Brexit and UK net Immigration – public spending and tax consequences

Not a catchy title but an important one. The referendum approaches and the level of debate is disappointing. It is now accepted that a remain vote will mean continued high levels of immigration to the UK as there appears no mechanism  to control some it given freedom of movement within the EU.

What are the fiscal and government spending consequences of this? Current immigration is just over 300,000 per annum split 50:50 between EU and non EU. I’m going to assume this rate continues at a slightly lower level of 250,000 per annum. This doesn’t seem unreasonable as forecasts for London by the Greater London Authority are for its population to increase from 8.5m to 10m by 2030 or 100,000 per annum.

This rate of increase means 1 million more people every 4 years or 5m over the next 20 years. The question I want to pose is what is the fiscal scorecard of this population growth?

On the spending side, the impact depends on the age profile of the immigration for some aspects but in general this increase in population will require more GPs (doctors) and more hospitals. It will put greater pressure on the NHS.  It will put pressure on housing and lead to demands for more housing  construction  – if the housing stock doesn’t increase it will result in a mixture of higher rents, higher house prices and/or more crowded housing conditions (greater demand, restricted supply) . It will probably lead to pressure on school places and the need for new schools. Transport infra structure  will be stressed so there will be pressure for more investment. All of this will compromise quality of life for many people unless these pressures are addressed promptly by more current and capital spending..

How will this  higher public spending which is both current and capital be funded?

In part that depends on which type of immigration is involved in terms of the earning power of the migrants. 43.8 % of UK taxpayers pay no income tax (IFS 2016). So, unless the immigration is largely at the higher end of the earnings spectrum, it seems likely that it will put more pressure on the public finances as increased expenditure will not be matched by higher tax receipts. This will lead to a longer period of austerity and greater competition by the users of social goods such as the NHS and state education.

Much has been written about the economic benefit of immigration. In terms of public finances that has to translate into fiscal income for the government to allow it to fund public spending. These levels of immigration are likely to restrain wages rather than see a period of  increase  (supply and demand again) –this doesn’t help government income.

While there may be economic issues with Brexit (and we’ve heard a lot about them), the same institutions have not addressed the fiscal consequences and impacts on public spending I’ve described above – one might pose the question why not?

I would suggest that the fiscal impact of Remain could lead to major challenges for the political economy of the UK in terms of increased public spending and pressures to increase taxes over the next decade or more.


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