Chancellor Rachel Reeves wants to showcase the UK as a haven of fiscal stability in next week’s Spring Statement. But official forecasts will probably expose a self-inflicted problem: a sharp drop in net migration to the UK that will, if sustained, carve a deep hole in the public finances.
Official data released this week underlined the degree to which immigration has fallen as a result of the government’s clampdown on work, study and family routes, even before it acts on plans to erect formidable barriers to migrants winning the right to settle in Britain.
At a minimum, the Office for Budget Responsibility will need to acknowledge next week how far immigration has already undershot its projections. Economists estimate this will add some £3.5bn a year to borrowing, although offsetting factors should leave the Reeves’ fiscal headroom largely intact.
The bigger question, though, is whether the UK fiscal watchdog will revise assumptions for net migration over the coming five years that now look implausibly high, in view of tighter visa rules and the proposed policies on settlement that could force some migrants already in Britain to leave.
“The bar for changing this is very high and would be telegraphed from quite a distance,” said James Smith, chief economist at the Resolution Foundation think-tank. The OBR would not be ready to “take a punt” before the Office for National Statistics updated its population projections later in the year, but could signal a bigger rethink to come in the autumn, he predicted.
This rethink would have big consequences for the public finances, because immigration is now the main source of growth in the UK labour force. With little sign yet of a pick-up in productivity, slower growth in the adult population will mean a smaller economy and a lower tax take.
The government’s clampdown, coinciding with a period of weak hiring, has had a powerful effect. Net migration fell to just 204,000 in the year to June, less than a third of the previous year’s 649,000 inflow, and well below the projections that underpinned OBR forecasts for the November Budget.
Smith estimated that even if net migration reverted swiftly to the watchdog’s projected path, the drop already seen would add £3.5bn to government borrowing in five years’ time, unless offset by other factors.
The November forecasts assumed net migration would fall in the near-term, bottoming out at about 260,000 in 2026 and 2027 before rising again to settle at roughly 340,000 by the end of the decade.
But in reality, net migration has already fallen below the OBR’s expected trough. Home Office figures published on Thursday showed visa grants dwindled to new lows at the end of 2025, with a particularly sharp drop in grants of work visas. Policy analysts say it is plausible that net migration will drop below 100,000 — and potentially close to zero — in the next year.
Both the Resolution Foundation and the Institute for Fiscal Studies think tank see this as one of the biggest risks to Reeves’ fiscal plans, even if it is one she can avoid tackling until the autumn, when the Budget will be delivered.
If annual net migration were to be 200,000 lower on average than the OBR’s current assumption over the five years of its forecast, the cumulative 1mn hit to labour supply could add up to £20bn per year to forecast borrowing, the IFS noted. This would wipe out Reeves’ headroom against her rule of balancing the current budget in the final year of the forecast.
Andrew Goodwin, economist at the consultancy Oxford Economics, said the political climate was consistent with net inflows remaining low for at least the remainder of this parliament. It estimates the population will be 660,000 smaller in 2030 than the OBR has assumed.
The actual effect of lower net migration on the public finances is less clear-cut than the OBR’s medium-term fiscal modelling suggests, according to the IFS, especially over a longer time horizon.
This is because migrants tend to be in work and ineligible for benefits when they first come to Britain, but those who stay and settle will eventually put children through the education system, draw pensions and call on the NHS more as they get older.
Because they look only over the period for which the government has already set spending plans, the OBR’s forecasts do not factor in these pressures on public services.
They also treat all migrants as similar to a UK national of the same age — rather than distinguishing between top-earning technology entrepreneurs and refugees who need long-term support.
The government has said its new regime will ensure all migrants make an “economic contribution” to the UK by restricting work visas to higher-paid graduates. It will also end overseas recruitment of low-paid care workers, and allow migrants to settle and qualify for benefits only when they have a record of taxpaying employment.
But analysis published at the end of last year by the Migration Advisory Committee, which advises ministers, suggested the tougher rules for skilled workers were shutting out young people who would make a clear fiscal contribution over their lifetime — while potentially deterring top earners who have many options to go elsewhere.
Jonathan Portes, professor of economics and public policy at King’s College London, said government policies were, if anything, driving away the migrants more likely to make a fiscal contribution because they were tightening work and study routes, while the number of asylum seekers was little changed.
Some economists have also argued that a sudden stop in immigration will worsen the UK’s looming demographic challenges, forcing the government to confront difficult decisions over the state pension age and pension “triple lock” sooner than it would need to otherwise. The lock ensures the state pension rises by the highest of wage growth, consumer price inflation or 2.5 per cent.
“It does make life much harder for the government over the longer term, if they don’t confront these things,” said Goodwin. “All the arithmetic becomes much harder five to 10 years down the line.”