Net zero migration (NZM) would have clear fiscal consequences for the UK economy: lower tax revenues would leave the government needing to raise taxes to close an increasing funding gap over the long-term, according to analysis contained within the National Institute of Economic and Social Research’s latest quarterly Economic Outlook.
Slower employment growth and a smaller tax base would reduce revenues, increasing the budget deficit by around 0.8 per cent of GDP, equivalent to approximately £37 billion in today’s prices, by 2040.
In addition to a worsening budget deficit, public sector net debt as a share of GDP would be set on a fundamentally higher path over time. This is because fewer workers and a lower population could result in the size of the economy being 3.6 per cent smaller.
While in the short run there would be higher GDP per capita, real wages and real personal disposable income (RPDI), driven by firms using more machinery relative to staff increasing productivity, these gains come at the cost of weaker headline GDP growth and a material worsening in the fiscal position over time.
The analysis concludes that, without a rise in the domestic fertility rate and fall in the dependency ratio, the net zero migration scenario is fiscally unsustainable over the long run. Based on the trajectory of current trends both seem unlikely.
However, if net migration stays positive, this would lead to a larger working-age population, supporting employment and tax revenues, broadening the tax base, and helping to stabilise the debt ratio.
As for our central case scenario:
- We project GDP to grow at 1.4 per cent in 2026, just above our estimate of trend (1.25 per cent), before moderating to 1.3 per cent in 2027
- We expect inflation to remain above three per cent until April 2026, when favourable base effects should bring it close to the two per cent target. Our central projection is for CPI inflation to average 2.3 per cent in 2026 and to settle around target thereafter.
- We expect unemployment to reach a peak of approx. five and half per cent in the second half of 2026, before gradually declining towards five per cent, our estimate of the natural rate.
- With inflation falling and unemployment rising, we expect the Monetary Policy Committee to cut Bank Rate by 25 basis points twice in 2026, bringing the rate to 3.25 per cent by year-end—our estimate of the long-run neutral rate.
Stephen Millard, Deputy Director for Macroeconomics, said: “Our analysis clearly shows that net zero migration would put pressure on the public finances and worsen the public debt outlook. Unlike Japan, the United Kingdom lacks the institutional and financial conditions to support a substantially higher debt ratio.
We therefore recommend the Government makes a concerted effort to get public debt down, so it has room to respond to a sharp fall in migration or any other negative shock happening to the UK economy.”
David Aikman, NIESR Director, said: “The economy may look normal on the surface, but geopolitical strain is here to stay and we need to prepare for a bumpy road ahead. That reality makes strong fiscal buffers — and resilient balance sheets in the financial system — more important than at any point in recent years.”
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