Westminster blog

Our front page story today put a number on the economic costs of David Cameron’s promise to bring net-migration down to the level of the 1990s.

If the Tories hit their immigration target next year, it will stunt growth and cost the exchequer around £9bn a year by the end of the parliament, at least according to the government’s own forecasting model.

We’ve had a few questions (including from the Home Office) about the detailed workings, so here’s a rough guide to Chris Giles’ workings for those confused civil servants and other economics geeks.

The basis of the calculation is this chart, which breaks down the Office of Budget Responsibility model for trend growth.

It assumes 0.7 per cent growth in the population over 16 until 2014/15, after which falls to 0.5 per cent. The drop is the main reason why trend growth falls from 2.35 per cent to 2 per cent.

There are around 50m people over the age of 16, which means the growth rate runs at around 350,000 a year. Part of this growth is through migration, which the OBR assume will be 140,000 a year, if Labour’s policies are unchanged.

Now if the Tories succeed in bringing that down to the 1990s average of 60,000, the overall post-16 population will only rise by 260,000 a year.

It cuts the population growth by around 0.2 per cent and if you plug the changed assumption into the OBR table above, long-term growth is reduced by 0.2 per cent too.

Over five years, that equates to a 1 per cent cut in economic output, which is around £15bn a year from 2014/15.

Relating this to foregone exchequer revenues is a bit more complicated. Chris Giles, our economics editor, used a Treasury report on ‘Public Finances and the Cycle’ to translate the impact of the output loss to the structural deficit.

The fall in net-migration equals a fall in national income of 0.7 per cent, which is about £9bn a year or £300 in extra taxes or lower public spending for every family.

UPDATE: It is worth making clear that this is a simple calculation using the government’s own model for forecasting economic growth. The change in immigration policy — if successful — has clear knock on effects for predicted growth. It has a real impact on Treasury planning. But the story is certainly not a cost/benefit analysis of immigration. Those suggesting it is “one sided” are merely reflecting the OBR’s rather mechanistic model. Please direct any complaints to Sir Alan Budd.