UK Debt Reduction Relies on Productivity Growth, Not Immigration
The sustainability of national debt in the UK has been a topic of concern, with a Lords select committee questioning the effectiveness of the government’s fiscal rule. In response, an executive member of the Office for Budget Responsibility (OBR), David Miles, has asserted that the key to reducing the UK’s debt lies in productivity growth rather than dependence on immigration.
Miles, who sits on the OBR’s Budget Responsibility Committee, submitted his evaluation of the UK’s debt issues to the Lord’s Economic Affairs Committee. The committee believes that the government’s fiscal rule regarding national debt is uncertain in terms of its effectiveness. Recent data revealed that the UK’s debt-to-GDP ratio reached 97.7 percent by the end of December 2023, a 1.9 percent increase from the previous year. The committee also highlighted the weakness of national growth outlook and the increased sensitivity of the UK’s debt to changes in short-term interest rates.
Miles proposed a multi-faceted approach to achieving a more sustainable fiscal stance and reducing national debt. His suggestions included ensuring more people are employed and preventing welfare payments from outpacing the government’s spending ability. As of September 2023, the UK unemployment rate stood at 4.3 percent, while the economic inactivity rate was at 21.1 percent. Miles emphasized the significance of reducing health-related inactivity and underemployment, as they not only generate more income and tax revenue but also reduce the welfare payments bill.
To achieve these goals, the government has already implemented reforms to sickness benefits and plans to support more people into work. Miles highlighted that welfare reform and a smaller benefits bill would be particularly beneficial for those with mental health issues, a group that has seen significant growth in recent years, especially among young individuals. The Office for Budget Responsibility estimated that benefits spending in 2024-2025 would cost slightly over £97 billion, accounting for 3.3 percent of GDP.
Miles also discussed the impact of government policies on productivity growth. He noted that while higher public sector investment and increased spending on the net-zero strategy can influence productivity growth, they should primarily focus on producing GDP in a less environmentally damaging manner rather than solely aiming to increase GDP.
Regarding immigration, Miles expressed uncertainty about its long-term impact on the labor force. While new immigrants, particularly those on work visas, may initially generate extra tax revenue, this favorable balance diminishes as immigrants age and have children. Moreover, an increased population puts pressure on public services such as health and education, potentially eroding their quality. OBR Chair Richard Hughes added that the composition of migration in the UK has shifted away from EU countries, with a significant number of migrants coming as students or for work, often bringing dependents with them.
The OBR assumes that there is no significant economic or fiscal advantage associated with migrants compared to UK citizens. This suggests that reducing reliance on immigration and focusing on productivity growth would be more prudent for reducing national debt and ensuring fiscal sustainability.
In conclusion, the UK’s fiscal rule in relation to national debt has come under scrutiny, prompting discussions on its effectiveness. David Miles of the OBR emphasizes the importance of productivity growth over reliance on immigration for reducing debt. By focusing on increasing employment and preventing welfare payments from surpassing government spending ability, the UK can achieve a more sustainable fiscal stance. Additionally, reforms in welfare and benefits systems can address issues related to health-related inactivity and underemployment. While government policies can influence productivity growth, they should prioritize environmental sustainability. The long-term impact of immigration on the labor force remains uncertain, and reducing reliance on immigration could prevent strains on public services. By considering these factors, the UK can work towards reducing its national debt and achieving fiscal stability.
