to cap the impact of levy-funded support on energy bills.

Of course, what is set out in the Budget and the Plan for Growth is necessarily very compressed; these are complex issues and much will depend on the detail of implementation. But taken together, this appears to represent some shift towards greater government "management" of both fuel and energy prices, with both floors and caps, explicit and implicit. Economists would generally argue that the optimal way to move towards lower carbon emissions would be through a "carbon price" of some sort, achieved either through taxation or through the market-based allocation of permits; although in practice there are good reasons a pure system of this type is unlikely, the planned framework appears to be quite a long way from this optimum.

The impact of the limits to skilled migration (Tiers 1 and 2) on output

In my testimony to the Committee, I said

"The extra employment regulation that the Government has imposed on employers wishing to employ migrant workers—the cap on skilled migration—will, using the Government's own methodology, reduce UK output by between £2 and 4 billion by the end of the Parliament."

This was based on the Home Office (HO) Impact Assessment published March 16;[9] and on the report of the Migration Advisory Committee (MAC) on limits on Tiers 1 and 2 published in November 2010.[10]

The HO paper shows (tables 2, 3, 5 and 6) that the proposed limits are expected to reduce net migration by about 11,000 a year, a total reduction of a little over 50,000 over the five year projection period; so by the end of the period there will be 50,000 or so fewer skilled migrants (and their dependents) in the UK as a result of the policy. It also states that Tier 1 and 2 migrants and their dependents are on average about twice as productive as current UK residents.

The MAC report shows (Table 7.1) that the impact of a reduction in net migration (through Tiers 1 and 2) of 10,000 on GDP will be about £560 million. Multiplying this by 5 gives about 2.8 billion.

The MAC report also reports Treasury analysis (Box 7.3) that suggests that a reduction in net migration (via Tier 1 and 2) of 50,000 would reduce GDP by about 0.2% (0.1% as the population effect, and 0.09% as the per capital GDP effect). The current OBR forecast for nominal GDP in 2015-16 is £1915 billion. So the impact would be about 3.7 billion or so (2015 prices).

So my statement to the Committee was based, as I said, on applying simple arithmetic to the official Government publications on this topic.

I would also note that all three parties quoted above—HO, HMT, and the MAC—use essentially the same methodologies and arrive at essentially the same conclusion; any differences reflect marginally different assumptions and are not very material. I would regard the analysis of all three on this topic as clear and consistent.

I would also note that all three correctly state that the impact in practice could be higher or lower. Lower, if those migrants excluded have lower productivity than the average Tier 1 or 2 migrant; higher, if, as some evidence suggests, skilled migrants have positive (short or long run) spillover effects on the productivity of those already resident. However, given the lack of strong quantitative evidence, they (rightly in my view) do not seek to quantify these further impacts in either direction.

Jonathan Portes, Director

March 2011

9   http://www.ukba.homeoffice.gov.uk/sitecontent/documents/policyandlaw/ia/migration-perm-limit-pbs/ia-pbs-t1-t2.pdf?view=Binary Back

10   http://www.ukba.homeoffice.gov.uk/sitecontent/documents/aboutus/workingwithus/mac/mac-limits-t1-t2/report.pdf?view=Binary Back

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Prepared 9 April 2011