Spooked by Reform, Labour may have cut net migration too far

When the Office for Budget Responsibility (OBR) sets its forecast for the 2026 budget it will have a big call to make. By then, annual net migration will likely have fallen to 100,000, perhaps even lower. Yet its last forecast assumes a net 300,000 new arrivals a year. If it decides we have shifted permanently to a lower level, it would spell big trouble for Rachel Reeves – or whoever is chancellor by then – wiping £14bn from government revenue, eliminating two-thirds of current headroom, and raising the prospect of yet more tax rises or spending cuts. Lower net migration is so costly because of lost tax revenue, which is worth more than the savings on public services from having a smaller population, as immigrants tend to be younger and in work.

So why have numbers dropped so much and is this the new normal?

Between the summers of 2019 and 2023, net migration rose from 200,000 to nearly 1 million. Some of this was down to one-off humanitarian schemes for Ukraine and Hong Kong, but Boris Johnson’s government did liberalise the visa system to avoid shortages when Brexit ended free movement across the EU. Ironically, it was only because of rocketing immigration that it had enough money to cut national insurance in the run-up to the election.

But towards the end of their term the Tories undid most of these changes, so numbers were already falling back towards 200,000 before Labour took power. Keir Starmer could have claimed credit without doing anything else.

Instead, with Reform climbing in the polls, he decided to go further. In May, Labour announced further measures, including ending social care visas, new language requirements and tougher rules for graduates who want to stay in Britain. A further announcement in the autumn will make it harder to obtain indefinite leave to remain and citizenship.

These changes had not yet been implemented when the most recent data was collected, which is why we can be confident migration will keep falling. Since most of these new measures were introduced in July, applications for skilled and health worker visas have fallen by a further 60%. Last month, there were just 900 applications for health visas, down from a peak of 18,300 in August 2023.

Whether these lower numbers are permanent will depend on two things. First, what happens to emigration. It’s been higher in recent years, as many who arrived in the 2019-23 bulge return home. Normally one would expect that to fall back again, but we may see levels stay high as the environment for non-citizens becomes more hostile and it gets harder to secure ILR.

Second, whether the government meets its ambition to attract more highly skilled immigrants by offering visas to those with “high potential” (attending elite universities or endorsed by leaders in their field, for example).

The problem with elite immigration is that the most talented people have a lot of choice over where they go, and other countries are making a lot more effort to create a welcoming environment. Cost is a key factor: UK visa fees are now much higher than they are in competitor countries and have risen a lot in recent years. A skilled worker with a partner and two children now has to pay more than £42,000 for their family from arrival to gaining full citizenship, on top of all the taxes that apply to the rest of us.

One hope is that businesses respond to lower migration by investing in training and reducing youth unemployment, which would save money. But studies suggest that isn’t likely. Many not in work have complex needs that make them unsuitable for sectors that rely on migration. Social care wages have risen considerably as a result of minimum wage increases but the number of British workers in the sector has fallen, even as visa restrictions have been introduced.

There’s no doubt the social care visa system was being exploited but cutting off supply completely will create serious shortages without more public spending to pay for much higher wages, which in turn will create inflationary pressure.

There are also worsening worker shortages in skilled construction jobs, despite countless attempts to invest more in programmes to train young British-born workers. It’s hard to see government plans for housebuilding and infrastructure coming to fruition if the numbers of visas being awarded keep falling.

Lower migration will cost us money. The government’s own estimate suggests costs to the exchequer of between £6.4bn and £15.2bn from the new measures alone. The only question is how much, and at the moment it looks like being at the higher end of the range.

Those who want to see permanently lower migration or even, like Reform, significant net emigration, argue these figures fail to take the long term into account. An OBR forecast will capture the benefits of a young and fit immigrant working and not using many public services, but not the future costs as they age, have children and draw pensions.

Yet recent analysis by the government’s Migration Advisory Committee shows that immigrant workers offer substantial fiscal benefit over their whole lifetime, even taking all these future costs into account. It estimates that the 2022-23 cohort of skilled workers, and their dependants, will offer a net fiscal contribution of £47bn.

For political reasons none of our main parties wants to accept there’s a trade-off between fiscal policy, economic growth and migration. But there is one, and Labour has made its choice. It’s one the party will regret if it finds itself planning another set of tax rises next autumn.

Sam Freedman writes Comment is Freed, Britain’s most popular politics Substack

Photograph by Isaac Lawrence/AFP via Getty Images