Royal Bank of Scotland share sell-off is a good news

Sam Dumitriu, Head of Research at the Adam Smith Institute, featured on the front page of City AM and in the coverage of the government's share sell-off in The Times and the Guardian today we welcomed the sale and criticised those that would see the government pursue unsound investment strategies.

Read City AM's coverage here.

The Times' story can be found here.

The Guardian's piece on the sale can be found here. 

To arrange an interview with Sam Dumitriu, or another member of Adam Smith Institute staff, please contact us via email (matt@adamsmith.org) or phone (02072224995 or 07584778207). 

Grayling has something (good) to declare on Heathrow

Following the news from Chris Grayling that the government is recommending approval for the third runway at Heathrow, Matt Kilcoyne welcomed the decision and criticised campaigners that want Britain to pay the price for more delays and less capacity: 

"Chris Grayling is right to greenlight a new runway at Heathrow. With increased capacity from 85.5m to 130m by the end of next decade this decisions could bring in billions of pounds for the British economy.

"If other domestic airports need new flights to compete they should be allowed to expand too, especially Gatwick. Capacity is tight across the country and fortunately demand isn’t letting up with over 40m overseas visits expected this year.

"The country needs more links across the world as we leave the European Union if we're to make a success of Brexit. More connections mean new business opportunities and more lives made easier – in short it means Britain can soar.

"Campaigners rushing out to say house prices will fall under the flight path are forgetting the generous compensation that taxpayers will pay out and the fact that expansion has been in the offing for decades – the price change should be factored in by now."

If you would like an interview or further comment please contact Matt via email (matt@adamsmith.org) or mobile (07584778207).
 

Selling this RBS share is fair

Following the announcement by the government of an RBS share sale and the Labour Party's criticism, Sam Dumitriu of the Adam Smith Institute calls on the government to follow sound investment strategies, not populism:

“Labour are wrong to oppose plans to sell-off RBS shares. It is a mistake to think that just because they were once twice as valuable that they will be again. The state-owned bank’s share price has fallen by 50 pence since the last sell-off three years ago.

If George Osborne had followed Mr McDonnell’s advice, then we would £320m worse off. Chasing your losses is not a sound investment strategy, it’s problem gambling.”

Please contact Matt Kilcoyne (matt@adamsmith.org or 07904099599) if you would like to arrange an interview or further comment from ASI staff. 

Happy Tax Freedom Day 2018!

TAX BURDEN NOW HIGHER THAN AT ANY TIME UNDER NEW LABOUR

Taxpayers worked 148 days for the Chancellor this year, today is the first day they start working for themselves

• Tax Freedom Day falls on May 29th the latest it's been since 1995
• Brits work 148 days of the year solely to pay taxes, 3 days more than last year, but as of today workers are earning for themselves
• UK Taxpayers will fork out over £700bn to the Treasury this year, 40.65% of net national income
• Cost of Government Day, which factors in borrowing as well taxes is the earliest it has been since 2008. The UK is successfully bringing down the deficit, but spending is still too high.
• With tax demands at record highs, if political parties want economic growth they need to come up with ways to reduce, not increase, the national tax burden. 

Tax Freedom Day is a measure of when Britons stop paying tax and start putting their earnings into their own pocket. In 2018, the Adam Smith Institute has estimated that every penny the average person earned for working up to and including May 28th went to the taxman—from May 29th onwards they are finally earning for themselves.

British taxpayers have worked a gruelling 148 days for the taxpayers this year. More than in any year under New Labour, and three days longer than last year. Britain’s tax burden is moving in the wrong direction.

Government spending choices fall on UK Taxpayers, this year they will fork out £703.7bn—representing 40.65% of net national income. 

Tax Freedom Day in the United Kingdom is now over a month later than in the USA, where this year it fell on April 19th. 

The ONS has revised net national income data and the Adam Smith Institute has calculated this means Tax Freedom Day is later than any day since reliable records began in 1995. The shortest number of days worked to meet HMRC’s tax demands was 122 in 1996. 

In a sign of good news though, Cost of Government Day this year falls on 21st June with the smallest gap after Tax Freedom Day in over a decade. The Cost of Government Day calculates spending over net national income—i.e. including debt-financed government activity, which we must eventually pay, as well as tax-financed government spending.

While it’s good news the gap is getting smaller, the money borrowed to cover the near month-long gap since Tax Freedom Day must eventually be paid off with future taxes. 

With squeezed budgets, low wage growth, inflation above target and high housing costs, UK taxpayers cannot afford budget proposals from Left or Right that attempt to squeeze more money from taxpayers. Instead politicians should look at reducing the size of the state, and reforming our taxes.

The Adam Smith Institute singles out two tax changes that would boost growth and the pay packets of Britons right across the country:

1. UK Government should move to take the poorest out of tax altogether. With budgets tight across the government should boost the take home pay of minimum wage workers by raising the National Insurance Contribution threshold in line with that of income tax. 
2. Governments across the UK should abolish stamp duty (in Scotland the Land and Buildings Transaction Tax). Britain’s most damaging tax, Stamp Duty destroys 75p of wealth for every pound raised. The Government should prioritise cutting the taxes that do the most harm. 

Dr Eamonn Butler, Founder and Director of the Adam Smith Institute, said:

“In the Middle Ages, a serf only had to work four months of the year for his feudal landlord, whereas in modern Britain people have to toil five months for the tax gatherers.

“It appears Britain is stuck in the past with an over-large and inefficient public sector that has cost each of us 148 days' hard labour this year, the most in over two decades.

“Since the the great recession a decade ago Britons have been economising to live within their means. Frankly, it’s about time government did too.”

Mark Littlewood, Director of the Institute of Economic Affairs, said:

“We are almost half-way through the year and it is only now that UK workers are finally working for themselves, not the taxman. Tax Freedom Day demonstrates how heavy the tax burden is in this country with high income tax rates, national insurance payments and draconian VAT and stealth taxes, including the newly introduced levy on sugar.

“While the Government has brought the budget deficit down, for all the talk of austerity, progress is still too slow. Reductions in public spending to relieve workers of the burden they are saddled with will allow them to spend more of what they earn, thus providing the economic boost this country needs.”

John O'Connell, chief executive of the TaxPayers' Alliance.

“Brits are very generous, and need little pushing in order to dig deep to causes that matter to them. That's why ever-higher taxes, raised under the pretence of 'asking' people to pay 'a bit more' is so cruel. Taxpayers work longer and longer, only to see their hard-earned money wasted by politicians who don't care a jot for it. It's time we recognised the sacrifices people have to make to contribute such high taxes, and time too for the government to begin lessening this burden by getting spending under control.”

Sam Dumitriu, Head of Research at the Adam Smith Institute, said:

“Tax Freedom Day is a stark illustration of the UK’s tax burden. It is a reminder that public services such as education, welfare, and the NHS must be paid for, either through taxes or borrowing (taxes on the next generation). 

“The Chancellor must resist the pressure to declare austerity over and turn on the spending taps. Labour too, must be honest with the public. Their proposed £50bn increase in public spending will inevitably lead to even higher tax burdens on ordinary people.

“Further reductions in public spending will be necessary to allow workers to keep and spend more of what they earn.”

Notes to editors:
 
For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

Sadiq Khan should accept the case for legalising and regulating drugs

This morning in Mayor's Question Time, Conservative London Assembly member Andrew Boff secured a meeting with Sadiq Khan for him to listen to the case for legalising and regulating drugs.

Daniel Pryor, Head of Programmes at the Adam Smith Institute, welcomed the news:

It’s great to hear that the Mayor is willing to hear the compelling case for taking back control of our violent drugs market by legalising and regulating drugs. Teenagers are being exploited by county-lines gangs, with an estimated 4,000 caught up in smuggling in London alone, precisely because we hand over a drugs market worth £5.3 billion to criminals. Young people are able to access hard drugs from dealers who don’t ask for ID, and users have no access to information on the purity of what they’re taking. Our current approach leads to tragic, entirely avoidable deaths from violent crime, overdose, a lack of support for problem users.

With around 12,000 people in prison for drug-related offences, police time and taxpayers’ money is being wasted on fighting an unwinnable war that makes our streets less safe. We should follow the examples of Canada and many U.S. states by moving towards a harm reduction approach, starting with legalising and regulating cannabis. These efforts were led by a coalition of public health experts and law-and-order conservatives, and the same groups are calling for legalisation in the UK.

Please get in touch with Matt Kilcoyne (07904099599 or 02072224995) to arrange an interview or further comment.

Bring in airline style competition to allow rail to soar

New report by analyst, former journalist and rail expert Adrian Quine for the Adam Smith Institute calls for the introduction of much greater competition in our railways. 
 

• Privatisation of British Rail led to greater number of services and record passenger numbers, but DfT over-specification and monopolistic franchises are costing consumers dearly
• Open Access operators compete directly with incumbent franchises
• Fares on Open Access are cost less per mile with higher customer satisfaction; fares on Virgin’s East Coast franchise where it faces direct competition are 24% cheaper than on its West Coast franchise where it doesn’t
• Open Access (OA) operators are held back by the excessive strictness of the “Not Primarily Abstractive” test, which is designed to prevent OA operators cherry picking the most profitable routes.
• Just 1% of passenger miles are travelled on OA operators despite OA operators topping passenger satisfaction polls.  
• Lack of competition has seen the cost of unregulated ‘anytime’ fares rise by as much as 250% on many routes since the last year of British Rail in 1995, while RPI has risen only 86%
• UK should learn from airline competition and scrap the one-size-fits-all model of franchising to give passengers real choice on long distance routes

A new paper by the free-market Adam Smith Institute is calling for a ‘complete rethink’ of how the country’s passenger rail services are structured. Rather than re-running tired debates between nationalisation and privatisation, the think tank advocates injecting more competition into the current franchise model by making it easier for Open Access (OA) Operators to compete on long-distance routes.

Short term political thinking and civil service micromanagement of the industry is unsustainable, argues report author Adrian Quine. Competition between rail providers on key long distance rail routes will deliver lower fares, reduced running costs, improved customer service, and a greater focus on technology and innovation to ensure a better deal for the passenger & taxpayer.

This new report follows on from the Public Accounts Committee’s (PAC) damning account of the Department for Transport’s management of the Southern rail franchise Govia and the East Coast mainline, which it called a “debacle” and “totally unacceptable”.

20 years on from privatisation, its full promise is yet to be fulfilled. Despite record numbers of passengers and high levels of investment, there is a lack of competition in the market and government is increasingly over-specifying franchise conditions. As consumers are well aware, this has meant uncompetitive delivery of bare bones services and high ticket prices despite the Competition and Markets Authority’s 2015 report ‘Competition in Passenger Rail Services in Great Britain’ calling for greater competition.  

Since the last year of British Rail in 1995 the cost of an ‘anytime fare’ has risen by 250% on many routes, while RPI has risen only 86% in that time.

Fares are dragged down where competition does exist. Virgin’s fare on the West Coast is 32% more than it charges on the East Coast where it faces competition. Between London and Crewe a peak train is £131 for a journey of 158 miles, while the 156 miles between London and Doncaster where there is Open Access competition costs £99 (The two open access operators are even cheaper: £58 with Hull Trains and £52 with Grand Central).

Open Access operators regularly top passenger satisfaction leagues, with Grand Central and Hull Trains taking the top two spots.

Where franchises overlap, unintended competition delivers cheaper and more frequent services. Peterborough is the starting point for GoVia Thameslink Railway (GTR) running a half hourly stopping service to London and onwards to the South Coast. Slower and with more stops, but lower in price than Virgin’s direct service, the GTR route has seen a 70% increase in commuter numbers in just 14 years.

But Open Access competition is rare in the UK with just 1% of passenger miles conducted by OA operators, despite the current Railway Act allowing for such competition. This slow take-up is down to the ‘Not Primarily Abstractive’ test.

At present operators are required by government to ensure that for every pound of abstracted revenue 30% of new revenue has to be generated. In practice this means virtually no competition on long-distance inter-city lines. This is part of the reason the UK is the only European country that runs its commercial inter-city operations on such a model despite the reduction in costs a move to Open Access would deliver to passengers.

Unlike commuter trains, long-distance inter-city services are “closer in style to the airline business” with most routes used by one-off business or leisure passengers who buy their tickets in advance, the report argues. But, while passengers choosing to fly have access to choice between budget operators like Ryanair and premium services like British Airways, rail passengers lack a similar range of options.

And that competition delivers dividends for passengers. Report author Adrian Quine finds that where competition does exist between airlines on intra-UK flights fares were nearly half as much as where there is a sole operator.

The lack of innovation in rail stems in small part from the level of micromanagement by the Department of Transport, which has left private companies hamstrung by what they can provide. The DfT can dictate timetables, frequency of trains, stopping patterns and even minor details such as whether a train has a catering trolley or not.

The paper argues that the level of detail the DfT can stipulate and the power of unions on services with just a single provider often leads to unexpected consequences, such as the recent scandal where half of the carriages on some inter-city services were closed on trains run by Great Western Railway.  

With such high levels of government oversight and control over the railways, what we have is now nationalisation in all but name. But Adrian Quine argues that ‘advocates of nationalisation really need look no further than the current costly’ running of the publicly-owned National Rail to understand why renationalisation would not work.

Opening up inter-city services to competition would drastically improve services, drive down operating costs, reduce fares, boost innovation, and give passengers real choice. By steering people away from road and air onto rail, the paper argues, we will see additional revenue from rail and reduce the burden on the taxpayer.

Competition in the Long Distance inter-city rail market has the potential to bring about the most radical and progressive realignment of our rail system since privatisation and create a true rail renaissance.

Adrian Quine, author of the paper and rail consultant, said:

“The UK rail industry structure is wasteful, bureaucratic and largely not fit for purpose. This paper highlights many of the core issues at stake yet provides radical, achievable solutions that are in the best interests of users, the taxpayer and the wider economy”.

Sam Dumitriu, Head of Research at the Adam Smith Institute, said:

“Renationalising the railways wouldn’t solve today’s problems. We need more, not less, competition on the UK’s railways. Allowing more Open Access operators to compete directly on long-distance rail routes would boost productivity, improve customer service, and deliver cheaper fares”

About the author:

Adrian Quine is an analyst and entrepreneur with a specialist interest in transport and infrastructure. He is a former investigative journalist and broadcaster and has worked for many leading publications including: the BBC, Discovery Channel, National Geographic and the Times. He also writes regular opinion pieces on rail as a columnist for The Telegraph.

Adrian has worked as a consultant on various projects including rail and aviation. He has specialist knowledge in public transport and infrastructure.

Adrian has a particular interest in rail competition and was one of the original founders of ‘Alliance Rail Holdings Ltd’ – he devised the name around a proposed ‘Open Access’ service between the Scottish and Welsh capitals from Edinburgh to Cardiff via the West Coast Mainline and Shrewsbury.

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207.

The report ‘A Third Way for Britain’s Railways’ can be accessed here.

A capitalist revolution in housebuilding

New paper by top architect Patrik Schumacher for the Adam Smith Institute calls for radical capitalist reform to solve Britain’s housing crisis

• Housing crisis is a failure of politics not markets and is the result of restrictive planning laws.

• Restrictive planning laws have led to an increase in house price to earnings ratio in London from 4:1 in the early noughties to 10:1

• Rent-to-income ratio has climbed from 1:5 to 1:3 in the last 15 years

• Government should resist calls to impose rent controls or mandatory long-term tenancies as they reduce supply and hamper labour mobility

• Sadiq Khan’s plan to mandate that up to 50% of developments be “affordable” will discourage development and push up prices elsewhere

• Micromanaging land uses creates high price distortions in our cities and should be abolished

• Reliance on home ownership as a savings and retirement vehicle is risky and hampers locational adaptation and labour mobility. Saving and housing should be decoupled

The housing crisis of ever rising prices and unaffordability can only be ended by a capitalist revolution in housing, a new paper by leading architect Patrik Schumacher, released by the Adam Smith Institute, argues today.

Instead of populist state-led solutions, the housing crisis can only be fixed effectively through the denationalisation and depoliticisation of development rights in general and in the radical liberalisation of housing in particular.

London’s house prices have gone from four times to over ten times the average annual wage over the past two decades. Meanwhile the average renter has gone from spending one fifth of their income each year on rent to spending over a third. Fifty years ago land values in the UK amounted to just 50% of GDP, now prices are nearly 200% of the national income. Local planning restrictions on supply, and increased demand to live in cities has led to these price rises. An expansion in supply, the paper argues, would help to alleviate the price rises that have made housing increasingly unaffordable for so many city dwellers.

While most of the 20th century was marked by increased numbers living in suburbs, recent decades have seen this trend reverse. IT, finance, and other service industries are most productive in dense urban clusters. With growing numbers needing and wanting to live in cities like London, prices have increased as new supply has been prevented from meeting demand.

Politically motivated nimbyism, as seen in the rejection of the 2,000 home redevelopment of an ASDA car park on the Isle of Dogs, and the discouragement of the redevelopment of the Bishopsgate Goods Yard in Hackney, shows the difficulty that developers face with any project in the capital. Delays or outright rejections of development are the most obvious costs of political interference. But the report also highlights the high cost of restrictions on different land uses, with residential plots reaching values nearly four times those of office space in London. As heavy industry has moved out of the city there is little social benefit to cities micromanaging land uses. Leaving decisions about the best use for a plot of land to entrepreneurs and consumers would increase affordability and boost growth.

All of this is hurting Britain’s productivity, argues the paper. London, which Patrik Schumacher calls the global prosperity engine, is artificially held back as many workers are discouraged due to the cost of living. While those that do choose to live in the city (and other high-price cities like Oxford, Cambridge, and Manchester) see their disposable income shrunk, live in less desirable locations, and spend more time and money commuting.

The answer to this problem, Schumacher argues, is to end the cycle of restrictive planning and price rises. More homes must be built to reduce house prices. Current land values are hugely enhanced by the permissions they receive if they receive them, with windfall gains as permission is granted. Removing planning restrictions across the board would push land prices down and make housing more affordable. Further restrictions on the number of small units allowed per development and size should also be reviewed to increase the number of studio flats available to those on lower incomes.

Government should resist calls to impose rent controls and mandate long-term contracts, argues the paper, with such actions reducing the supply of low-income housing. In doing so these measures hamper labour mobility and further hit productivity.

Plans by London Mayor Sadiq Khan to force developers to earmark up to 50% of developments as ‘affordable’ will have the opposite effect, suggests the paper. Affordable housing requirements act as a tax on new development. Schumacher argues this creates a vicious cycle as developments are disapproved, disrupted or abandoned, and other plots on sites are hiked in price to reflect politically imposed rationing.

A capitalist revolution is needed in house building the paper suggests, arguing “there is no need to infantilize people via paternalistic subsidies” but instead to reform planning laws to enable house builders to “deliver decent, truly affordable housing”.

Patrik Schumacher, top architect and author of the paper, said:

“Capitalism was and is the great prosperity engine behind all the material freedoms of modern life. Tragically capitalism is not allowed to work its magic with what matters most to us, namely our dwellings and cities. Urban development and housing provision have been unduly politicised and thereby paralyzed. We should be experiencing an urban Renaissance as a crucial productivity boosting component of our knowledge-and network society. Instead planning restrictions and imposed standards block the adequate supply of urban residences leading to prohibitive prices. Paradoxically, the “affordability” system contributes to rather than alleviates the affordability crisis.”

Sam Dumitriu, Head of Research at the Adam Smith Institute, said:

“There is a growing consensus that our planning system is not fit for purpose. Restrictive planning systems are pricing people out of the places where they are most productive and redistributing wealth upwards. This situation is crying out for change, so it is great to see a leading architect call for a capitalist revolution in housebuilding.”

Sophie Jarvis, Research Associate, Adam Smith Institute, said:

“Millennials already know that they are at a massive disadvantage to their parents in terms of getting on the housing ladder. What they don’t know is that rent caps and restrictive planning laws are holding them back, not helping them out. Liberalising planning laws, however, could get them on that ladder. The best example of this is if developers were allowed to build smaller houses, millennials could live in a compact, ergonomic flat in  Zone 1 or 2, instead of a rundown, cold flat in at the end of the Central line or half-way to Hull”.

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207. 

You can read the full paper here.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

Standing up for safe standing after West Brom decision

Following the news of West Brom's safe standing bid rejection by government Sam Dumitriu, Head of Research, Adam Smith Institute said:

“Sports Minister Tracey Crouch’s decision to reject West Bromwich Albion’s plan to introduce ‘safe standing’ next season is a blow to football fans across the country. The requirement for all teams in the top-two tiers of English football to have all-seater stadiums is outdated. Rail seating is widely used in German, Austria and Sweden, and was recently introduced at Celtic Park to great success. 

“Right now in most football grounds, many of the most enthusiastic fans will stand throughout the match, regardless of the all-seater nature of Premier League stadia. This is more dangerous than rail seating as fans frequently fall over the seats in front of them causing injury. Under the status quo, we have unsafe standing. 

“Safe standing is overwhelmingly popular with football fans, with polls regularly finding more than 80% of football supporters in favour. According to Adam Smith Institute research, it could cut the cost of a season ticket at some top-flight grounds in half and save West Brom fans around £120 a year on the lowest-priced season ticket. Tracey Couch should follow the evidence and listen to the fans. After the season they’ve had, the Baggies’ deserve all the good news they can get.”

For more information, read the Adam Smith Institute report Safe Standing: Why it’s time to remove the ban. Please get in touch with Matt Kilcoyne (07904099599 or 02072224995) to arrange an interview or further comment.

Getting a ruddy grip on Britain's drug gang problem

Following the Home Secretary's speech this morning unveiling her plan to tackle violent crime, Daniel Pryor, Head of Programmes at the Adam Smith Institute, said:

"In setting out her strategy for tackling violent crime, the Home Secretary has inadvertently made a powerful case for ending drug prohibition. Gang violence, including youth violence, is intimately connected to the illegal drugs market. You’re less likely to face violent crime purchasing alcohol in an off-licence than buying cannabis in a dark alley. Taking drugs out of the hands of gangs by legalising and regulating them would significantly reduce violent crime: putting drug dealers out of business, protecting young people (drug dealers don’t ask for ID) and destroying the black market.

Last week, David Lammy MP told BBC Radio 4's Today programme that “the police and our country has lost control of [the] drugs market,” but the truth is that they never had control in the first place. Our failed policy of prohibition undermines relations between police and communities, and leaves criminal gangs violently competing over power vacuums left in the wake of police disrupting incumbents. Get drugs into the light of the legal market. Until we do, the police will be left chasing shadows."

For further comment or to arrange an interview please contact Matt Kilcoyne (matt@adamsmith.org, 07584778207, 02072224995).

Auction work visas after Brexit

New report shows how the UK can reform immigration after Brexit, be responsive to business needs and pay for public services.

• UK must set out post-Brexit immigration system by year-end
• Immigration has been a net positive to the UK’s fiscal position, with little impact on unemployment or wages of low-skilled workers
• Reducing high-skilled immigration would hit businesses and UK competitiveness
• Points-based systems attract workers who look good “on paper” but are not necessarily the best fit for employers
• A more business friendly approach would be to auction work visas to employers
• Auctioning visas would promote economic growth and allow government to raise funds to spend on addressing concerns about pressures on public services and low-skilled wages

With just over one year to go until Britain leaves the European Union, the country must design an immigration system that can win popular support. Building on the work of Nobel Prize winning economist Gary Becker, labour economists Pia Orrenius and Madeline Zavodny argue that auctioning employer permits to hire foreign workers, provided security checks are met,  would maximize the economic benefits of immigration and increase government revenue. The Adam Smith Institute’s new report comes at a time that the UK has to decide on how it will manage immigration. It’s time to kick-start a mature debate on how we organise this system. 

At present the UK has two migration systems. The first, for non-EU migrants, has five tiers for work- and study-based visas as well as additional channels for family migration and humanitarian migrants. The second is the free movement regime that the UK has with the European Union, which grants EU citizens preferential access. As we prepare to leave the EU, the government has made clear it is seeking to control numbers, the skill level of migrants, their length of stay and the benefits they receive. 

It might be easy for the UK government to simply fold the EU into the existing skills-based tiered system. While doing so might enable the Conservatives to hit their goal of reducing annual net inflows to the tens of thousands, it would come at considerable economic cost with businesses hit by labour shortages and consumers facing higher prices for goods and services, the report suggests. Points-based immigration systems, as used by Canada and Australia, tend to attract workers who look good “on paper” but are not necessarily the best fit for employers. 

Instead, the UK should consider auctioning employment visas to employers. Auctions are a flexible alternative to complex points-based systems and replace central planning with employers’ bottom-up knowledge. By allocating visas to the firms that value migrant labour the most the policy has the potential to boost economic growth and government revenues.

Visas purchased by companies could be resold, while foreign workers would be allowed to move across employers with a visa, to ensure workers’ rights are protected. With the Migration Advisory Committee providing advice or setting a target number of visas up for auction, it would be responsive to changes in UK economic conditions and the demand for foreign workers. Changes in permit prices would act as a signal to increase or reduce the numbers of permits available in auctions in future years.

The UK should consider separate auctions for high- and low-skilled permits, with low-skilled permits reserved for foreign workers who will earn less than a certain amount or work in certain occupations or industries. Creating another separate auction of short-term permits for seasonal foreign  workers, such as those working in agricultural jobs or at holiday  resorts, might also be advisable.

Visas as currently constructed are not free. At present a typical Tier 1 exceptional talent applicant pays ₤585 to apply, while a typical Tier 2 general applicant for a three-year visa pays between ₤587 and ₤1267 (although less if in a shortage occupation). Sponsoring employers of Tier 2 and Tier 5 workers also pay an Immigration Skills Charge of up to ₤1476. Thousands more are paid in legal fees to lawyers as applicants and employers attempt to prove need and skills. An auction system would allow the government to streamline the process, make it more responsive to business requirements, and capture funds currently spent on legal costs.

In 2014, Professor Sir David Metcalf, who chaired the Government’s Migration Advisory Committee until 2016, proposed using auctions to allocate investor visas. 

The paper also draws on extensive research to conclude that immigration has had negligible effects on employment, unemployment, or the earnings of people born in the UK. However, some research suggests that low-skilled immigration slightly lowers the earnings of low-paid workers, with the most-negative effects on wages felt among other immigrants.

Immigrants to the UK contribute more to taxes than they consume in terms of public benefits and services. Immigrants from countries that joined the EU in 2004, including Poland, Hungary and Lithuania, are strongly net positive contributors to the UK government’s coffers. 

Immigration responds to and generates more economic activity, the report suggests, with the economy especially able to absorb higher migrant rates during times of expansion. Extensive research finds migration leads to greater levels of trade, innovation, and productivity gains. Report authors Zavodny and Orrenius report that migration increases patent activity and productivity, and in the UK has been instrumental in retaining the City of London’s pre-eminent position at the centre of global finance. 

Immigration was named by 73% of those who voted leave as a concern in the British Social Attitude survey immediately after the EU referendum. But instead of using Brexit as a means toward reducing immigration from the EU, the UK government should seize it as an opportunity to design an immigration system that best strengthens the country’s economy. Creating an auction system would be a bold move that would maximize the economic benefits from immigration while possibly bolstering public support for immigration.

Madeline Zavodny, author of the report and Professor of Economics at University of North Florida, said:

“The UK has a unique opportunity to replace its immigration system with one that would benefit the economy and increase support for immigration. Auctioning visas to employers is the best way to bring in talented workers who contribute to the economy while minimizing any harms to UK natives. It would also generate funds that could be used to achieve other public goals.”

Sam Dumitriu, Head of Research at the Adam Smith Institute, said:

“It is vital that the UK’s post-Brexit immigration policy is informed by evidence. This important report by two distinguished economists reviews extensive empirical research to develop the framework for a innovative immigration policy that meets the UK’s specific economic requirements and improves the public’s support for immigration.”

About the authors:

Madeline S. Zavodny is a Professor of Economics at the University of North Florida. She is also a Research Fellow at the Institute of Labor Economics (IZA), a Fellow at the Global Labor Organization, and an Adjunct Scholar at the American Enterprise Institute. Much of her research focuses on economic issues related to immigration, including Beside the Golden Door: U.S. Immigration Reform in a New Era of Globalization (AEI Press, 2010) and The Economics of Immigration (Routledge, 2015). Her research on immigration has also been published in the Journal of Labor Economics, Industrial and Labor Relations Review, the Journal of Policy Analysis and Management and Demography, among others. Before joining UNF she was a professor of economics at Agnes Scott College and Occidental College and an economist with the Federal Reserve Bank of Atlanta and the Federal Reserve Bank of Dallas.

Pia M. Orrenius is Vice President and Senior Economist at the Federal Reserve Bank of Dallas where she works on regional economic growth and demographic change. She manages the regional and microeconomics group in the Dallas Fed Research Department. Her academic research focuses on the labor market impacts of immigration, unauthorized immigration and U.S. immigration policy. She is coauthor of the book Beside the Golden Door: U.S. Immigration Reform in a New Era of Globalization (2010, AEI Press). She is research fellow at the Tower Center for Political Studies at Southern Methodist University and at the IZA Institute of Labor in Bonn, Germany, as well as adjunct scholar at the American Enterprise Institute. Orrenius is also adjunct professor at Baylor University (Dallas campus), where she teaches in the executive MBA program. Orrenius was senior economist on the Council of Economic Advisers in the Executive Office of the President, Washington D.C., in 2004–05, where she advised the Bush administration on labor, health and immigration issues. She holds a PhD in economics from the University of California at Los Angeles and bachelor degrees in economics and Spanish from the University of Illinois at Urbana—Champaign.

PLEASE NOTE: The views expressed here are solely those of the authors and do not reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System.   

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207. 

You can read the full report here.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.