ROI-Slashing immigration could lead to higher taxes: Joachim Klement

NET NEGATIVE In a country with an ageing demographic, like the UK, decreasing net migration can speed up the trend towards lower labour supply and slower economic growth, meaning UK GDP growth is apt to take a hit if immigration is reduced as much as politicians are promising.

Many politicians in the U.S., Britain and Europe are trying to reduce immigration in response to ​rising public opposition rooted partly in concerns about welfare spending and job opportunities. But if these governments are successful, economic growth in these ​areas may suffer, leading to larger budget deficits, higher taxes and even more discontent. The UK appears to ‌be ​ground zero for this debate. In local elections last week, the populist Reform party, which has called for crackdowns on immigration, was the biggest winner while the ruling Labour Party was comprehensively beaten. Even before these elections, both parties had indicated that they would seek to reduce immigration, though Reform is pushing for a more hardline stance, so last week’s results may intensify this policy push. Immigration already appears to be slowing. The Office for Budget Responsibility (OBR), the UK’s ‌government watchdog, estimates that in 2025 and 2026, net migration will be around 200,000 persons. This is down from 924,000 in 2023 and 649,000 in 2024 and about half the annual average of the last 10 years. This is not the first time the UK has been a testing ground for unorthodox policy ideas. In 2016, the British electorate voted to leave the European Union, despite economists’ warnings that this would reduce economic growth and put a strain on government budgets. Brexit has likely cost the UK some 6% to 8% of its GDP since then, according to a NBER study published last year.

Sometimes economists do know what they’re ‌talking about. NET NEGATIVE

In a country with an ageing demographic, like the UK, decreasing net migration can speed up the trend towards lower labour supply and slower economic growth, meaning UK GDP growth is apt to take a hit if immigration is reduced as much as politicians are promising. While the ‌impact of reduced immigration on UK GDP per capita is challenging to determine – and may be slightly positive or negative depending on a host of assumptions – the OBR notes that the impact on aggregate real GDP appears a lot more clear-cut.

The budget watchdog estimates that the decline in net migration in 2025 and beyond – and the subsequent reduction of the working-age population – will reduce trend GDP growth for the UK by 0.35 percentage point in 2026 versus 2025. The projected increase in net migration after 2026 may not change that picture much since it is small and may never materialise given the possible acceleration in policies to reduce immigration. The OBR also expects increased capital deepening, the process of using capital investments to replace labour, but they don’t anticipate that it ⁠will be nearly ​enough to offset the negative impact of reduced immigration. A similar trend is visible in ⁠the U.S.

The Brookings Institution estimates that the immigration crackdown by President Donald Trump’s administration – which led in 2025 to the first negative net migration figure in 50 years, according to the think tank’s calculations – will reduce U.S. GDP growth by 0.1 to 0.3 percentage point in 2026 versus 2025. This reflects lost consumer spending by immigrants, the reduced labour supply, and lower savings, as ⁠immigrants typically have a higher savings rate than natives, Brookings noted.

WHAT ABOUT LOW-SKILLED IMMIGRATION? While the immigration curbs in many countries are ostensibly aimed at curbing illegal activity, the policy measures often reduce legal immigration as well due to their signalling effect. If politicians are constantly complaining about immigration, would-be newcomers may decide they are not welcome in that country.

Some politicians ​argue that this is a desired effect since it may deter, in particular, low-skilled immigrants who are viewed as less productive and more likely to compete with low-skilled native-born workers for jobs. However, a newly published study from South Korea suggests these beliefs may not be correct. During ⁠the COVID-19 pandemic, South Korea effectively stopped its immigration scheme for low-skilled labourers who typically worked in low-paid positions in the country’s manufacturing sector. This “sudden stop” in low-skilled immigration had several detrimental effects. Companies that relied more on low-skilled workers had a harder time finding replacements and thus faced production disruptions and drops in revenue. They were also more likely to go bankrupt in the aftermath.

These insolvencies increased the ⁠pool ​of unemployed workers, who were subsequently hired as replacements for low-skilled immigrants at lower wages. The result was a drop in the average wage of low-skilled Koreans. Meanwhile, the companies that managed to survive struggled to find additional workers to take on low-skill tasks. The result was that they retained underperforming workers and assigned them to these tasks. The immigration disruption acted like a job retention scheme for underperformers.

Of course, the experience in Korea may not be replicated in other contexts where the industries, immigrant pool and broader demographics are different. Also, the pandemic was obviously an anomalous period. Nevertheless, this study undermines the contention that ⁠reducing low-skilled immigration has little economic cost. LOW GROWTH TO HIGHER TAXES?

The negative chain reaction from reducing immigration does not necessarily end with lower economic activity. GDP growth is highly correlated with government tax revenues, meaning, all else being equal, slower growth should reduce tax revenue increases. Lower growth also typically increases government ⁠spending on welfare and unemployment benefits, while the pace of cost increases for other important ⁠budget items like healthcare and defence remains unchanged. Thus, slower economic growth usually triggers rising budget deficits and, by extension, the need to increase borrowing or find alternative sources of revenue – also known as taxes.

The bottom line is that developed nations can reduce immigration, but it will cost them. (The views expressed here are those of Joachim Klement, an investment strategist for Panmure Liberum.)

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