Christian Dustmann and Tommaso Frattini
Centre for Research and Analysis of Migration (CReAM) at University College London
The impact immigration has on the tax and welfare system is perhaps the single most important economic issue of concern in the public debate when assessing the pro’s and con’s of immigration in the UK. There are claims that immigrants from Europe free-ride on the benefit- and health system, resulting in demands that not only should their access to benefits and public services be restricted, but that immigration from the European Economic Area (EEA) countries should be restricted as well.
Following this debate, it is surprising how little well researched evidence exists on how much immigrants take out of, and contribute to, the public purse. We fill this void in a study published by the Royal Economic Society today in the Economic Journal. Based on the UK Labour Force Survey and a multitude of government sources, we compute the fiscal net contribution of natives and immigrants by assigning individuals their share of cost for each item of government expenditure and identifying their contribution to each source of government revenue. We distinguish between immigrants from the European Economic Area (EEA), and immigrants from outside Europe. The former group, we break down into immigrants from the Eastern and Central European countries that joined the EU since 2004 (A10), and immigrants from the rest of EEA.
Our findings show that immigrants to the UK who arrived since 2000, and for whom we observe their entire migration history, have made consistently positive fiscal contributions regardless of their area of origin. Between 2001 and 2011 recent immigrants from the A10 countries contributed to the fiscal system about 12% more than they took out, with a net fiscal contribution of about £5 billion. At the same time the net fiscal contributions of recent European immigrants from the rest of the EU totalled £15bn, with fiscal payments about 64% higher than transfers received. Immigrants from outside the EU countries made a net fiscal contribution of about £5.2 billion, thus paying into the system about 3% more than they took out. In contrast, over the same period, natives made an overall negative fiscal contribution of £616.5 billion. The net fiscal balance of overall immigration to the UK between 2001 and 2011 amounts therefore to a positive net contribution of about £25 billion, over a period over which the UK has run an overall budget deficit.
Our analysis thus suggests that – rather than being a drain on the UK’s fiscal system – immigrants arriving since the early 2000s have made a net contributions to its public finances, a reality that contrasts starkly with the view often maintained in public debate.
This conclusion is further supported by our evidence on the degree to which immigrants receive tax credits and benefits compared with natives. Recent immigrants are 43% (17 percentage points) less likely to receive state benefits or tax credits. These differences are partly attributable to immigrants’ more favourable age-gender composition. However, even when compared with natives of the same age, gender composition, and education, recent immigrants are still 39% less likely than natives to receive benefits.
We also point out that recent immigrants, by sharing the cost public expenditures insensitive to population size (such as defence) which account for 16% of total public expenditure, reduced the financial burden of these fixed public obligations for natives by about £8.5bn over the period 2001-2011.
Additionally, our research points at the strong educational background of immigrants. For instance, while by 2011, the percentage of natives with a degree was 24%, that of EEA and non-EEA immigrants was 35% and 41%, respectively. Similarly, about one in two native born individuals fall into the “low education” category (defined as those who left full- time education before 17), while only 21% of EEA immigrants and 23% of non-EEA immigrants do so.
Furthermore, most immigrants arrive in the UK after completing their education abroad, and thus at a point in their lifetime where the discounted net value of their future net fiscal payments is positive. If the UK had to provide to each immigrant the level of education they have acquired in their home country (and use productively in the UK, as natives do), the costs would be substantial. Our estimates indicate that recent immigrants endowed the country with productive human capital between 2000 and 2011 that would have cost the UK £6.8bn in spending on education. This aspect is often neglected in the debate about the costs and benefits of immigration.
Christian Dustmann and Tommaso Frattini, “The Fiscal Effects of Immigration to the UK”, Economic Journal, Vol.124, Issue 580, pages F593–F643, 2014.
This article was originally featured in the Conversation on the 5th November 2014.