Cutting immigration would mean higher taxes or deeper spending cuts, OBR warns

The Government's fiscal watchdog says hitting the Tories' immigration target would wipe out any Budget surplus

(Getty Images)

The Government would have to raise taxes or make deeper spending cuts if immigration to Britain was reduced, the Office for Budget Responsibility (OBR) has warned.

The Treasury’s spending watchdog said cutting inward migration would create “additional fiscal pressures” that would blow George Osborne’s deficit reduction drive off course.

The Tories pledged in their manifesto to cut migration from the “hundreds of thousands to the tens of thousands” – but have so far overseen a rise in net migration to record levels.

The OBR however believes the contribution of migrants to the economy is such that if the target was somehow hit, taxes would have to go up to compensate and deficit targets could be missed.

“If a government succeeded in reducing net inward migration from what would otherwise occur then that would be likely to create additional fiscal pressures, but it could always choose to offset those pressures through additional spending cuts or tax increases,” the watchdog said.

The warning was buried deep in the watchdog’s 250 page report on how likely the Government is to hit its spending targets, released alongside this month’s Budget.

In its analysis the OBR modeled three immigration scenarios – a “high migration” scenario, a “natural change” scenario, and a “low migration” scenario.

The lower immigration scenario saw interest payments on government debt rise and tax receipts fall, while higher immigration had the opposite effect and actually shored-up public finances.

The Chancellor could be forced to raise taxes if immigration falls (PA Wire)

Worryingly for the Chancellor, the watchdog said that hitting the Conservatives’ target of reducing net migration to 100,000 by the end of the Parliament would likely wipe out any budget surplus.

“Multiplying the results of the ‘low migration’ scenario by 1.5 would be illustrative of the impact on the public finances if net migration fell below 100,000 by 2019-20. On that basis, the surplus in 2019-20 would fall closer to zero,” its warned.

While the OBR has said it is neutral in the upcoming European Union referendum, the calculations are a blow to Brexit advocates who say leaving the bloc would reduce the rate of immigration to the UK.

“We have long been witness in Britain to the failed policy of the EU’s open borders, supported by the establishment politicians to the detriment of our nation,” Ukip leader Nigel Farage said last year, urging a Leave vote.

Far-right protesters in a protest about immigration in Dover (PA)

“When the referendum comes, the British people will finally have their chance to reject these open borders by saying No to the European Union.”

The calculations however suggest that any significant cut to immigration caused by Brexit would leave Britain facing significant economic problems.

Jonathan Portes, senior fellow at the National Institute for Economic and Social Research (NIESR) said the OBR’s calculations were economically uncontroversial.

"The OBR is simply pointing out the obvious: since immigrants more than pay for themselves over time, a substantial reduction in immigration will mean either higher taxes or worse public services for the rest of us,” he told the Independent.

“Reduced immigration would come at a significant economic and fiscal cost.”

Previous studies have suggested other major economic benefits to immigration. University of Oxford research published last year found that areas with higher migrant populations tended to have lower NHS waiting times, while a landmark LSE study found that migration had not on average reduced wages or increased unemployment.

An HM Treasury spokesperson said: “As the Chancellor has said, fixing the public finances should not be incompatible with the government’s ability to control migration. The Government remains committed to both controlling migration and running a surplus in normal times – the OBR themselves expect a surplus would be achieved in 2019-20 whether migration is assumed to be low or high.”