The fiscal effects of A8 migration to the UK

Christian Dustmann, Tommaso Frattini, Caroline Halls 08 August 2009

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Immigration often causes debate in receiving countries about the potentially negative consequences an influx of immigrants may have on the welfare of incumbent residents. Of particular concern is whether immigrants “pay their way” in the welfare system. These fears were echoed in the debate following the 2004 EU enlargement to include Czech Republic, Estonia, Hungary, Latvia, Lithuania, Slovenia, Slovakia, and Poland.

Citizens of these countries – which came to be collectively known as “A8 countries” – were granted immediate right of free movement across all the EU, though access to national labour markets could be restricted by national governments for a transition period of up to seven years. Only the UK, Sweden, and Ireland allowed immediate access of A8 citizens to their labour markets. Concerns about the fiscal impact of this policy decision on the UK budget are often expressed in the popular press: “[Eastern European] Economic migrants need schools for their children. They need housing. They need medical care. They can even lose their jobs.” (Daily Mirror, 24 July 2006), or “Jobs dry up but Poles stay to reap the benefits” (Daily Mail, 9 Jan 2009).

Are these concerns justified? Do A8 immigrants make a positive contribution to the UK fiscal system, or do they receive more payments than they contribute in terms of taxes and contributions? Are they more or less likely than natives to claim welfare benefits and live in social housing? Gott and Johnston (2002) and Sriskandarajah, Cooley and Reed (2005) looked at early migration waves and found immigrants making a net fiscal contribution to UK public finances. But is the recent wave different?

New evidence

In a recent paper, we provide the first comprehensive analysis of the fiscal consequences of post-enlargement migration to the UK (Dustmann, Frattini, and Halls 2009).

The fiscal impact of immigration can be evaluated with static or dynamic analyses (see Rowthorn 2008 for a recent review). Static analyses compute, for a given year, the net fiscal contribution of a cross-section of immigrants as the difference between the amount of taxes paid in and the government transfers received. Dynamic studies (see e.g. Storesletten, 2000) compute the net present value of the lifetime net fiscal contribution of immigrants and (in some cases) their descendants. Dynamic analyses have the distinct advantage of providing a forward-looking picture of the fiscal consequences of emigration, but this comes at the expense of strong assumptions about immigrants’ future behaviour and future fiscal policies. Static analyses are more backward-looking, but they allow a precise quantification of the fiscal costs and benefits of a particular immigrant population.

We adopt a static approach and evaluate the annual net fiscal effect immigrants from A8 countries had on the UK since enlargement in 2004. We also assess the degree to which A8 immigrants obtain benefits or rely on social housing in comparison to UK-born Britons. The analysis is based on data from the UK Labour Force Survey and publications by HM Treasury, the Office for National Statistics, and several other Government Departments. It is the first study to assess the fiscal impact of A8 immigration to the UK. Previous work considered the fiscal impact of overall migration for earlier years (and came to the conclusion that immigrants were making a net fiscal contribution to UK public finances.

Some key facts

Figure 1 illustrates the evolution of the stock of A8 immigrants in the UK since the second quarter of 2004 (EU enlargement took place on 1 May 2004). The figure shows that their net inflow was positive and sustained until about the second quarter of 2007; since the first quarter of 2008, the stock of A8 immigrants remained basically stable.

Figure 1. Stock of A8 immigrants in the UK

Some of the key characteristics of A8 immigrants, compared to native workers, are illustrated in Table 1. A8 immigrants arriving between the second quarter of 2004 and the first quarter of 2009 are younger and better educated than the native population. They also have a higher labour market attachment than natives due to a higher labour market participation rate (88% versus 79%) and a higher employment rate (83% versus 75%). Despite the higher level of education among A8 immigrants, they are disproportionately concentrated in the least-skilled occupations (71% are in routine or semi-routine occupations versus 24% of natives) and their hourly wages are considerably lower than those of natives throughout all parts of the wage distribution. However, there has been a remarkable increase in average wages. For example, the wages of the cohort that arrived in 2004/2005 have increased by 40% after four years in the UK. Likewise, employment and participation rates increase with time in the country.

Table 1. Characteristics of A8 immigrants and UK natives

Are A8 Immigrants more likely to claim benefits or living in social housing?

Restricting analysis to those immigrants who have been in the UK for more than one year as A8’s eligibility for many benefits is limited for the first year in the UK, the study finds that A8 immigrants are about 60% less likely than natives to receive state benefits or tax credits, and to live in social housing. Even if A8 immigrants had the same demographic characteristics of natives, they would still be 13% less likely to receive benefits and 28% less likely to live in social housing

The fiscal impact of A8 immigration

We compute the fiscal impact of A8 immigrants by comparing the ratio of government transfers to taxes and welfare contributions for native-born workers and A8 immigrants. Computation of these figures is based on various data sources but requires some assumptions, so we compute various scenarios, most of them making conservative assumptions about the contribution of A8 immigrants.

The key results are that in each fiscal year since enlargement in 2004, A8 immigrants made a positive contribution to public finance (see Table 2). For instance, in the latest fiscal year, 2008-09, A8 immigrants paid 37% more in direct or indirect taxes than they received in public goods and services. This is even more remarkable because the UK has been running a budget deficit in recent years. In contrast, in 2008-09 UK-born individuals contributed to the Exchequer 20% less than they received in terms of public goods and services.

Table 2

Our paper shows that A8 immigrants receive, on average, lower wages than UK-born workers despite their better educational background, in particular immediately after entering the UK. Why are they nevertheless net contributors to public finances? The reason is that they have a higher labour force participation rate (increasing the number of fiscal contributors), are likely to pay (proportionately) more in indirect taxes like VAT, and – most importantly – make much lower use of benefits and public services. For instance, in 2008-09 A8 immigrants represented 0.91% of the total UK population, but contributed to 0.96% of total tax receipts and accounted for only 0.6% of total expenditures.

The long run

These facts paint a very positive picture of A8 immigration to the UK –highly educated young people enter the UK predominantly to work, making subsequent positive contributions to the tax system. Our analysis also suggests that the labour market situation of immigrants substantially improves with time in the UK, in terms of both wages and labour force attachment.

But what are the longer-term effects on the fiscal system? What happens if A8 immigrants age, have children, and become more susceptible to illness and disability? Any predictions about future contributions and receipts must rely on a set of very strong assumptions (for instance about the magnitude and nature of return migration), and we do not wish to engage in such speculation. While it is true that younger populations receive fewer benefits, it is also the case that younger immigrants, and in particular those who have just arrived, receive much lower wages. The strong wage growth of A8 immigrant arrival cohorts that we have observed so far is likely to continue with time in the UK, so that A8 immigrants’ tax contributions are likely to rise considerably. In fact, if in the long run A8 immigrants receive wages relative to their levels of education similar to those of native born workers, then – as A8 immigrants are far better educated than natives in the same age cohort – their contributions to the tax system could supersede those of natives.

Thus, in our view, there is little reason to believe that, in the longer run, A8 immigrants who arrived between 2004 and 2008 will constitute a net burden to the welfare system. This is also in line with the results of the analysis on the probability of welfare claims, which shows that A8 immigrants – even if they were identical in a large number of characteristics to natives, like age, education, number of children and disability – would still be less likely to claim benefits.

References

Dustmann, C., Frattini, T. & Halls, C. (2009). “Assessing the Fiscal Costs and Benefits of A8 Migration to the UK”, CReAM Discussion Paper No. 18/09

Gott, C., & Johnston, K. (2002). “The migrant population in the UK: fiscal effects”. Home Office Research, Development and Statistics Directorate Occasional Paper No.77. London: Home Office.

Rowthorn, R. (2008). The fiscal impact of immigration on the advanced economies. Oxford Review of Economic Policy , 24 (3), 560-580.

Sriskandarajah, D., Cooley, L., & Reed, H. (2005). Paying their way: the fiscal contribution of immigrants in the UK. London: IPPR.

Storesletten, K. (2000). “Sustaining Fiscal Policy through Immigration”. Journal of Political Economy, 108 (2), 300-323.

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Topics:  Europe's nations and regions Migration

Tags:  EU, migration, UK, fiscal burden

Professor of Economics, University College London and Director of the Centre for Research and Analysis of Migration

University of Milan and Centre for Research and Analysis of Migration

University College London and CReAM