EREP

Immigration brings both benefits and costs – but no reason to leave

If UK voters decide to leave the European Union, it will be for one reason above all. From the outset, nationalism bordering on xenophobia has been a defining feature of the Leave campaign. Having lost the argument on broader economic issues, it looks likely the Leave camp will fight the final month of the campaign on immigration. The scapegoating of migrants for the UK’s economic problems will become increasingly unrestrained as the referendum date approaches.

It is not difficult to understand why the Leave camp has chosen to focus on immigration: it is the issue which matters most to those likely to vote for Brexit. Fear that immigration undermines living standards and increases precarity is strong. The anti-European political right has harnessed this fear in a cynical attempt to exploit the insecurity of working class voters in the era of globalisation.

It is countered by Remain campaign statements emphasising that immigration is good for the economy: there are fiscal benefits, immigrants bring much-needed skills and –  because migrants are mostly of working age – immigration offsets the effects of an ageing population.

These claims are well-founded. But immigration has both positive and negative effects. Like other facets of globalisation, the impact of immigration is felt unevenly.

At its simplest, the pro-immigration argument is that migrants find work without displacing native workers, thus increasing the size of the economy. This argument is a valid way to dispel the ‘lump of labour’ fallacy and counter naive arguments that immigration automatically costs jobs. But it does not prove immigration is necessarily positive: an increasing population also puts pressure on housing, the environment and public services.

A stronger position is taken by those who claim that immigration increases GDP per capita – migrants raise labour productivity. It is difficult to interpret the evidence on this, since productivity is simultaneously determined by many factors. But even those who argue that the evidence supports this position find the effect to be very weak. Positive effects on productivity are likely to due to skilled migrants being hired as a result of the UK ‘skills gap’.

But not all – or even most – immigrants are in highly skilled work. Despite being well-educated, many come looking for whatever work they can find and are willing to work for low wages. A third of EU nationals in the UK are employed in ‘elementary and processing occupations’. What is the effect of an increasing pool of cheap labour looking for low-skilled work? The evidence suggests there is little effect on employment rates over the long run. There may, however, be displacement effects in the short run. In particular, when the labour market is slack – during recessions – the job prospects of low-paid and unskilled workers may be damaged by migrant inflows.

The evidence on wages likewise suggests effects are small, but again there appears to be some impact of immigration on the wages of low-skilled workers. There is also evidence of labour market segmentation: migrants are disproportionately represented in the seasonal, temporary and ‘flexible’ (i.e. precarious) workforce.

Further, much of the evidence on employment and wages comes from a period of high growth and strong economic performance. This may not be a reliable guide to the future. It is possible that more significant negative effects could emerge, particularly if the economy remains weak.

Economists on the Remain side downplay the negative effects of immigration, presenting it as unequivocally good for the UK economy. It is undoubtedly difficult to present a nuanced argument in the short space available for a media sound-bite. But it is possible that the line taken by the Remain camp plays into the hands of the Leave campaign.

Aside from the skills they bring – around a quarter of NHS doctors are foreign nationals – the main benefit of immigration is the effect on demographics. Without inward migration, the UK working age population would have already peaked. But ageing cannot be postponed indefinitely.

Rapid population growth leads to pressures on public services, housing and infrastructure unless there are on-going programmes of investment, upgrading of infrastructure and house building. Careful planning is required to ensure that public services are available before migrants arrive – otherwise there will be a period while services are under pressure before more capacity is added.

Long-run investment in public services, infrastructure and housing is exactly what the UK has not been doing. Instead, we are more than five years into an unnecessary austerity programme. Our infrastructure is ageing and suffers from lack of capacity. Wages have yet to recover to pre-crisis levels. Government services continue to be cut, even as the population increases.

Those who face pressure on their standard of life from weak wage growth and rising housing costs will understandably find it difficult to disentangle the causes of their problems. For many, immigration will not be the reason – but it will be more visible and tangible than austerity, lack of aggregate demand and weak labour bargaining power.

The root of the problem is that the UK is increasingly a low-wage, low-skill economy. There is a shortage of affordable housing and public services are facing the deepest cuts in decades. None of these problems would be solved by the reorganised Conservative government that would take power immediately following a vote to leave the EU. Instead, it is clear that much of the Leave camp favours a Thatcherite programme of further cuts and deregulation.

Campaigners for Leave will continue to use immigration as a way to take Britain out of the EU. They are wrong. This is cynical exploitation of genuine problems and fears faced by many low-wage workers.  Immigration is not a reason to leave the European Union.

But the status quo of high immigration alongside cuts to public services and wage stagnation cannot continue indefinitely. If high levels of migration are to continue, as looks likely, the UK government must consider how to accommodate the rapidly increasing population. Government services must keep pace with population increases. Pressures will be particularly acute in London and the South East.

We must also be more open in admitting that immigration has both costs and benefits – it does not affect the population evenly. Liberal commentators should acknowledge the concerns of those facing the negative effects of immigration. In doing so, they may lessen the chances that voters fall for the false promises of the Leave campaign.

 

This article is part of the EREP report on the EU referendum ‘Remain for Change‘. The authors of the report are:

John Weeks, Professor Emeritus of Development Economics at SOAS
Ann Pettifor, Director of Policy Research in Macroeconomics
Özlem Onaran, Professor of economics, Director of Greenwich Political Economy Research Centre
Jo Michell, Senior Lecturer in economics, University of the West of England
Howard Reed, Director of Landman Economics.
Andrew Simms, co-founder New Weather Institute, fellow of the New Economics Foundation.
John Grahl, Professor of European Integration, Middlesex University.
Engelbert Stockhammer, Professor, School of Economics, Politics and History, Kingston University
Giovanni Cozzi, Senior Lecturer in economics, Greenwich Political Economy Research Centre
Jeremy Smith, Co-director of Policy Research in Macroeconomics, convenor of EREP

 

 

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2015: Private Debt and the UK Housing Market

This report is taken from the EREP’s Review of the UK Economy in 2015.

In his 2015 Autumn Statement, Chancellor George Osborne gave a bravura performance. He congratulated himself on record growth and employment, falling public debt, surging business investment and a narrowing trade deficit. He announced projections of continuous growth and falling public debt over the next parliament.

While much of this was a straightforward misrepresentation of the facts – capital investment has yet to recover from the 2008 crisis and the current account deficit continues to widen – other sound bites came courtesy of the Office for Budget Responsibility. The OBR delivered the Chancellor an early Christmas present in the form of a set of revised projections showing better-than-expected public finances over the next five years.

When, previously, the OBR inconveniently delivered negative revisions, the Chancellor responded by pushing back the date he claims he will achieve a budget surplus. In response to the OBR’s gift, however, he chose instead to spend the windfall.  This is a risky strategy because any negative shock to the economy means he will miss his current fiscal targets – targets he has already missed repeatedly since coming to office.

As it turns out, these negative shocks have materialised rather quickly. Since the Chancellor made his statement a month ago, UK GDP growth has been revised down, the trade deficit has widened and estimates of borrowing for the current year have increased.

ca-forecasts

In reality, the OBR projections never looked plausible. The UK’s current account deficit – the amount borrowed each year from the rest of the world – is at an all- time high of around 5% of GDP. Every six months for the last three years, the OBR forecast that the deficit would start to close within a year; every time they were proved wrong (see figure above).  Their current assertion – that the trend will be broken in 2016 and the deficit will steadily narrow to around 2% of GDP in 2020 – must be taken with a large pinch of salt.

The current account deficit measures the combined overseas borrowing of the UK public and private sectors. In the unlikely event that George Osborne was to achieve his stated aim of a budget surplus, the whole of this foreign borrowing would be accounted for by the private sector. This is exactly what the OBR is projecting. Specifically, they predict that the household sector will run a deficit of around 2% per year for the next five years. They note that “this persistent and relatively large household deficit would be unprecedented”.

This projection has been the basis of recent stories in the press which have declared that the Chancellor has set the economy on a path to almost-certain financial meltdown within the current parliament. This is too simplistic an analysis. Financial imbalances can persist for a long time. The last UK financial crisis originated not in the UK lending markets but in UK banks’ exposure to overseas lending.

But the Chancellor’s strategy entails serious financial risks. Even though there is no real chance of achieving a surplus by 2020, further cuts to government spending will squeeze spending out of the economy, placing ever more of the burden on household consumption spending to maintain growth.

The figure below shows the annual growth in lending to households. While total credit growth remains subdued, unsecured lending has, in the words of Andy Haldane, chief economist at the Bank of England, been “picking up at a rate of knots”.

debt-growth

Moderate growth in the mortgage market may conceal deeper problems: household debt-to-income ratios have fallen since the crisis but, at around 140% of GDP, remain high both in historical terms and compared to other advanced nations. The majority of new mortgage lending since 2008 has been extended to buy-to-let landlords. These speculative buyers now face the prospect of rising interest rates and tax changes that will take a large chunk out of their property income. Many non-buy-to-let borrowers are badly exposed: a sixth of mortgage debt is held by those who have less than £200 a month left after spending on essentials.

The Financial Policy Committee has noted that these trends “… could pose direct risks to the resilience of the UK banking system, and indirect risks via its impact on economic stability”.

What is often left out of the more apocalyptic visions of a coming credit meltdown is that underlying all this is an unprecedented housing crisis in which an entire generation are locked out of home ownership. Instead of tackling this crisis, Osborne is using the housing market as a casino in the hope of keeping economic growth on track during another five years of austerity. It is a high-risk strategy. His luck may soon run out.

The report’s authors include:

John Weeks on fiscal policy

Ann Pettifor on monetary policy

Richard Murphy on taxation

Özlem Onaran on inequality and wage stagnation

Jeremy Smith on labour productivity

Andrew Simms on climate change and energy

Jo Michell on private debt

The full report is can be downloaded here.

Information on EREP is available here.