Select Committee on Economic Affairs First Report


CHAPTER 5: IMPACTS ON PUBLIC SERVICES AND PUBLIC FINANCE

125.  The fiscal impact of immigration is complex. The Government argues that on average migrants contribute more to the public finances than the local population. The Immigration Minister declared last October: "Our country and exchequer is better off with immigration than without it."[55] On the other hand, MigrationWatch argue there is "no fiscal benefit to the host population" (p 361).

126.  There are two possible approaches to measuring the net fiscal impact of immigration, that is, the difference between the taxes immigrants pay and the costs of public services and benefits they consume. The static or "snapshot" approach measures net fiscal impacts in a given period (for instance, in a certain year). The dynamic approach takes a long-term view, assessing the expected fiscal costs and benefits of immigrants over their entire lifetime (for instance, the expected taxes immigrants and their children will pay in the future, their future use of public services etc.). In theory, the long-term approach is preferable; but, as the Government recognises, there are practical problems as it relies heavily on forecasts about relative earnings, employment and the tax and benefits system which are "difficult to predict accurately in the long run" (p 317). The snapshot approach looks at historical data, which makes it easier to conduct. But it still requires difficult decisions about what costs and benefits to include, and about how to attribute them to migrants and non-migrants.

127.  In theory, the net fiscal impacts of immigration are likely to depend on a range of factors: immigrants' age; their earnings; their eligibility for and take-up of public services and benefits (with eligibility critically determined by migrants' immigration status); and the nature of the tax and transfer system, especially on the extent to which it redistributes income from high to low-income earners. Everything else being equal, high skilled immigrants can expect to find employment in higher-paying jobs and thus make a bigger net fiscal contribution than low-skilled immigrants.

Existing estimates of net fiscal impacts

128.  All existing studies of the fiscal impacts of immigration on the UK are of the static or "snapshot" type. They reached different conclusions. Two studies—by the Home Office and the IPPR—found that immigration creates net fiscal benefits for the UK. The Home Office study[56] claimed that immigrants paid in £2.5 billion more than they consumed in Government services in the year 1999-2000 (p 316). Immigrants paid in 10% more in taxes than they received in public services and benefits, compared to only a 5% 'surplus' for the UK-born population.

129.  The IPPR study, published in 2005, updated the earlier Home Office paper.[57] It found that immigrants had a more positive net fiscal impact than the UK-born each year from 1999 to 2004. In 2003-04, when the Government ran a budget deficit such that all taxpayers on average consumed more public benefits and services than they paid in taxes, the IPPR study found that the average immigrant cost the exchequer £74 in net terms compared to a net cost of £892 per UK-born person. In other words, immigrants were less of a burden on the exchequer than the UK-born population. The Government uses these figures to back up claims that the "exchequer is better off with immigration rather than without it."

130.  MigrationWatch claimed these figures are flawed, mainly because the health care, education and other public service costs of children born to one immigrant and one UK-born parent were all allocated to the UK-born population (p 361). MigrationWatch argued these costs should be split equally between immigrants and the UK-born population. Making this adjustment but keeping the rest of the Government methodology intact, MigrationWatch calculated the migrant population had a net fiscal cost of £100 million in 1999-2000 compared to the £2.5 billion surplus figure in the Home Office study. It also means, according to MigrationWatch, that immigrants made a smaller net contribution per head than the UK-born in 1999-2000, and a "similar contribution" to the UK-born in 2003-04. The Government has conceded that MigrationWatch's method "would substantially bias the calculation against migrants" but dismissed it as unacceptable: "Children born in the UK are UK citizens and it is inconsistent to view them as 'part migrant' before the age of 16, but UK nationals after that age" (p 317). However, if this argument is valid, the Government is itself inconsistent in not applying this approach to children born in the UK to two immigrant parents. Like MigrationWatch, the Government attributes to the immigrant population the cost of public services provided to such children.

131.  Professor Rowthorn showed that the results of fiscal impact studies depend not only on the treatment of children but also on a range of other factors including, for example, whether a proportion of defence costs are attributed to migrants. Different treatment of these factors leads to various estimates for the net fiscal impact of immigrants, ranging from -£5.3 billion to +£2.6 billion for 2003-04. Although it is "difficult to obtain an accurate picture of how immigration has affected public finances", Professor Rowthorn concluded that the potential fiscal impact is small relative to the size of the total economy, ranging from the equivalent of -0.47% to +0.23% of GDP (p 6).

132.  Determining whether immigrants make a positive or negative fiscal contribution is highly dependent on what costs and benefits are included in the calculations. Government claims that the exchequer consistently benefits from immigration rely on the children of one UK-born parent and one immigrant parent being attributed to the UK-born population—a questionable approach. But even using the Government's preferred method, the fiscal impact is small compared to GDP and cannot be used to justify large-scale immigration.

133.  While the overall fiscal impact of immigration is small, this masks significant variations across different immigrant groups. Professor Rowthorn concluded that "the positive contribution of some immigrants is largely or wholly offset by negative contributions of others" (p 6). A recent IPPR study found that immigrant employees from 13 countries—ranging from Americans to Zimbabweans—paid more tax and national insurance contributions on average than UK-born citizens, while immigrants from countries such as Bangladesh and Turkey paid considerably less on average. [58] These variations are largely due to differences in average incomes between different immigrant groups. The same study also found that almost no Americans and 1% of Poles and Filipinos in Britain claim income support, compared to 39% of Somali immigrants.

134.  The IPPR thus argues: "The immense differences between different sub-groups within the immigrant population (e.g. country of origin or route of entry) and even bigger differences within groups can often mean that lumping people together as immigrants is almost meaningless" (p 299).

Uncosted externalities: Impacts on public services

135.  As discussed in chapter 4, the employment of immigrants in the public sector means that public services can be delivered at a cost that is lower than would be the case with fewer or no immigrants. This is an important positive effect of immigration on the supply of public services. At the same time, immigration has an impact on the demand for and use of public services, issues that have attracted considerable attention and public debate in recent years.

136.  Most of the analyses of fiscal impacts that do consider public services simply estimate immigrants' use of public services based on their shares in the population. This assumes that the average cost of providing public services to immigrants is the same as for those born in the UK. However, there are likely to be some additional costs in providing public services to immigrants which Professor Coleman described as "uncosted externalities" (p 167). For example, immigrants are likely to make greater use of translation services than those born in the UK, but this is not factored in to existing analyses of fiscal impacts. A more accurate assessment is needed, based on figures detailing immigrants' actual use of public services. However, few hard data are available. Professor Coleman noted that most of the existing data and information relate to ethnic minorities rather than foreign-born persons (p 167).

137.  Liam Byrne MP said that his inner-city Birmingham constituency has experienced high rates of immigration which he believes "affects the ability of public servants to deliver education and health services". However, in general, "people are not able to produce hard statistical evidence that would necessarily allow us to put together a very neat cost-benefit analysis of different patterns of migration" (Q 522).

138.  We have focused our analysis of immigration and public services on education and health. However, on both issues the evidence received has been very limited. We have not considered other important areas such as policing, the prison population (of which, in England and Wales, 14% are foreign nationals[59]) or government activities related, for example, to the promotion of social cohesion.

EDUCATION

139.  In the last two decades, children have come to the UK from an increasing range of different countries. The LGA and Dr Janet Dobson both pointed to increasing costs that schools have consequently incurred on translation, English language training and books such as bilingual dictionaries (p 259, p 208). The National Union of Teachers (NUT) referred to Government figures showing that almost 790,000 school children in England—12% of all pupils in 2007—did not speak English as their first language, up from 9.7% in 2003 (p 211).

140.  Dr Dobson noted that smaller primary schools also find it more difficult to organise necessary support for immigrants as smaller budgets are less flexible than at larger schools (p 208). Most immigrant children still go to schools in towns and cities. However, the dispersal policy for asylum seekers and the move to rural areas of more immigrants, especially from Eastern Europe, has led to numerous schools across the UK either receiving immigrant pupils for the first time or experiencing a sharp increase in their numbers (Q 343).

141.  Both the LGA and Dr Dobson also noted the problems for schools in assessing the needs of the children of newly arrived immigrants, due to a lack of records and/or poor English (p 259, p 208). Faced with such pupils, who were largely an "unknown quantity", Slough Council set up a dedicated centre at one of its secondary schools to assess the needs of new immigrant children before they entered mainstream classrooms. The centre costs £92,000 a year to run and can only handle eight pupils at a time compared to the 89 secondary-age pupils who arrived in Slough during the summer holidays in 2006 (p 275).

142.  Immigrants arriving in the middle of the school year create extra administrative costs. The LGA quoted an Association of London Government study that found the additional administrative costs of registering a new child after the start of the school year amounted to £400 per child at primary level and £800 for secondary schools (p 259). Dr Dobson, who had worked in schools which had taken in 120 to 150 pupils at non-standard times, said the process for each child was time-consuming, it "often involves several members of staff" and "it does have this very negative impact in terms of diverting resources" (Q 342).

143.  Dr Dobson noted that many immigrant families make frequent changes of residence in the early part of their stay in the UK. This leads to continuous inflows and outflows of pupils at some schools. These "high-mobility" schools face bigger problems as they frequently repeat many of the routines outlined above. (p 209)

144.  However, immigrant children also create benefits for schools. Dr Dobson told us many immigrant children study hard and that the extra investment for immigrant pupils can raise the quality of education for all children at the school (p 209). The NFU suggested immigration has contributed to the maintenance of some local village schools as the children of immigrants boost enrolment (p 102).

HEALTH

145.  The British Medical Association, Royal College of Nursing and UK Home Care association were unable to provide any data on migrants' use and associated costs of health care services. Dr Borman of the BMA said that collating data on the demand for and costs of health services created by migrants "would pose considerable difficulty". This is partly because within the hospital sector "no-one will be specifically collecting that information for patients who are clearly entitled to healthcare", such as EEA citizens (Q 309). Professor Coleman said that the NHS does not collect information about the country of birth of the people who use its service (p 168). The UK Home Care Association noted that the Director General of Social Care of the Department for Health had recently described the social care sector as a "data desert" (Q 310).

146.  In the absence of hard data, both Liam Byrne MP and the LGA argued that the impact of recent immigration on costs in the health service is limited because new immigrants have tended to be young and therefore relatively healthy (Q 522, p 260). The Scottish Executive and the LGA referred to reports of increased use of maternity services and that recent immigrants had sometimes used accident and emergency services at hospitals where a GP would have been more appropriate[60] (pp 502-503, p 260).

147.  As a result of the very limited evidence on the impacts of immigration on health, education and other public services, the Government has recently set up the Migration Impacts Forum. It aims to "help build the evidence base for the effects which migration is having on communities and public services throughout the United Kingdom and on how these challenges can best be met"[61]. Liam Byrne MP told us that the Forum had reported some increase in GPs' caseloads in two regions, "quite limited" inappropriate use of A&E services at hospitals (when a GP would have sufficed) and an increase in the number of pupils who needed help with English as a second language (Q 522).[62] However, the costs involved do not appear to have been quantified.

148.  Immigration has important economic impacts on public services such as education and health. The current information and data available to assess these impacts are very limited. The launch of the Migration Impacts Forum is a welcome development but so far it has not produced any systematic evidence needed to assess the economic costs and benefits of immigration for public services. The Government should give priority to ensuring the production of much more information in this area.

FUNDING FOR LOCAL COUNCILS

149.  Most taxes are collected at the national level but many public services are provided and paid for at the local level. Councils in the south of England—Westminster, Hammersmith and Fulham, Hillingdon, Slough and the LGA—all argued strongly that the problems with the current immigration statistics (see chapter 2) have led to immigrant numbers in their areas being significantly under-estimated (pp 279, 467, 272, 472-473, Q 440). Since the funding to local councils from central government is directly linked to the size of each district's population, the undercount of immigrants has, local councils argue, led to inadequate funding for public services. The LGA thus called for a special migration 'contingency fund' of £250 million a year—about 1% of the total funding councils receive from central government (Q 447).

150.  Local councils also pointed out that the extra funding needed following a sudden increase in immigration can take time to feed through despite the immediate increase in pressure on local services (Q 447). Similarly, Dr Dobson said schools sometimes face a jump in pupil numbers through rapid migration but experience a slow response of extra funding from the authorities (p 207)

151.  More work needs to be done—by both central and local government—to assess whether and how much extra funding for local services is needed because of increased immigration. The Government should ensure that local councils have adequate funding to provide and pay for the increasing demand for public services.

Impacts on pensions

152.  It is frequently argued that immigrants are needed to defuse the "pensions time bomb" by helping to support an increasing population of elderly people in the UK. This argument is usually made in the context of Britain's rising dependency ratio—the ratio of pensioners and children to the working age population. The IPPR presented estimates of the income tax increases required to help maintain the UK pension system if net immigration was to decline (p 302).

153.  A number of witnesses suggested that the argument that immigrants are needed to help maintain the UK pension system is greatly overstated. First, immigrants too grow old and eventually add to the old-age population drawing pensions.

154.  Second, as Lord Turner of Ecchinswell pointed out in his recent lecture at the London School of Economics (LSE), arguments for high immigration to reduce the dependency ratio are usually made on the basis of figures which assume that the retirement age remains unchanged, an assumption he described as "absurd".[63] Lord Turner argued that as people live longer, it is reasonable to assume that the extra years of life are divided between working years and retirement so as to keep roughly stable the proportions of life spent working and retired. Under this assumption, half of the projected increase in the dependency ratio disappears, when compared with the simplistic case in which the retirement age stays unchanged.

155.  This principle of proportionally measuring retirement ages is reflected in government policy for the state pension age, which will now rise from today's level of 60 for women and 65 for men, to reach 68 by 2046. This is appropriately reflected in the GAD's latest 2006-based projections for the dependency ratio. As a result, despite the fact that the latest projections incorporate higher than previous estimates of life expectancy, the 2006 Projections (shown in Table 5) show lower increases in dependency ratios than previous projections. As Professor Rowthorn pointed out, the latest projections suggest that in the "zero migration" scenario (zero immigration and zero emigration) the dependency ratio is now projected to rise from 60.7% in 2006 to 73.6% in 2056, and not the 82.4% predicted under the 2004-based projections, which made the unrealistic assumption of an unchanging retirement age. A more reasonable "balanced" scenario (zero net migration with immigration equal to emigration) produced by Professor Rowthorn, suggests a dependency ratio increase to 68.2% (p 26).

156.  It should be noted, however, that the 2006-based projections still overstate the very long-term dependency burden, since they assume that increases in retirement age will cease after 2046 (the furthest date covered by present legislation). On the more realistic assumption that by 2056 a further year will have been added to state pension age (taking it to 69) in line with the principle of fixed working / retirement proportions, the Principal Projection dependency ratio at 61.0% will be only minimally higher than in 2006, and even zero migration will produce a figure of about 70%.

157.  It does not therefore seem reasonable to argue that immigration at or above the current Principal Projection level of 190,000 a year is essential to avoid an unsustainable increase in the dependency ratio. And, as Lord Turner pointed out, a policy of seeking to keep the dependency ratio down via high immigration would require not just a period of high immigration and population growth, but permanent population growth and an ever increasing absolute level of net immigration given that immigrants themselves grow old.

158.  Arguments in favour of high immigration to defuse the "pensions time bomb" do not stand up to scrutiny as they are based on the unreasonable assumption of a static retirement age as people live longer, and ignore the fact that, in time, immigrants too will grow old and draw pensions. Increasing the official retirement age will significantly reduce the increase in the dependency ratio and is the only viable way to do so.

TABLE 5

Projected changes in the UK's dependency ratios* (%), 2006-2056


Dependants per 100 working age pop.
Assumed net
annual immigration
(millions)
(GAD Figure)
(SPA=69)
2006
2031
2056
2056

High Migration
0.250
60.7
63.1
62.9
60.0
Principal Projection
0.190
60.7
63.9
63.9
61.0
Low Migration
0.130
60.7
64.6
65.1
62.2
No migration (natural change only)
0
60.7
68.2
73.6
70.2
Balanced Migration
0
60.7
66.5
68.2
n/a


*The total dependency ratio is defined as the number of children plus pensioners divided by the working age population. The GAD figures define the upper age limit of the working population as the State Pension Age, which will rise to 66 in 2026, 67 in 2036 and 68 in 2046. The first four scenarios are from the GAD 2006 based projections. The Balanced Immigration scenario is from Professor Rowthorn—a dependency ratio for 2056 with a state pension age of 69 was not available. (p 27) SPA—State Pension Age.



55   Liam Byrne MP addresses Harlow on immigration, October 17, 2007. Available at: http://press.homeoffice.gov.uk/Speeches/LB-immigration?version=1 Back

56   Gott, C. and Johnston, K. (2002) The migrant population in the UK: fiscal effects, Home Office RDS Occasional Paper No 77, available at http://www.homeoffi ce.gov.uk/rds/pdfs/occ77migrant.pdf Back

57   Sriskandarajah, D., Cooley, L. and Reed, H. (2005) Paying their way: the fiscal contribution of immigrants in the UK, IPPR, available at http://www.ippr.org/publicationsandreports/publication.asp?id=280 Back

58   Sriskandarajah D, Cooley L, and Kornblatt T (2007) Britain's immigrants: an economic profile, London: IPPR, available at http://www.ippr.org/publicationsandreports/publication.asp?id=563 Back

59   Ministry of Justice, Population in Custody Monthly Tables, England and Wales, December 2007 Back

60   Also see BBC News, NHS "not ready for immigration", 29 January 2008, available at http://news.bbc.co.uk/1/hi/health/7215624.stm Back

61   See Department for Communities and Local Government, Migration Impacts Forum at:
http://www.communities.gov.uk/communities/racecohesionfaith/asylumandimmigration/migration-forum/  
Back

62   Also see evidence from a regional consultation by the Migration Impacts Forum at: http://www.communities.gov.uk/documents/communities/pdf/regionalimpacts Back

63   Lord Turner of Ecchinswell, 'Do we need more immigrants and babies?' London School of Economics, 28 November 2007 Back


 
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