The UK economy would be 3.6% smaller by 2040 if net migration fell to zero, forcing the government to raise taxes to combat a much bigger budget deficit, according to the National Institute of Economic and Social Research (NIESR). The thinktank warned that a smaller and ageing population would lead to fewer tax revenues, widening the gap between public spending and receipts.
NIESR said falling birthrates and a sharp decrease in net migration last year prompted it to consider the scenario of zero net migration continuing to the end of the decade. In that case, the UK population would stop growing at about 70 million in 2030, compared with 69.3 million in 2024.
Dr Benjamin Caswell, a senior economist at NIESR, said: “Net zero migration leaves the economy 3.6% smaller by 2040 and this reflects slower employment growth and a smaller workforce.” Initially, real wages and disposable income would rise as firms become more productive, with GDP per capita up 2% by 2040. However, these gains would come at the cost of weaker overall growth.
The thinktank said the government would fill the spending gap by borrowing, causing the budget deficit to increase by about 0.8% of GDP, or £37bn, by 2040. This forecast assumes government spending and tax rates follow the Office for Budget Responsibility’s path to 2030, with the spending-to-GDP ratio constant thereafter.
Caswell added that unless the fertility rate picks up, zero net migration “would not be fiscally sustainable for the UK unless there were significant tax rises, and significant tax rises could potentially choke off economic growth”. The forecast follows a sharp fall in net migration from 649,000 to 204,000 in the year to June after visa rule changes.
