Fiscal Impact of EU Migrants in Austria, Germany, the Netherlands and the United Kingdom

Abstract

The recent decade marked two quite important trends in the economic landscape of the European Union. The first one was the expansion of the Union to include former Soviet bloc countries, including the big enlargement of 2004 followed by the accession of Bulgaria and Romania in 2007. This was a huge challenge for the EU, as the impact of opening the economic space to markets so divergent in terms of economic development was largely unknown.The economic impact of the EU enlargement started to unravel, to a great extent, amidst the global financial crisis and the ensuing recession in Europe. This was a period of significant strain for public finances. Weak economic activity, increased unemployment combined with the relatively wide social welfare protection in most EU countries resulted in a sharp worsening of the fiscal balance. In fact, social expenditure (including old-age pensions) currently takes more than half of all government spending in most EU countries. As a share of GDP, its share has gradually grown to exceed 30%. In some countries, the last five years saw an increase in social expenditure of 5 percent (of GDP).At the same time, in recent years the free movement of people in the EU has gained speed. It has been facilitated by the gradual removal of all barriers to the employment of workers from the new Member States which were applied to a different extent by some of the old Member States. As a result, the number of EU migrants increased substantially between 2005 and 2013. By 2013, there were 13.7 million EU citizens living in another EU country, which is 2.7% of the entire population of the Union.This raises the valid question about the impact of the free movement of people on the economy of the destination country. Migrants change the demographic profile of cities and regions, they affect the labour market, they pay taxes and they claim benefits. The evaluation of the net fiscal impact of non-native EU-citizens residing in other EU countries is a complex task, requiring a number of credible key assumptions, detailed data on various items of public spending and revenues, in addition to precise information on migration flows and population, and this information is not always available. Most of the recent studies suggest that immigrants have a rather small impact on the host country’s public finances. Notwithstanding the methodologies used, coverage or assumptions, the bulk of academic research estimates the net fiscal impact of immigrants to vary in the range of ± 1% of GDP.The fiscal impact of migrants depends, to a great extent, on the way social security systems are financed; there is a different mix of social security contributions and general taxation in each EU country. The reliance on these contributions has been gradually eroding, as less than half of the social expenditure can be covered by the contribution. This is a result of both the introduction and enlargement of non-contributory benefit schemes and the demographic challenges faced by the health and pension systems in most countries. Moreover, even supplementing social contributions with personal income tax revenues cannot cover the entire cost of the welfare systems. The revenues from social contributions together with the taxes on individual or household income were 21.7% of GDP in EU-27 in 2005, and remained relatively stable throughout the years until 2012 when they reached 22.5% of GDP, according to Eurostat. At the same time, total social expenditure stood at 27% of GDP in the EU-27 in 2004, while in 2010 it exceeded 29%. The transfer from other government revenue (i.e. other taxes and levies) grew from 5.3% to 7.1% between 2005 and 2011. If direct taxes and contributions alone are taken into account, a typical employee in the EU is a net beneficiary of the social security system.This study was undertaken to estimate some aspects of the net fiscal impact of EU migrants in four EU countries – Austria, Germany, the Netherlands and the United Kingdom. The report outlines the role of migrants from EU countries as participants in the labour market, as taxpayers and as benefit recipients also.