Chancellor George Osborne can only meet his budget target — getting the UK government into surplus by 2020 — if there are high levels of immigration, according to The Guardian. And that immigration will have to occur at the same time as the government executes £3.5 billion in budget cuts in 2019/2020, the year by which Osborne has promised to show a balanced budget.
Analysts are sceptical that Osborne can pull this off. Credit Suisse, HSBC and Bank of America Merrill Lynch all put out notes this morning that describe the incredible fiscal switchback the UK economy would have to perform in order for Osborne to hit a surplus in 2020. Under Osborne’s plan, the UK will run deficits until 2019 and then suddenly shift gear into a surplus via an austerity plan that requires a £3.5 billion cut in spending, according to Credit Suisse. Here is what that would look like according to BAML:
Most analysts think this is simply not going to happen. 2020 is an election year, and no government wants to go into a vote while swinging the axe at Britain’s favourite spending programmes.
So how is Osborne going to pull this off? One potential route is for the government to simply let in more immigrants.
The link between migration, economic growth, and government finances is well established. Basically, the more immigration you have, the more workers you have, the more growth you have, and the more tax you collect. That’s all good for GDP and balancing the government’s books. The Office for Budget Responsibility’s review of Osborne’s budget put some specific numbers on that yesterday. Here are its immigration estimates through 2020:
There was net inward migration of about 323,000 people into Britain in 2015. Reducing that rate could wipe nearly two percentage points off UK GDP and three points off house prices, the OBR says:
- in the ‘high migration’ scenario, net inward migration falls to 265,000 by 2021. The population is 0.6 per cent higher by 2020 and the employment rate 0.1 percentage points higher. That translates into potential output and nominal GDP 0.8 per cent higher. House prices are 1.3 per cent higher;
- in the ‘low migration’ scenario, net inward migration falls to 105,000 by 2021. The population is 0.6 per cent lower by 2020 and the employment rate 0.1 percentage points lower. That translates into potential output and nominal GDP 0.8 per cent lower. House prices are 1.3 per cent lower; and
- in the ‘zero net migration’ scenario the population is 1.5 per cent lower by 2020 and the employment rate 0.2 percentage points lower. That translates into potential output and nominal GDP 1.9 per cent lower. House prices are 3.0 per cent lower.
Osborne is a candidate to replace prime minister David Cameron in 2020. What are the chances that he is going to back home secretary Theresa May’s plan to “keep the numbers down,” when that plan will kill economic growth and crush house prices?
The OBR is non-political, and thus it proposed an alternative way to balance the government’s books without immigration (emphasis ours):
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.
Again, the chances of Osborne proposing additional tax increases in an election year are slim. So a cynic might be forgiven for believing that the Conservatives are going to turn a blind eye to immigration over the next five years — the economy needs them.
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