Few subjects arouse such widespread concern and strongly held views – for and against – as immigration.

On most issues there is lively discussion about alternative policies, the pros and cons and trade-offs between them.

Immigration is different.

Whenever I mention to people that I am researching the subject, their advice, without exception, is: ‘Don’t even think about it. You will either be dismissed as a libertarian crank or labelled a racist’. When I was writing in favour of legalising cannabis, friends urged caution – but nothing like this.

Fear of being labelled racist has certainly stifled intellectual debate. All censorship has malign consequences and this is no exception. Moderate commentators, who have a positive view of immigrants and want a generous approach to refugees but believe in restricting the total numbers of people settling here, have been effectively silenced.

Now the election has forced immigration into the limelight we urgently need a moderate case for some, but limited, immigration. Because no one has put that case, the contest has been between those who oppose any immigration at all and those who oppose all limits on immigration.

Experience of living in areas with a large number of immigrants, knowing them as neighbours and working with them as constituents has convinced me that the caricature of immigrants – as scroungers, criminals and a threat to society – is the reverse of the truth.

The overwhelming majority of immigrants are decent, hard working, law abiding people who want to make a positive contribution to this country. They tend to epitomise the values of enterprise and family cohesion that I, as a Conservative, admire. 

Furthermore, the decent majority of the British people are not hostile to immigrants as people. They instinctively recognise that stopping all immigration would damage the economy. But they do not conclude that we should therefore relax all restrictions on settlement in this country.

If moderate mainstream politicians do not present the public with a reasonable case for allowing some, but no unlimited amounts, of immigration, voters will become increasingly susceptible to the irrational appeal of extremist parties like the BNP.

Throughout this pamphlet, the term ‘immigrant’ refers to people (be they Belgian bankers of Bangladeshi catering workers) coming to work or settle here. The terms British, resident or native refer to the existing population of all races.

The suppression of moderate debate has been convenient for the Government. Their immigration policies and the arguments they use to justify them largely escape serious scrutiny. For example, it is astonishing that Government policy underwent a reversal – moving from ‘severe restriction’ to active ‘encouragement of immigration without the liberal media reporting that fact.

Because this change of objectives has gone unreported, the public still assumes that the Government is trying to restrict the total inflow into the UK. They are aware that immigration has accelerated sharply but assume this is due to the failure of policy rather than the reversal of policy. They conclude that most immigration must be illegal or exploitation of the asylum system. The Government fosters this illusion by regular claims to be cracking down on illegal immigration and abuse of asylum laws. Its pre-election pledges are designed to reinforce this impression while still leaving them free to continue to encourage more immigration should they win the next election.

The arguments the Government uses to explain why higher immigration is necessary are largely exempt from criticism. By contrast, populist arguments against immigration are rightly subjected to merciless criticism by the liberal media.

As it happens, the arguments the Government uses to justify higher immigration – that it promotes economic growth, fills labour shortages, staffs the public services, boosts the public finances and will pay for our pensions – are often the mirror image of the populist arguments (that immigration takes away British jobs, creates unemployment and is a burden on the public services and the taxpayer).

Both sets of arguments have three things in common: they are plausible, they are bogus, and they rely on the same economic fallacies. Both deserve to be debunked.

If the Government’s arguments in favour of more immigration were valid, they would destroy the case for restricting it at all.

They imply that the more immigrants we allow in, the better off the resident population will be. That matters because civil servants take ministers at their word. They therefore set about developing, interpreting and implementing policy accordingly. As we shall see, that is exactly what they have been doing.

They also feel it is their duty to conceal those consequences of large scale immigration which do not conform to the rosy arguments enunciated by Ministers – hence their refusal to acknowledge the extent to which the Government’s unpopular house-building targets are driven by immigration.

There is an obvious humanitarian case for helping refugees. But there is also a strong case for some economic migration. A two-way flow of skilled workers is natural and desirable in an open economy.

To stop migration entirely would not only be impractical but would inflict significant damage on the economy. Some immigration undoubtedly enriches this country both economically and culturally.

Beyond a certain point, however, there is little reason to suppose that an increased inflow will enrich us much further. On the other hand the problems resulting from immigration – not least the pressures on housing and land – do rise in proportion to the numbers settling here.

The economic benefits that the Government invokes are largely imaginary and divert attention away from identifying the real benefits which can flow from certain limited kinds of immigration. These benefits need to be understood so that policy can be tailored to maximise them.

There is therefore a strong case for some, but not unlimited, immigration. So recent Conservative proposals to impose a ceiling on the annual inflow makes a great deal of sense. However, a Conservative Government should go further: it should harness market forces to restrain immigration by charging employers fees for work permits that fully reflect the social, environmental and housing costs of increased population.

Such fees could possibly be established by auctioning to employers some of the strict quota of permits. These charges would also protect resident workers from being undercut; maintain incentives to acquire scarce skills and prevent employers treating those on work visas as indentured labour. Such an approach would be:

• based on a positive view of the contribution individual immigrants make to the nation’s life;
• compatible with a belief in markets and understanding of how they work;
• and a measured approach to public concerns.

Recommendations

For the economy, immigration acts as a lubricant, not a fuel.

Without lubrication, a car will suffer severe damage. But once it has enough, adding more does not make it go better – indeed it may cause problems. Likewise, stopping all immigration would damage the economy. But beyond a certain point, immigration will not make it grow better.

Unfortunately, the Government mistakenly believes that immigration is a fuel which makes the economy grow faster and has duly put its foot on the accelerator. If it believes, as its rhetoric implies, that the economic benefits of immigration are proportionate to the number of immigrants, it should remove openly (rather than by stealth) the remaining controls and confront the issues for housing, land use and pay relativities.

Alternatively it should spell out any non-economic reasons for retaining restrictions on immigration.

Although the benefits of immigration are not proportionate to the number of immigrants, as the Government appears to believe, the costs – particularly pressure on housing and land – are.

The Conservative proposal: the right direction, but not far enough

The Conservative proposal to set an Australian style annual limit is sensible. However, no indication has been given of what that target might be.

Current inflows are huge. There is therefore ample scope for reducing the net inflow whilst still allowing a high level of gross immigration.

In 2003, the estimated number of people (including returning Britons) entering to stay for a year of more was 513,000 whereas some 362,000 people left to live abroad for a year or more, giving a net inflow of 151,000. Even if the aim were to secure a balance – no net inflow – to end the pressure imposed by net immigration on housing and land, the ceiling on immigration could still be set at nearly 360,000 people a year in all categories.

That leaves plenty of room to accommodate our humanitarian obligations given that the peak number of asylum seekers granted asylum or leave to remain was 42,000.

There is likely to be a net inflow from the new EU member states until their living standards begin to catch up with ours. As the Government surrendered the right to restrict this movement, we must accept it. Meanwhile the aim should be to bring non-EU migration into balance, with particular restraint on forms of immigration which tend to result in permanent settlement.

But Conservative policy should go further than promising a limit in two respects.

First, it should spell out the categories of entrant most likely to make a genuine economic contribution: employees with company specific skills, star performers, entrepreneurs, investors, workers to meet temporary shortages and where an industry has economies of scale which it is constrained from achieving because of the domestic pool of talent is too small. The visa scheme can then be tailored to restrict economic immigration to those categories.

Second, it should harness market forces to limit demand and to ensure that the benefits are secured by the community as a whole.

Relying purely on bureaucratic procedures to ration immigration is bound to create distortions in the labour market. Employers will continue to try to exploit the system simply to bring in cheap labour. That undercuts the pay of domestic workers in those occupations and reduces the incentive for the resident population to acquire the imported skills. Many employers like to import workers on work permits, not just because they are cheaper, but because they are more beholden to the employer. They are in effect indentured labour.

Most workers on a work permit assume they must stay with their sponsoring employer until they have been here four years and can apply for indefinite leave to remain. (Moving to another employer who is willing to reapply for a work permit is possible but not easy). Tying workers to an individual employer risks injustice to the employee. It is also economically damaging since the employer has less incentive to motivate the employee and the employee is precluded from moving to another job where he or she may be more productive.

These problems can all be diminished if employers are charged a fee representing not just the administrative cost of the work permit system but also the other social costs that expanding the population involves as well as the economic benefit of being able to import workers from abroad.

At present, the maximum fee for an employer applying for a work permit is €153. This covers only the administrative costs. It compares with fees of £500 to €1,000 in Australia and the US. British agencies charge an additional £1,500 simply for helping companies obtain these permits. This is an indication of how valuable foreign workers can be to employers.

American studies show that even though US employers, like those in the UK, are supposed to pay the prevailing wage to employees brought in on a skilled workers visa, in practice they pay on average 15% to 30% less than resident workers with identical experience and job description. So the value of work permits is substantial. It would be far more effective to charge an annual fee of at least a four figure sum for the privilege of employing a work permit holder.

This would make employers think twice about bringing in foreign workers just because they are cheaper than British workers. It would stop domestic pay rates being artificially depressed. It would maintain the differentials necessary to give domestic residents the incentive to acquire scarce skills. And it would make it easier to stop employers treating migrant workers as indentured labour. They could be permitted to move to another employer if he (or they) were prepared to pay the annual fee for the remaining visa period. Work permit holders would then be more likely to be employed in a more productive way.

Martin Wolf of The Financial Times has suggested that work permits should be sold to employers by auction. Presumably the Government would set an annual quota of work permits it proposes to issue for the year and then hold monthly auctions. To be eligible to bid, employers would still need to satisfy the criteria set by the Government as would the candidate they wished to bring in. 

Wolf outlined the following benefits of an auction:

• it would reduce the need for bureaucratic rationing procedures;
• the market would allocate the scarce resource of access to the UK labour market more efficiently than a bureaucracy can;
• businesses that genuinely need a specific applicant will be prepared to pay for the privilege of bringing them here;
• those who merely wanted access to cheap or indentured labour are likely to be outbid by firms with a compelling business case or at least will find that much of the benefit is siphoned off to the benefit of the public purse;
• those who put the highest value on the right to work here are likely to be those who will gain most from it and therefore to be the most economically productive;
• the general public has a right to benefit from the value, which they collectively own, of access to a high productivity economy.

However, it would be wise to be cautious before adopting such a proposal. In theory, employers wishing to bring in cheap labour might outbid those needing to bring in staff with company specific skills, for example, to establish a new venture. Yet the latter would bring more benefit to the British economy than the former. It might nevertheless be useful to auction some permits on a trial basis to help establish the true market value of access to the UK market.

Whether the fee is set administratively or by auction it could in aggregate raise substantial sums. At present work permits are being issued at the rate of over 120,000 a year for up to four years each. Even at £2,000 per annum those are worth well over £1bn. At present that value accrues primarily to employers. Of course, a tight limit on the number of work permits issued would reduce the yield unless the reduction in numbers is offset by increased scarcity raising their market value.

In fairness, a portion of these revenues could be used to compensate poorer countries for the cost of training the graduate staff whom we poach.

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Peter Lilley is the former MP for Hitchin and Harpenden and served as a cabinet minister in the governments of Margaret Thatcher and John Major.