This article appears in the following Oxford Review of Economic Policy issue: LABOUR MIGRATION IN EUROPE [View the issue table of contents]
The fiscal impact of immigration on the advanced economies
* King's College, Cambridge, e-mail: rer3{at}econ.cam.ac.uk
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This paper is concerned with the advanced economies. It begins with a discussion of the demographic issues that have played such a large role in the debate on immigration. This is followed by a section on the main problems involved in estimating the fiscal impact of immigration and then a summary of the international evidence on this topic, mostly from Europe and America. Separate sections on the UK and on low-fertility countries follow. The main conclusions are as follows. Highly skilled migrants normally make a large fiscal contribution, whereas unskilled migrants are likely to impose a net cost on native taxpayers if they settle in the receiving country. However, even unskilled migrants may be net contributors if they eventually depart and make few claims on government expenditure while in the country. Most empirical studies find that the fiscal contribution of the immigrant population as a whole is quite small. The positive contribution of some migrants is largely or wholly offset by the negative contribution of others. This finding holds across a variety of countries and methodologies. Estimates of the net fiscal contribution of immigration normally lie within the range ±1 per cent of GDP. There are a few exceptions, but these refer to countries experiencing demographic collapse and they are based on unrealistic assumptions about the inter-generational allocation of future taxes and government expenditure. With more realistic assumptions, the overall fiscal benefit of immigration is quite small, even in these countries. These findings suggest that, in general, there is no strong fiscal case for or against sustained large-scale immigration. The desirability or otherwise of large-scale immigration should be decided on other grounds.
Key Words: migration • taxation • ageing • generational accounting
1 The balanced migration estimates are derived by linear interpolation from the official projections that are available on the GAD website (GAD, 2007). For details of the method see Rowthorn (2007).
2 According to ONS (2008) the stock of migrants from the A8 accession countries increased by 448,000 between mid-2003 and mid-2007, from 53,000 to 501,000.
3 These estimates are derived by comparing the low- and high-fertility variant projections in World Population Prospects, 2007 Revision (UN, 2007).
4 The following quotation is representative: ‘The empirical literature from around the world suggests little or no evidence that immigrants have had a major impact on native labour market outcomes such as wages and unemployment. Recent work by a number of other authors for the UK is also consistent with this view’ (Blanchflower et al., 2007).
5 These numbers are derived from the coefficients given in Table 4.1 of Dustmann et al. (2003).
6 The propositions which follow are established in an appendix.
7 These estimates are taken from a survey in Storesletten (2000).
8 The figures cited here are based on Table 2 of Auerbach and Oreopoulos (2000). If all generations share the burden of adjustment and defence is not regarded as a public good, the change in taxes and transfers owing to halting immigration is –3.8 per cent (= –2.5 per cent – 1.3 per cent). If future generations shoulder the entire burden of adjustment and defence is a public good, the change in taxes and transfers owing to halting immigration is +1.9 per cent (= 9.2 per cent – 7.3 per cent). These were converted to percentages of GDP using national accounts data for 1998.
9 Conversion to US dollars at the 1996 exchange rate, US$1 = 6.706 SEK.
10 Swedish GDP was 1,772 billion SEK and population was 8.827 m in 1995. If immigrants are 10 per cent of the population, the total net cost of supporting them is 6.4 billion SEK = 0.36 per cent of GDP.
11 This figure is derived by summing a number of distinct items listed by Coleman.
12 The term ‘excess medical costs’ refers to expenditure in excess of the per capita amount for the national population as a whole.
13 This estimate is derived as follows. The total number of persons receiving care for HIV infection acquired through sex between men and women was 25,754 in 2006 (Health Protection Agency, 2007, Table 1). Migrants account for 88 per cent of HIV infection acquired in this fashion but constitute only 8.4 per cent of the UK population. (The former figure refers only to persons born abroad and excludes dependent children born in the UK.) If the incidence of heterosexual HIV infection were uniform across the population, the number of migrants receiving care would be 2,163 (= 0.084 x 25,754), whereas the actual number is 22,664 (= 0.88 x 25,754). The difference 20,500 is the ‘excess’ number of migrants receiving care. Coleman (2007) cites a figure of £15,000 for the average cost of treating a patient with HIV/AIDS in 2000–3 (as estimated by the House of Commons Select Committee on Health). Thus, the ‘excess’ cost of treating migrants with HIV infection acquired through sex between men and women is around £0.3 billion (= £15,000 x 20,500).
14 This adjustment is derived from paragraph 38 of Migration Watch UK (2006).
15 Total expenditure on defence in 2003/4 was £31.4 billion. The IPPR study allocates this in proportion to the share of migrants and non-migrants in the population.
16 In 2003/4 there was a budget deficit of £48.5 billion. The balanced-budget adjustment shown in Table 1 assumes that this deficit is eliminated by means of a uniform 11.8 per cent increase in the amount of tax paid by migrants and non-migrants. The extra tax paid by the two groups is equal to £4.9 billion and £43.6 billion respectively. An alternative procedure is as follows. After the adjustments shown in the upper section of Table 1 (i.e. excluding the balanced budget adjustment), the ratio of taxes to government expenditure is 90.3 per cent for migrants and 89.4 per cent for non-migrants. As a result, migrants pay £0.4 billion more in taxes than they would do if their tax–expenditure ratio were the same as that of non-migrants. This can be taken as a measure of their net fiscal transfer to the non-migrant population. It is the same as our final estimate of the net fiscal contribution of migrants.
17 The term ‘excess crime’ refers to crime in excess of the per capita amount for the national population as a whole.
18 Another option not explored in these studies is to widen the tax base by increasing the employment rate among working-age people or raising the retirement age.
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