Can immigration to the UK help cut inflation?

By Amer Zaman

on July 18, 2023

Read Time: 8 Minutes

Immigration and inflation have unquestionably been two of the defining “hot topics” of UK political discussion in recent times. The country’s inflation levels, for example, have proved stickier over the last few months than many economists had anticipated, with the Consumer Prices Index (CPI) showing an 8.7% rise over the 12 months to May 2023 – the same as the equivalent figure for April.

“Core” inflation, too – a measure of inflation that excludes the price of energy, food, alcohol, and tobacco – is stubbornly high, and has even remained on a broadly upward trend. Core CPI inflation was 7.1% in May, compared to 6.8% a month earlier.

Various factors have been cited as contributing to the UK’s lingering high inflation, with escalating food and energy bills particularly blamed. It is practically impossible not to reference Russia’s invasion of Ukraine at this point, given that the war has restricted the amount of oil and gas from Russia, in addition to driving down the availability of grain – all factors that have pushed up prices.

So, what role has UK immigration played in the country’s inflation levels?

For many observers, it might seem far from obvious what the connection would be between levels of immigration to the UK, and the levels of inflation experienced in the country.

However, fresh attention was recently drawn to this topic by the deputy head of the International Monetary Fund (IMF), Gita Gopinath, who told the BBC’s Newsnight programme that immigration that helped to fill gaps in the domestic jobs market could also be key to lowering inflation.

She said in the interview broadcast on Monday 5th June: “With inflation being as high as it is, having workers who can fill the shortages in some of the sectors that we’re seeing right now will help with bringing inflation down.”

Indeed, it has been suggested that one factor in UK inflation levels not cooling as rapidly as had been anticipated, has been upward pressure on wages. With the number of job vacancies in the UK hovering at around 1.05 million as of the three months to May 2023, sectors of the economy that have been especially struggling to fill their vacancies – such as hospitality and farming – have been forced to offer higher wages in order to attract the workers they need.

Does immigration help the UK economy?

The question of the impact that immigrants to the UK have on the country’s economy is a complicated one. Much depends on what metrics one uses for “economic growth”, as well as the assumptions made by various studies on the subject.

Nonetheless, it has long been recognised that immigration to the UK can help bring a range of economic benefits. These include:

  • According to University College London (UCL) research, the net fiscal balance of overall immigration to the UK, for the period from 2001 to 2011, equated to a positive net contribution of approximately £25 billion.
  • Data from HM Revenue & Customs (HMRC) indicates that for the 2018/19 fiscal year, European Economic Area (EEA) and Swiss citizens paid £22.4 billion more in income tax and National Insurance contributions (NICs) than they received in tax credits and child benefit.
  • The situation was similar for non-EEA (and non-Swiss) citizens, who paid £20 billion more in income tax and National Insurance than they took out in tax credits and child benefit.
  • The Office for Budget Responsibility (OBR) has forecast that higher net migration helps to reduce pressure on Government debt over time.  

However, it is important to acknowledge that the net fiscal impacts of immigration vary greatly depending on such factors as the age, skills, and earnings of migrants.

But aren’t UK levels of net migration already extremely high at the moment?

Some observers will respond to Ms Gopinath’s comments by pointing to the fact that international immigration to the UK reached record levels in 2022, with net migration estimated at 606,000 for the year. As part of this, long-term immigration – defined as that involving people coming to the UK for more than 12 months – went up by 221,000 to 1.2 million for the 12 months to December 2022.

So, some might ask… if immigration can be a solution for driving down the UK’s inflation levels, why has that effect not already been evident? The answer lies in the exact makeup of immigration to the UK during what the Office for National Statistics (ONS) has described as a “unique year for migration due to world events”, as well as the peculiar nature of the UK labour market.

As things stand in the UK, unemployment levels are low, but inactivity is high, with the country’s employers effectively only having a modest pool of ‘willing and able’ workers to draw from. The Bank of England (BoE) – ever-eager to drive down inflation to its 2% target – has expressed concern about this situation leaving many employers having to offer higher wages. And sure enough, average total pay in the UK went up by 5.8% on a year-on-year basis in 2023’s first quarter.

But shouldn’t the high net migration levels have helped to ensure more of those vacancies were filled? One might have thought so, but with some 114,000 people estimated to have arrived in the UK from Ukraine during 2022, and 52,000 from Hong Kong, a sizeable chunk (19%) of non-EU immigrants clearly came via humanitarian, instead of work-focused routes last year. That doesn’t even account for the additional 39% of non-EU immigrants who came to the UK to study.

All the while, since the end of 2019, there has been a 12,000 fall in the European Union (EU) working population in the UK. There has clearly, then, been a mismatch between many of the people who have arrived in the UK and the needs that UK employers have for their open roles, which has meant migrant talent hasn’t been entirely effective in filling all the gaps.

What are the positives of immigration in the UK?

Not all the widely recognised benefits of immigration to the UK are necessarily directly connected to the economy. Various other positives have been observed, including – but not necessarily limited to:

  • It frequently brings entrepreneurial and other valuable skills to the UK. As organisations that hold a sponsor licence will be aware of, immigrants to the UK are often young, mobile, ambitious – and determined to make something of themselves in life and business. As a consequence of this, migrants are frequently a highly dynamic part of the UK workforce.
  • It can help the UK to combat an ageing population. Many countries across the West are seeing an increase in their “dependency ratio” – their ratio of old to young workers – due to a combination of low birth rates and ageing populations. Young migrants have been credited with helping to counteract this by taking up roles in the UK workforce.
  • It adds to the multicultural appeal of the UK. Many people are highly appreciative of the more diverse and inclusive feel that immigrants from a wide range of cultural and national backgrounds have brought to the UK – not just in relatively recent years, but down the generations. From music and literature to cuisine and politics, there are many different fields in which migrants have long made major positive contributions to the UK.

So, what could the UK Government do to help ensure immigration contributes to lowering inflation?

At this point, it is worth referring back to Ms Gopinath’s words in her interview to the BBC. She did not argue that higher levels of immigration, in and of themselves, would be a “silver bullet” that would automatically solve the UK’s inflation woes.

Instead, the IMF deputy managing director specifically emphasised the role that a “well-designed immigration policy” could play, reasoning: “The evidence is that that’s usually beneficial for the country.” She also noted the contributions that migrants eventually make to taxes.

Still, it is messaging that differs somewhat from UK Prime Minister Rishi Sunak’s recent statement that legal immigration levels to the UK are “too high”. Indeed, on this basis, he has already set out restrictions on family visas for international students.

In a statement in response to Ms Gopinath’s interview, the UK Treasury said that its points-based immigration system was “designed to flex to the needs of the economy to ensure we have the skills we need.”

The Government added that while it wanted employers to invest in the UK’s domestic workforce to fill vacancies, “where there’s an acute need for staff, we have also been flexible, including putting care homes and the seafood industry on the shortage occupation list.”

Certainly, the shortage occupations list (SOL) has been a major focus for many of those who argue that the UK needs to loosen up its labour market in order to help organisations fill their open roles.

The British Chambers of Commerce (BCC), for example, which recently found that four fifths of employers struggling to recruit were unable to find the people they needed, has called for the SOL to be expanded to better reflect “the reality on the ground”.

Critics of the current SOL have said that while the list is greatly weighted towards engineers, scientists, and care workers, various other areas of the UK economy are also suffering from worker shortages.

It has been argued, then, that the addition of more occupations to the SOL could be instrumental in bringing down the high levels of vacancies – and with it, the upward wage pressures and associated high levels of inflation.

Don’t look elsewhere for the immigration services that will help you fill your business’s vacancies

Is your own organisation in the UK looking to hire migrant talent more easily? If so, you might be interested in learning more about the benefits of obtaining a sponsor licence from the Home Office, as well as about our related services here at Cranbrook Legal.

Simply call 0208 215 0053 today, or complete and submit our online contact form, to arrange a free consultation with a member of our award-winning team of experts in UK immigration law.

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