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.
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.