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Yes, EU immigrants do have a positive impact on public finances

5 November 2014

The impact of immigration on Britain’s tax and welfare system is a key element in the debate over the country’s relationship with the EU. Yet contrary to received opinion, research shows that EU immigrants to the UK in fact relieve the fiscal burden on UK-born workers and contribute to the financing of public services. 

Prof. Christian Dustman
Dr. Tommaso Frattini

UK border
The impact of immigration on Britain’s tax and welfare system is perhaps the most important economic issue in the debate over the country’s relationship with the EU and its principle of free movement. There are claims that immigrants from Europe take advantage of the UK’s benefit and health system. This has led to political pressure to limit immigrants' access to benefits and public services and even restrict immigration from the European Economic Area countries.

But, despite the controversy surrounding this issue, evidence for how much immigrants take out of and contribute to the public purse in Britain is surprisingly sparse. Our new research published by the Royal Economic Society in the Economic Journal aims to fill this void.

Based on the UK Labour Force Survey and a multitude of government sources, we calculate the overall fiscal contribution of native Britons and immigrants. Our findings show that European immigrants to the UK have paid more in taxes than they received in benefits, helping to relieve the fiscal burden on UK-born workers and contributing to the financing of public services.

To do this, we assign individuals their share of cost for each item of government expenditure. We then identify their contribution to each source of government revenue. We distinguish between immigrants from the European Economic Area (EEA), and those from outside Europe. Additionally, we break down the EEA group into immigrants from the Eastern and Central European countries that joined the EU since 2004 (known as A10 countries), and immigrants from the rest of EEA.

Positive net contribution

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 overall fiscal contributions of recent European immigrants from the rest of the EU totalled £15 billion, with fiscal payments about 64% higher than the value of public services they used. 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, native British people made an overall negative fiscal contribution of £616.5 billion. The 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 in which the UK has run an overall budget deficit.

Our analysis thus suggests that immigrants arriving since the early 2000s from Europe have made a net contribution to Britain’s public finances. This is a reality that contrasts starkly with the view often maintained in public debate that immigrants are a drain on the economy.

State benefits

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 the fact that immigrants are generally working-age men and coming to the UK to work. 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.

Additionally, our research points at the strong educational background of immigrants. For instance, while the percentage of natives with a degree was 24% in 2011, that of EEA and non-EEA immigrants was 35% and 41%, respectively. Similarly, about one in two British 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.

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 each immigrant with 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 Britain with productive human capital between 2000 and 2011 that would have cost £6.8 billion in spending on education. This aspect is often neglected in the debate about the costs and benefits of immigration.

This article was first published in The Conversation, 5 November 2014.

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