Immigration is falling but the economic cost may be high – UK in a changing Europe

Jonathan Portes analyses the latest immigration figures from the Home Office and Office for National Statistics, arguing that the government’s success in putting immigration on a downward path is likely to come at an economic cost.

Be careful what you wish for. For the last eighteen months, historically very high levels of immigration – close to 2 million over the last three years – have caused the government serious political problems. But today’s statistics add to the evidence that net migration is now falling sharply. While it was only modestly lower in 2023,  685,000 compared to 2022’s record of 764,000, more up-to-date visa data from the Home Office shows a much sharper drop is in prospect. The number of new visas for work and study has fallen by about 20% year on year. Meanwhile, as I predicted, emigration is now rising.

Much of this reversal is simply the automatic result of known trends. The figures for 2022 were boosted by refugees arriving from Ukraine and Hong Kong. The big increase in student immigration after the end of the pandemic is, after a lag, now pushing up the numbers leaving.

However, it is also driven by the policy changes introduced at the end of last year and early this year, in particular the removal of the right to bring dependents both for international students pursuing Masters’ degrees and for care workers. Applications for student visas are down 12% even before the main peak in applications over the summer, while those for health and care workers have fallen by 75%, likely due not just to the restrictions on dependents but also a more restrictive approach to granting sponsor licenses after some well-publicised cases of abuse and exploitation.

And this fall is likely to accelerate. Some measures, such as the rise in the salary threshold for skilled workers and the increase in the earnings threshold for family visas, have only just come into effect (skilled work visa applications actually rose in April as applicants tried to beat the deadline). The government estimated that the full package would, if it had been applied in 2023, reduced the number of visas issued by about 300,000, but it now appears the actual impact might be even larger.  The Chair of the Migration Advisory Committee, Brian Bell, even suggested that net migration might fall to 150 to 200,000, below the level just prior to the pandemic.

So is this good news for the government – or, more likely, the winner of the upcoming election? It may help draw some of the political poison from the immigration debate post-election, although there are many other factors driving that. But it will also have consequences for the economy, labour market and the public finances.

In the short term, the biggest impact will be on social care, already struggling with workforce pressures and years of underfunding.  Over the last two years, only a very large influx of migrant workers – 70,000 new starters in the last year – has saved the sector from an even deeper crisis. If the fall in visas issued is sustained, and there is not a large infusion of taxpayer funds, prospects are bleak.

And there will be wider economic and labour market impacts as well. Since just before the pandemic, all job growth – and indeed such economic growth as the UK has had – has been driven by immigration. While the number of UK-born workers has fallen over the last five years, the number born outside the EU has increased by well over a million. As well as health and social care, migrants coming on skilled work visas have driven job growth in the professional and scientific sector, while those arriving as dependents or students have filled vacancies in accommodation and hospitality.

With little sign that the post-pandemic increase in inactivity – largely due to sickness and disability – is going to reverse any time soon, it’s far from clear where any future labour force growth in any of these sectors will come from.

This in turn has major implications for the public finances. Back in March, the OBR revised its forecasts for net migration up yet again. The resulting additional tax revenue – £7.5 billion in 2028-29 – more than covered the net cost of the tax cuts  announced in the Budget. This repeated the consistent pattern of the past few years, when higher migration has been invaluable in helping the Chancellor’s sums add up (even as he was complaining about it).

But now the ratchet may go into reverse. At the same time, the OBR also observed that a ‘low migration’ scenario would – even after taking account of reduced pressures on public spending – push up borrowing by about £14 billion per year in 2028-29, considerably more than the cost of a 2p cut in National Insurance contributions, and raise the debt to GDP ratio – the government’s key fiscal target – by about 2.5%, or about £75 billion.

So the government may well have succeeded in putting immigration firmly on a downward path. The price, however, is likely to be high, and paid both by taxpayers and those who use public services – that is, all of us.

By Professor Jonathan Portes, Senior Fellow, UK in a Changing Europe.