When is immigration likely to cause a fiscal drain?
Increased immigration is practical. That’s what conventional wisdom says in the West. Below replacement birth rates lead to a demographic crisis: too many older people, who are net drains on the economy, relative to too few young people, who are net contributors. Thus, increased immigration is held up as not only an ideological social stance but also the pragmatic fix for the demographic fiscal imbalance.
The Irish Times’s editors recommended “rethinking attitudes to immigration” which “is vital” to offset the demographic problem. The Irish Examiner’s Cianan Brennan wrote “increased migration, is by far the most practical” way of dealing with the issue. The Irish government’s June 2024 “Population Ageing and The Public Finances in Ireland – Fiscal Costs” report, prepared by Minister of Finance Michael McGrath, also suggested that a higher migration scenario would be more fiscally beneficial than the baseline scenario. The International Monetary Fund (IMF) published an article in support of this theory as a general recommendation to below replacement birth rate countries.
But is this true? This theory is much more dubious upon inspection. The U.K.’s Centre for Policy Studies (CPS) recently released a report that shed light on this topic.
The CPS collected a series of independent studies across the U.K. and Europe. According to the Migration Observatory at the University of Oxford, whether a cost or benefit, “the fiscal impact of migration to the UK is small…estimated at less than +1 [percent] or -1 [percent] of GDP.” The OECD also similarly suggested, “the [fiscal] impact of the cumulative waves of migration that arrived over the past 50 years in OECD countries is on average close to zero, rarely exceeding 0.5 [percent] of GDP in either positive or negative terms.”
When taken together, the overall effect of all immigrants is indiscernible and lacks substance to support the argument that immigrants will solve the fiscal imbalances projected by the demographic crisis. However, it is important to distinguish different categories of immigrants based on educational attainment and country of origin.
The Migration Observatory found that “the fiscal impact of [European Economic Area (EEA)] migrants is more positive than that of non-EEA migrants.” The CPS report claimed, “Every study cited shows that non-European migrants as a group are net recipients, while some studies show European migrants as contributors while others suggest they are net recipients.”
The Danish Finance Ministry studied similar patterns which The Economist publicized and the CPS report highlighted. Non-western migrants cost the Danish state “31 billion kroner (£3.6 billion), the equivalent of 1.4% of GDP. Immigrants from Western countries, by contrast, contributed 7 billion kroner (£800 million).”
Photo Credit: The Economist, Danish Finance Ministry, Centre for Policy Studies
The University of Amsterdam looked into these patterns for the Netherlands. The study “found that the Dutch government had spent net €400bn on migrants over the 1995-2019 period…In the reference year of 2016, the net benefits of migration from Western countries came to around €0.9 billion (about €500 per person) whereas other migrants cost €18 billion (€8,500 per person).” This study also found that, even in the third generation of descendants of immigrants, the fiscal impact is still negative.
The Irish Economic & Social Research Institute (ESRI) similarly found in their 2020 study of the 2016 Irish census that “outcomes for EEA nationals would be better, in general, than those for non-EEA nationals, given high levels of economic development in those countries…We found that EEA migrants do indeed have lower unemployment rates than non-EEA migrants.”
The insights from all these studies suggest that immigrant effects on the fiscal picture vary by immigrant background.
Immigrants from more developed countries are the most likely to be positive fiscal contributors. Immigrants from less developed countries are the most likely to be negative fiscal drains. Immigrants from more developed countries tend to have higher educational attainment than those from less developed countries. Immigrants from less developed countries that do have higher educational attainment emulate the positive effects of those from more developed countries.
“The Economic and Fiscal Consequences of Immigration” produced by the U.S. National Academies of Sciences, Engineering and Medicine (NAS) is an in-depth 500 plus page study on immigration. The NAS report indicated immigrants with below university educational attainment were consistently net drains while those with university and above educational attainment were piercing into positive territory. Educational attainment can be seen as a proxy for the developmental level of the immigrant’s country of origin. The more developed a country is, the more its population can be better educated.
It’s clear that the simplistic argument that immigrants can solve the fiscal imbalances of the demographic crisis is unfounded. This is especially the case for unspecified mass migration which in recent years has leaned towards immigrants from less developed countries which tend to have lower educational attainment. If an immigrant has below an university education, it is almost guaranteed they will be a net drain on the state’s finances.
Debates on the subject of the fiscal impacts of immigrants should acknowledge that difference. At that point there are also other considerations.
Is there a sufficient quantity of these positively contributing immigrants that want to move to a given country? Is there the domestic employment capacity to give the sufficient quantity of those immigrants the jobs they would need to derive income to pay their taxes? Would these immigrants stimulate other problems – in healthcare and housing, for example – outside of the state’s fiscal context?
By thoughtlessly assuming any and all immigrants produce positive effects, the state risks expanding and accelerating fiscal imbalances. It may also have implications for unexpected externalities like crime and cultural disharmony. Further discussion should be had on solutions that target curtailing spending, raising taxes, stimulating economic growth, and family supports to tackle falling fertility rates in the native population.
With higher life expectancy and better quality of life for older people thanks to improvements in healthcare, one way to lower the financial burden is by pushing back the retirement age which many countries have considered. While raising taxes might seem to be the mathematically logical thing to do, this currently seems electorally unviable yet future fiscal pressures might enable it.
A smaller working age labour pool could increase wages. This stimulates investors to offset their higher labour costs with increased capital investment. This would catalyse innovation in technology, knowledge, and processes. This would make a given worker more productive and efficient which enables more economic growth to accommodate the increased burden of the demographic crisis. This effect could be muted if unspecified mass migration or oligarchic corporate policies keeps labour costs too low. Thus, there’s an argument for limiting immigration and advising firms to pay higher wages.
In the long-run, policies should target returning the population to above replacement birth rates which would eventuate in a healthier capacity for the state to manage its finances with a proper distribution of net tax contributors to net tax recipients. Countries like Hungary have experimented with such policies and there are signs of early efficacy.
Hungary’s total fertility rate increased by 33 percent from 2010 to 2020. The country’s fertility rate was 1.23 in 2011 and reached 1.56 in 2022, above the EU average. Hungary exempts women with four or more children from paying taxes, provides substantial cash benefits and loans to growing families, and promotes a family-centred culture. Across the world, South Korea, which has one of the worst demographic problems, has firms offering $75,000 baby bonuses.
Given the complex relationship immigration has on fiscal impacts such policies deserve further consideration and scrutiny. The hypothesis that immigration as a practical fix to the demographic crisis’ fiscal imbalance is generally unfounded and more nuanced depending on the specifics of each immigrant. There are low-hanging fruit equivalents of non-immigration policy solutions outlined above that could restore fiscal normality and respect the obligation the state has to its existing citizens.
Originally published on Gript on 09/09/2024:
https://gript.ie/when-is-immigration-likely-to-cause-a-fiscal-drain/