Chancellor Rachel Reeves has been warned that a sharper-than-anticipated fall in net migration will add billions of pounds to the UK's borrowing, creating a significant fiscal challenge ahead of her spring statement next month.
Migration Drop Impacts Public Finances
Successive governments have implemented crackdowns on migration since figures peaked at nearly a million in 2023. These measures have proven remarkably effective, with net migration dropping by two-thirds in a single year, driven largely by reduced numbers of people arriving for work or study.
However, this success now threatens to strain the exchequer, according to analysis from the Resolution Foundation think tank. Lower migration, particularly among working-age individuals, can reduce government tax revenue without corresponding decreases in public service costs.
Economic Forecasts Exceeded
James Smith, chief economist at the Resolution Foundation, emphasized that "migration really matters" during an event in London looking ahead to Chancellor Reeves' spring statement. He noted that recent statistics indicate a "much sharper fall" in net migration than economic forecasts had predicted.
"The migration figures have pointed to a much sharper fall in net migration than the Office for Budget Responsibility had built into their forecast," Smith explained. "This would add about £3 billion to borrowing."
Broader Economic Context
The warning comes despite Wednesday's announcement of a surprise drop in inflation, and less than two weeks before Chancellor Reeves delivers her spring statement outlining the latest economic forecasts.
Office for National Statistics figures from November showed that net migration in the 12 months to June was estimated at 204,000 - down from 649,000 a year earlier and representing the lowest annual figure since 2021. Net migration, calculated as the difference between long-term arrivals and departures, peaked at 944,000 in 2023.
Long-Term Fiscal Implications
The Resolution Foundation estimates that lower growth, higher wages and unemployment, combined with falling net migration, will increase UK borrowing by £6 billion by the end of the decade. However, lower interest rates on government debt will partially offset these additional costs, leaving borrowing only around £1 billion higher than at Chancellor Reeves' previous budget.
At the same think tank event, Karen Ward, managing director at JPMorgan Asset Management, warned that the UK economy cannot withstand another year of speculation about potential tax increases. "If we go through yet another year where we are speculating on which taxes are going to go up through the course of the year, we're going to have another year of economically debilitating paralysis," she cautioned.
Broader Economic Challenges
These warnings emerge against a backdrop of broader economic difficulties. Since entering Downing Street, Labour has failed to achieve the growth promised by Chancellor Reeves and Prime Minister Keir Starmer during their campaign.
The economy nearly stalled at the end of last year, expanding by a meager 0.1 percent in the final three months following budget uncertainty in November. Additionally, figures released on Tuesday revealed that the unemployment rate has reached its highest level in five years.
The migration-related borrowing concerns follow earlier advice to Chancellor Reeves that she should reconsider her self-imposed rules on debt and borrowing to address what critics describe as "dysfunctional" policymaking contributing to Britain's economic uncertainty.
