The effect of immigration on public finances

Ian Preston

Data on social attitudes show that the perceived burden of immigration on a nation’s public finances is one of the strongest economic concerns associated with hostility to immigration. Yet recent official reports suggest an important positive role for immigration in the long-run health of public finances. This column argues that there can be no general conclusions applicable in all circumstances about whether immigration is favourable or unfavourable for public finances. But evidence is emerging on particular cases through studies of immigrant composition and use of services, and the effects of immigration on native outcomes.

Much attention of researchers and policy-makers has been directed at the effects of immigration on the wages and employment of natives in the host country (for example, Friedberg and Hunt 1995; Manacorda et al 2012; Dustmann et al 2013). But most empirical studies have failed to find any convincing evidence of substantial negative impact. Data on social attitudes show that the perceived burden of immigration on public finances is a dimension of economic concern just as and perhaps more strongly associated with hostility to immigration, not only in the UK but across many countries (Card et al 2012; Dustmann and Preston 2006, 2007).

Such priority may well be economically justified: the burden or surplus generated through the effects of immigration on public finances may plausibly be regarded as a matter of prime importance. Press coverage in the UK and elsewhere reflects this with immigrants’ use of public services an easy focus of concern. Yet recent reports – by the UK’s Office for Budget Responsibility (2013) and the OECD (2013), for example – have also directed attention towards an important positive role for immigration in the long-run health of public finances.

A proper understanding of such effects is both an important input into decision-making on immigration policy and a necessary concomitant to planning for its implications.

Research suggests that there is no simple and general answer, applicable in all circumstances, to the size and direction of the effect of immigration in this respect (Preston 2014). Immigrants contribute through payment of taxes at the same time as they draw on public finances through consumption of publicly provided goods and services. Immigrants differ from native-born residents in demographic type, in skills and in social customs and consequently both groups pay different taxes and impose differently on public services.

In particular, net fiscal contributions vary over individual lifecycles, with the heaviest burdens on major public spending categories, such as health and education, coming early and late in life, whereas the main taxpaying years are those of working age in between. The age composition of the immigrant population typically differs from that of the native-born.

Moreover, to the extent that migration is economically driven and that the economic rewards are affected by tax rates and entitlements to benefits in cash or in kind from public spending, there is potential for the composition of the immigrant population itself to be affected by the nature of public sector finances.

There is no way to answer the question of whether immigration affects the public exchequer of any particular country positively or negatively except by careful and comprehensive accounting. Pointing to particular visible burdens or contributions while ignoring less visible counterbalances is not helpful.

Tax payments and welfare benefit receipts will be driven largely by the incomes and labour market status of immigrants and by the nature of immigrant spending. Evidence suggests that recent UK immigrants are younger and better qualified than the typical UK-born worker though many immigrants tend to work initially at jobs paying less than would be earned by similarly qualified UK-born workers (Dustmann et al 2013). Over time such downgrading tends to diminish as immigrants adapt to the receiving labour market. The path of tax payments ought to evolve accordingly.

Much research has been devoted across many countries to the question of whether generous welfare systems act as magnets for economic migration, comparing welfare dependence of immigrants and natives or looking for association across countries between the nature of migration flows and welfare entitlements, with mixed results. Evidence for the UK shows that levels of benefit receipt and use of social housing are lower among recent immigrants than among the UK-born (Dustmann and Frattini 2014).

Receipt of benefits in kind is less easy to assess and to cost accurately. For collectively consumed public services such as defence or the environment, the growth in numbers that comes with immigration allows the burden of financing to be spread more widely. For those elements of the public sector provided in kind but largely or partially consumed individually, assessment is trickier but pertinent research nonetheless offers useful evidence.

Research in several countries suggests that immigrants are typically healthier than natives when arriving (unsurprisingly if the economic gains from migrating for work are greater for the more healthy), but they assimilate to native health levels over time. It would therefore be odd if burdens on health spending were very much different to those from comparable UK-born. Wadsworth (2013), for example, shows no difference, which is compatible with what has been found for other countries.

The potential impact of immigration on crime rates is sometimes cited as an issue. But again, empirical work across several countries offers little to confirm such fears. Bell et al (2013) and Jaitman and Machin (2013), for example, show that the most recent wave of UK immigration has had no evident impact on crime rates.

As regards education, immigrants typically arrive after the costs of primary and secondary education have been borne in their country of origin. Their own children may, of course, need to be educated but, unless those children are expected to leave before adulthood, that needs to be seen in the context of their whole lifecycle and, especially, their future tax payments.

Cross-national evidence of any effect on educational attainment of children of native heritage is mixed. But recent UK research on the effect of linguistic diversity on results in primary schools suggests negative effects can be ruled out (Geay et al. 2013). The contribution of fees paid by overseas students is, of course, an important part of university budgets, and Machin and Murphy (2014) show no evidence of any crowding out of domestic students.

Overall, the sensitivity of public expenditure to immigration will vary depending on the composition of public spending and in particular on its redistributiveness and on the extent of rivalry in consumption. Immigration not only has the potential to generate costs through the consumption of public services by immigrants themselves but can also affect the costliness of provision to natives. Viewed in a dynamic context, immigration can also alter the calculus of public sector finances through its impact on the age structure of the population and through the timing of immigration in the immigrant life span.

Because the balance between these effects depends, among other things, on the nature of tax and spending rules, the selection pressures on immigrant composition and the stage of the business cycle at which effects are assessed, there are no general conclusions applicable in all circumstances and to all countries about whether immigration is favourable for public finances. Nonetheless, evidence is increasingly emerging on particular cases through studies of immigrant composition and use of services and also through studies of the effect of immigration on native outcomes.

References

Bell, B, F Fasani and S Machin (2013) ‘Crime and Immigration: Evidence from Large Immigrant Waves’, Review of Economics and Statistics 95: 1278-1290.

Card, D, C Dustmann and I Preston (2012) ‘Immigration, Wages and Compositional Amenities’, Journal of the European Economic Association 10: 78-119.

Dustmann, C and T Frattini (2014) ‘The Fiscal Effects of Immigration to the UK’, Economic Journal 124(580).

Dustmann, C, T Frattini and I Preston (2012) ‘The Effect of Immigration along the Distribution of Wages’, Review of Economic Studies 80: 145-173.

Dustmann, C and I Preston (2006) ‘Is Immigration Good or Bad for the Economy? Analysis of Attitudinal Responses’, Research in Labor Economics 24: 3-34.

Dustmann, C and I Preston (2007) ‘Racial and Economic Factors in Attitudes to Immigration’, Berkeley Electronic Journal of Economic Analysis and Policy 7, Art. 62.

Friedberg, R and J Hunt (1995) ‘The Impact of Immigrants on Host Country Wages, Employment and Growth’, Journal of Economic Perspectives 9: 23-44.

Geay, C, S McNally and S Telhaj (2013) ‘Non-native Speakers of English in the Classroom: What are the Effects on Pupil Performance?’, Economic Journal 123: F281-307.

Jaitman, L and S Machin (2013) ‘Crime and Immigration: New Evidence from England and Wales’, IZA Journal of Migration 2(19).

Machin, S and R Murphy (2014) ‘Paying Out and Crowding Out? The Globalisation of Higher Education’, Centre for Economic Performance Discussion Paper No 1299.

Manacorda, M, A Manning and J Wadsworth (2012) ‘The Impact of Immigration on the Structure of Wages: Theory and Evidence from Britain’, Journal of the European Economic Association 10: 120-51.

Office for Budget Responsibility (2013) Fiscal Sustainability Report, London: Her Majesty’s Stationery Office.

OECD, Organisation for Economic Cooperation and Development (2013) International Migration Outlook, chapter 3: 125-89.

Preston, I (2014) ‘The Effect of Immigration on Public Finances’, Economic Journal 124(580).

Wadsworth, J (2013) ‘Mustn’t Grumble: Immigration, Health and Health Service Use in the UK and Germany’, Fiscal Studies 34: 55-82.