If net migration fell to zero, the UK economy would be 3.6% smaller by 2040, forcing the government to raise taxes to deal with a much larger budget deficit, a thinktank has predicted.
The National Institute of Economic and Social Research (NIESR) says the UK’s falling birth rate and sharp fall in net migration last year have led it to wonder what will happen if the trend continues to the end of the decade.
In this scenario the UK population would stop growing at around 70 million in 2030. According to the latest official figures, the UK population will be 69.3 million in 2024.
Dr Benjamin Caswell, senior economist at NIESR, said: “Net zero migration would leave the economy 3.6% smaller by 2040 and this would reflect slower employment growth and a smaller workforce.”
With GDP per capita rising by 2% by 2040, real wages and disposable income will rise initially as firms are forced to use more machinery and become more productive, the thinktank said.
However, these gains are accompanied by weaker growth in the economy, as a younger and aging population leads to lower tax revenues, widening the gap between public spending and receipts, and forcing the government to borrow more.
“Imagine freezing where the population is, and then having a perpetually aging population,” Caswell said. “In the short and medium term, it’s not very harmful, but in 20 years this gap is [in spending and receipts] Constantly getting bigger and bigger.”
By 2040, the government will cover the deficit by borrowing, which would cause the budget deficit to rise by 0.8% of GDP, or £37bn, the thinktank said.
This forecast is based on the assumption that government spending and tax rates will follow the projected path until 2030 Office for Budget Responsibility (OBR), the UK’s official estimator, then the share of government spending as a proportion of GDP remains constant.
Specific payments, such as child benefit or jobseeker’s allowance, will adjust following these changes in population, but government investment and consumption will remain largely unchanged, the thinktank said.
Caswell said that if the fertility rate did not increase, zero net migration would “make the UK financially unsustainable in the absence of significant tax increases, and significant tax increases could stifle economic growth”.
The forecast comes after net migration falls sharply in 2025. 649,000 to 204,000 in the year to Juneafter the Conservative government tightened work visa requirements.
Additional measures by the Labor government to recruit foreign workers in health and social care could further reduce migration, NIESR said. At the same time, births and deaths in the UK have been more or less equal since the start of the decade, with any change in the UK population being driven by immigration.
