Ideas for the UK: election economics international week

What is the right level of migration for the UK? Is the country on track to meet its commitments on tackling climate change? And how will big changes in the world trading environment affect the economy? Our fourth election newsletter looks at some of the global issues at stake in the election.

In two weeks, people across the UK will go to the polls. Many voters’ decisions are likely to be made on the basis of issues that affect them locally – such as education, healthcare and housing – but more international challenges and opportunities may also play a role. In this week’s election newsletter, we look at the parties’ ideas on three big topics: migration, climate and trade.

Migration

Immigration is a hot topic in the UK, one on which the parties have made a range of policy pledges. At one end sit the Liberal Democrats, who stress the country’s ‘proud history of welcoming newcomers’, and propose safe and legal routes for refugees to stop dangerous Channel crossings. At the other extreme is Reform UK, who aim for ‘net zero migration’, where the number of people entering the UK equals those leaving.

The Conservatives are sticking with their plan to send asylum-seekers to Rwanda. Under the scheme, migrants who have made ‘dangerous journeys’ to the UK would see their claims decided in Rwanda where, if successful, they would remain. The Conservatives also promise to cap the number of worker and family visas available each year, although they have not specified a level.

Labour oppose the Rwanda deal and would cut net migration by restricting visas. They would also require employers to satisfy additional criteria – such as training workers – in order to receive sponsor licences. The problem of small boats would be tackled by a new border security command under a Labour government. This new security force would have teeth, employing special investigators and using anti-terror legislation to ‘smash’ human traffickers.

Immigration patterns have shifted since 2021. Long-term net migration in the UK – the number of people immigrating minus the number emigrating – totalled 685,000 in 2023, down from a record 764,000 in 2022. This marks a sharp increase from the 2010s, when annual net migration averaged around 247,000.

Figure 1: Long-term migration in the UK, 1964-2023

Source: Office for National Statistics (ONS)

The rise in net migration has been driven by an increase in citizens from outside the European Union (EU) moving to the UK. Before Brexit, migration from within the EU – mostly arrivals from Eastern Europe – made up the lion's share of total migration. Now, more EU citizens are leaving the country than arriving. Non-EU immigration has tripled since 2020, reaching 2.7 million between 2021 and 2023, compared with just 414,000 from the EU.

According to the Office for National Statistics (ONS), three main factors have fuelled the increase in migration from outside the EU.

International students (43%): A policy to increase and diversify foreign recruitment – targeting 600,000 students a year – and the reintroduction of post-study work rights have made the UK more attractive.
Skilled workers (37%): In 2022, care workers joined doctors and nurses to become eligible for health and care worker visas. Others coming to work in prescribed fields for salaries over £38,700 are eligible for skilled-worker visas.
Humanitarian routes and refugee resettlement (13%): Dedicated allowances for Ukrainians and Hong Kong British nationals saw non-EU humanitarian arrivals peak in December 2022. Numbers have declined since.

Figure 2: Foreign-born population in OECD countries, 2012 and 2022

Source: OECD

The relative size of the UK’s migrant population is similar to that in comparable countries. As of 2021, 14.3% of the population were born abroad. This places the UK close to the middle among OECD countries, higher than France and Italy, but lower than Australia, Canada and Germany. The percentage has gradually increased over the last decade: up from 12% in 2012.

Figure 3: Immigration to the UK among non-EU nationals

Source: ONS, Home Office

Public attitudes towards immigration have changed in the last ten years. According to a new report from UK in a Changing Europe (UKICE), more of the British public now see immigration as having positive economic and cultural effects, than negative.

Voters have also become increasingly supportive of the immigration of skilled workers into the NHS or social care. Over the last two years, 70,000 migrant workers have entered the social care sector, and 19% of the sector’s workforce has a non-British nationality.

Cutting net migration would bring economic costs. The Office for Budget Responsibility (OBR) forecasts that net migration growth would bring £7.5 billion in additional tax revenue annually by 2028/29. Immigrants are more likely to be in work and are younger than the existing population, which means that they pay more in taxes than they receive in state benefits. Under a 'low migration' scenario, public borrowing would have to increase by £14 billion per year to meet current spending plans.

Climate

The UK has been a global leader in setting stringent climate objectives. The target for net-zero emissions of carbon and the other greenhouse gases that cause global warming – together with the 2030 n ationally d etermined c ontributions (NDC) goal – are ambitious compared with the EU and US equivalents. By 2030, the goal is for UK emissions to be at least 68% of 1990 levels. In contrast, the EU target is 55% and the US goal is 50-52% below 2005 levels.

Bu UK policy developments have been slow, making it harder to meet these tough targets. The Climate Change Committee (CCC), an advisory public body established in 2008, has stated that the UK government’s policies have sent mixed signals to the international community regarding its climate commitments.

Recent government decisions to licence new oil and gas production and to approve a new coal mine have contributed to the backtracking. In addition, the slow reaction to the US Inflation Reduction Act and the EU’s Green Deal Industrial Plan risks green investment being diverted from the UK.

UK emissions have dropped by 46% since 1990, with small increases in recent years. Nevertheless, for the UK to meet the 2030 NDC goal, the rate of emissions needs to decrease by 4.7% each year. This is almost four times more than the current annual rate of reduction of 1.2%.

Figure 4: Change in the UK emissions in key sectors, 2021-22

Source: CCC, Progress in reducing UK emissions, report to parliament, 2023

According to the CCC, the UK will need an additional £50 billion each year by 2030 to reach net-zero emissions by 2050. Such net-zero investments can also bring energy security, reduce waste, and improve health and productivity.

As Matthew Agarwala (Bennett Institute, University of Cambridge) highlights: ‘More investment upfront will reduce the pure losses associated with climate change. But the fact remains that there are trade-offs. Democratic societies use elections to agree their strategy for dealing with trade-offs, but this requires an honest and open debate in which the facts are clearly described.’

The UK does have a comparative advantage in areas relevant to the net-zero transition. It specialises in clean technologies, such as tidal stream, offshore wind, carbon capture, usage and storage, and nuclear.

The country also continues to provide leadership in areas such as climate finance, where the government announced a support package of £2 billion to the Green Climate Fund to assist developing countries with climate change adaptation and mitigation. It has also supported sectoral initiatives – such as the Breakthrough Agenda, the Powering Past Coal Alliance, the Clean Energy Transition Partnership – and made a £500 million pledge to the Investment in Forest and Sustainable Land Use programme.

Figure 5: UK’s relative technological advantage by selected clean technologies, 2015-18

Source: Currant et al, 2022

Key policy actions are needed to maintain the UK’s climate leadership and to ensure progress towards its climate commitments. The UK needs to establish a plan to guide private sector action and investments towards the net-zero transition. This could include policies such as tax incentives for investment in net-zero technologies and financial structures to catalyse private investors towards low carbon.

As Matthew Agarwala reminds us: ‘Nature is on the ballot, whether the political process wants to acknowledge it or not.’

Matthew is one of a number of economic experts available to talk to journalists and commentators about the research evidence on policy ideas during the election campaign. If you work in the media and would like access to our #GE2024Economists directory, please contact Ashley (ashley.lait@bristol.ac.uk).

‘Real hope, real change’ – Greens

The Green party’s manifesto calls for a fairer and greener country. This theme runs across their plans for health, housing, education, transport and the economy. The Greens stress the urgency of the climate crisis, pressing the government to make the transition to net-zero emissions a decade ahead of the current 2050 target, but ideally sooner. This would come with a £40 billion annual investment over the course of the next parliament.

Carla Denyer and Adrian Ramsay (co-leaders of the Greens) would phase out nuclear power and fossil fuels, including removing recent licences and oil and gas subsidies. Tax breaks and subsidies for fossil fuel exploration and research and development (R&D) currently total around £10 billion a year.

Instead, they would ramp up the use of renewable energy with the aim of 70% of the country’s electricity coming from wind by 2030. In 2023, this figure was 29%, with other renewable sources – including biomass, solar and hydropower – contributing an additional 12% to the energy mix.

Biodiversity and nature protections also feature in the Green manifesto with a commitment to introduce a ‘Rights of Nature Act', to stop the water pollution scandal, to expand access to green spaces and waterways, and to set up a new commission on animal protection.

Funding would come from savings on subsidies, expanding the 75% windfall tax on fossil fuel forms’ profits to include banks, a wealth tax (of 1% on assets valued at over £10 million and 2% on those worth over £1 billion) and a new carbon tax on businesses. The latter would charge £120 per tonne of carbon emitted, rising to £500 a tonne over ten years.

The Greens also propose reforms to capital gains tax to bring it in line with rates paid on income, and to remove the upper earnings limit on national insurance. Under the national insurance change, someone earning £55,000 a year would pay just over £5 more per week in tax (or £284 over the year), while those earning £65,000 a year paying about £17 more per week (or £883 a year).

Analysis of the manifesto by the Institute for Fiscal Studies (IFS) highlights the significant growth in the size of the state proposed by the Greens. It equates to an increase in taxes of over £170 billion per year ‘to fund a £160 billion boost to day-to-day public spending’ alongside ‘an additional £90 billion a year on capital spending’. Helen Miller and Carl Emmerson point out that some of the Greens’ tax measures are sensible but that they are unlikely to be sufficient to cover all the spending proposed.

Green party policies in brief

Health: Invest an extra £28 billion a year in NHS England by 2030, as well as a further £20 billion per year for social care, and a £20 billion package for upgrading the country’s hospitals.
Housing: Provide 150,000 new affordable social homes every year, while scrapping the ‘right to buy’ scheme. Implement rent controls so local authorities can control prices. Over the next five years, make a £4 billion investment in insulation and £9 billion in low-carbon heating systems.
Transport: Ban domestic flights that would take less than three hours by train, and introduce a frequent flyer levy (between 2007 and 2018, a fifth of UK households were responsible for 76% of all flights). Require airlines to pay VAT on jet fuel and prevent further runway expansions.
Education: Scrap university tuition fees in England, and bring back maintenance grants (as opposed to loans). Boost funding for schools by £8 billion, including £2 billion for teachers’ salaries, over the next parliament.

Trade

Over the last few decades, the UK has experienced a significant shift in its trade balance. It now imports more than it exports – what economists call a larger current account deficit. This trend has been driven primarily by a persistent deficit in trade in goods, which contrasts with a surplus in trade in services.

The latest UK trade data reflect an increasing reliance on the EU, contrary to post-Brexit expectations. Between April 2022 and March 2023, imports from the EU were valued at £259.8 billion, while imports from non-EU countries totalled £278.7 billion. In the following year, imports from the EU increased slightly to £262.5 billion, while imports from non-EU countries saw a notable decrease, falling to £215.7 billion.

Figure 6: Current account balance

Source: ONS

Research by the UK Trade Policy Observatory (UKTPO) shows that Brexit has had negative economic effects on the UK economy as a whole. This is now a sentiment echoed by a majority of voters according to recent opinion polls.

Despite this, discussions of Brexit remain at a whisper during the election campaign. Labour have committed to reducing unnecessary border checks and trade barriers, but have firmly ruled out rejoining the single market and/or the customs union, or allowing freedom of movement.

The Conservatives go further and emphasise avoiding ‘dynamic alignment’ with EU rules and resisting the jurisdiction of the Court of Justice of the EU. Dynamic alignment involves adhering to EU regulations even as they change, which could provide regulatory predictability and reduce costs for industries like chemicals and motor vehicles.

Remaining outside the single market and customs union means that checks on UK exports to the EU are necessary to ensure compliance with EU rules. This underscores the complexity of removing trade barriers while maintaining regulatory standards, as highlighted by the UKTPO analysis.

In contrast, the Lib Dems, the Greens and the Scottish National Party (SNP) have all asserted their ambitions for a closer relationship with the EU, including rejoining the customs union, with a longer-term plan to become a member state once again.

The UK’s economy reaches beyond Europe. Recent Economics Observatory research visualises the global nature of the UK’s food supply. Up to 80% of food consumed in the UK relies on imports, exposing grocery costs to various external factors, including trade frictions, geopolitical tensions and climate shocks. This sensitivity is evident from the significant increase in food prices by 30% between January 2021 and October 2023, a stark contrast to the previous 30% increase, which took 13 years.

Figure 7 shows the origin of food products in six of the largest UK supermarkets. Products in these supermarkets were sourced from at least 125 countries.

Figure 7: Products by origin, LLM-identified

Source: Davies and Hellings, forthcoming

But international trade is less stable than in previous decades. There is a trade war underway between China and the United States. The Biden administration has introduced significant protectionist policies to counter perceived unfair trade practices by China. These aim to reduce reliance on Chinese components in key industries, especially within the renewable energy sector.

President Biden has directed increases in tariffs a t strategic sectors, including steel and aluminium, semiconductors, a tariff of 100% on Chinese electric vehicles, lithium-ion batteries, critical minerals, solar cells, ship-to-shore cranes and medical products. These measures are designed to push China to eliminate unfair trade practices on technology transfer, intellectual property and innovation.

The nature of these tariffs – and the products they target – may risk hindering the green transition. Critics argue that such protectionism could lead to a slowdown in the development of the US renewable energy industry, by discouraging investment and innovation in cleaner technologies.

The trade war also reflects a broader shift in US policy towards China, characterised by a focus on national security and technological independence. Recent legislation like the CHIPS and Science Act and the Inflation Reduction Act underscore the US government's commitment to supporting domestic industries and reducing dependency on Chinese supply chains. The US approach under Biden – targeting specific emerging industries – differs from the blanket tariffs employed during the Trump administration.

Despite the aim of protecting local production, the net costs to consumers of such tariffs can be considerable. For example, in 2018, Trump imposed tariffs of 20% (rising to 50% shortly after) on washing machines imported from China.

Subsequent research found that this created about 1,800 jobs as manufacturing companies shifted production to the United States. But, the price of washing machines rose by an average of $86, raising overall consumer prices by $1.5 billion. The additional jobs created therefore came at a cost of about $817,000 per job. Further, costs of tumble dryers also rose by an average of $92, even though these were not subject to any additional tariffs.

The China-US trade war inevitably has consequences for the UK. For example, when the US government imposed sanctions on the Chinese firm Huawei in 2020, the UK quickly followed suit, moving to ban or limit the use of the company’s equipment in the fibre and 5G supply chains.

The European Commission will also impose additional duties of between 17% and 38% on electric vehicles imported from China from July, on top of the existing 10% tariff.

Indeed, the effectiveness of US tariffs and sanctions will, in part, be decided by the extent to which other developed nations impose similar restrictions. As such, the next UK government should expect considerable pressure towards this end.

Trade policies in brief

Conservatives

International trade: Pursue free trade agreements with India and the Gulf countries. Restart US-UK trade talks when possible, while maintaining current high food standards for imports, and removing US tariffs on Scotch whisky.
EU-UK trade: Build on the EU-UK Trade and Cooperation Agreement without infringing UK sovereignty.

Labour

International trade: Publish a trade strategy to increase UK business access to international markets, strike new free trade agreements and promote high food standards.
EU-UK trade: Improve the UK’s trading relationship with Europe by removing unnecessary border checks and trade barriers, negotiate a veterinary agreement and secure mutual recognition of professional qualifications.

Liberal Democrats

International trade: Renegotiate trade agreements with Australia and New Zealand, and boost trade among small businesses.
EU-UK trade: Forge a new comprehensive trade agreement with the EU to remove barriers, negotiate veterinary and plant health agreements, and secure mutual recognition agreements.

New reports

Here we highlight new election briefings from some leading UK research institutions:

A productivity plan: The Productivity Institute led by Bart van Ark (University of Manchester) has updated its blueprint for boosting the UK’s productivity, highlighting the top ten productivity policies for the next government and assessing how the three main parties’ election manifestos match up. As has been discussed in many pieces here at the Observatory, tackling the country’s foundational problem of poor productivity requires a broad-based and integrated set of policies. These should above all support business and public investment in skills, innovation and the transition to a net-zero economy across all sectors, regions and devolved nations.

UK-EU relations: A new collection of articles from Anand Menon and colleagues at UKICE notes that despite the Windsor framework agreement, UK-EU political dialogue remains limited. The UK has failed to boost trade with the rest of the world and there has been no clear strategy for coping with EU regulatory changes, which complicates life for UK businesses. There will be further challenges after the election: the full implementation of both GB border controls and the Windsor framework could create new trade problems; negotiations on Gibraltar and fisheries could cause friction; and the application of EU law in Northern Ireland is likely to be a continued source of tension.

Levelling up: A briefing by Adrian Pabst and colleagues at the National Institute of Economic and Social Research (NIESR) looks at what’s been achieved on the current government’s agenda of reducing regional inequalities. They show that the combination of insufficient central government resources and the slow disbursement of relatively small pots of money has meant that there are few signs of levelling up. Indeed, geographical disparities in living standards and productivity have either remained unchanged or widened. Much higher levels of public investment together with institutional reform will be required if the next government is to make a real difference. A new Institute for Government report also makes the case for a simpler funding landscape for local and combined authorities to boost growth across England. We will return to issues around devolution and regional policy in next week’s newsletter.

Manifesto analysis: The IFS has now completed assessments of the tax rises and spending changes proposed in parties’ election manifestos: Labour; the Conservatives; the Lib Dems; the Greens; the SNP; and Plaid Cymru.

The failing planning system: In the summer issue of CentrePiece magazine from the Centre for Economic Performance (CEP) at the London School of Economics, housing economics expert Paul Cheshire explains how two generations of failure to build enough houses have led to considerable damage to employment, productivity and equality. CEP has also published three new election analyses this week: on Brexit and trade; on spatial disparities in productivity and income; and on work, wages and inactivity.