Immigration and the Welfare State Revisited:
Fiscal Transfers to Immigrants in Canada in 2014*
May 30, 2015 of paper published by Fraser Institute on November 10, 2015
Vancouver Sun article by Douglas Todd on study.
As Milton Friedman so wisely observed “You cannot simultaneously have free immigration and a welfare state” (Friedman, 1999). This, of course, is an observation based on pure free market economic theory. If people can immigrate, they will as long as they can improve their standards of living. The higher social benefits usually offered in the destination country contribute to higher living standards for immigrants just as wages do. But unlike wages, which reflect the immigrants’ contribution to the destination country’s output, fiscal benefits must be paid for by the population already living in the destination country, creating a net fiscal burden and reducing the living standards of the countries existing residents. While the tendency of immigrants to be attracted by social benefits is based on economic theory, the extent to which it generates a net fiscal burden is an empirical question, which depends largely on the extent to which immigrants earn less than other Canadians and thus pay less tax for the services they receive which are generally the same as those received by other residents. The exact magnitude of any net fiscal burden is an empirical question that can only be answered by the type of analysis and resulting estimate offered in this paper.
Our previous estimate (Grubel and Grady, 2011 and 2012) that recent immigrants coming to Canada between 1987 and 2004 received fiscal transfers of over $6,000 per capita in fiscal year 2005/06 and that the fiscal burden in that year was between $16.3 billion and $23.6 billion gave rise to a lot of controversy because of its obvious restrictive implication for immigration policy (Javdani and Pendakur,2011). And while Javdani and Pendakur questioned some of our numbers and specific assumptions, they did not question our methodology, which we believe is the only one capable of producing credible estimates of the net fiscal cost of immigration that can serve as a guide for the development of an evidence-based immigration policy. Indeed, the Minister of Employment and Social Development cited it as providing the evidence for “why we [the Government] fundamentally reformed our immigration system.” (Kenney, 2014, p.17) This indicates that no plausible alternative methodology for assessing the fiscal implications of immigration exists.
Since new data for 2010 is now available from the 2011 National Household Survey (NHS), which is itself a subject of some controversy, we have updated our earlier estimate to incorporate this most recent information. This is particularly timely because the Federal Government has taken a number of major steps to improve the selection of immigrants from the point of view of their labour market readiness focussing the immigration system more on selecting economic immigrants. And it is important to determine if these steps are sufficient to halt the growing fiscal cost of immigration identified in our earlier papers.
Since we support the main thrust of the Government's immigration policy reforms, we are sorry to have to report that while our new estimate of the net fiscal transfer to recent immigrants is significantly lower at $5,329 per capita per year, the improvement is disappointingly small given the magnitude of the Federal Government’s efforts to better select immigrants who are prepared to succeed in Canada’s labour market. These efforts, which were attacked by proponents of continued high mass immigration, included the elimination of the growing backlog of immigrants who had met the specified points criteria established for admission and who hence had to be admitted under the Immigration and Refugee Protection Act. These prospective immigrants already selected numbered around a million. The problem was that the Government had come to a realization that, if it admitted these previously selected immigrants, they would be likely to experience labour-market difficulties stemming from their inadequate labour market and language skills.
The wide-ranging reforms introduced by the Government refocused the selection of immigrants more on the employability and less on education following the Australian and New Zealand models (Hawthorne, 2011) and moved moderately in the direction we recommended in our earlier papers (Grubel and Grady, 2011 and 2012). This included: improved selection criteria in the Federal Skilled Worker program; the introduction of the Canada Experience Class, which gives preference to immigrants who have already demonstrated their labour market skills in Canada as Temporary Foreign Workers or students; the implementation of the Federal Skilled Trades program for immigrants in 43 targeted occupations with job offers in their trades; and an expansion of the Provincial Nominee Programs, whereby provincial government are able to identify immigrants with skills and experience needed in provincial labour markets.
While it is a source of concern that the per capita improvement in the net fiscal burden identified in this paper is so small given the relative ambitiousness of the reforms in selection introduced (which, however, did stop short of basing admission on a job offer paying higher than the average wage as recommended in our earlier papers), it is even more worrying that the overall net cost of fiscal transfers to recent immigrants has continued to grow reaching a range of $20 to $28 billion in 2010 (and $27 to $35 billion in 2014) up from our earlier estimate of $16 to $24 billion in 2005. To put this number in perspective, it is large enough to account for a substantial proportion of the Canadian consolidated government sector net borrowing in 2013, the latest year available, which was reported to be $56.9 billion.
On the other hand, it is worth noting that the Government has introduced a new Express Entry Program effective January 2015 (Government of Canada, 2015). This program promises to further improve the performance of immigrants by allowing prospective immigrants to submit profiles and then inviting the top ranking candidates to submit applications for permanent residence under several existing federal programs designed to attract the most able immigrants with job offers and/or skills and experience (and also makes the applicant inventory available to provincial and territorial governments for use in their Provincial Nominee Programs if desired). Obviously, however, the success of this Express Entry Program cannot be evaluated until enough time has passed to generate reliable data on the performance of those selected. A concern we have with the Express Entry Program is that it is not clear if it puts an adequate emphasis on selecting high-wage immigrants. If not, it could lead to the admission of low-wage immigrants with job offers who would still impose a net fiscal burden on Canadian taxpayers. There is also the question of the number and performance of family class immigrants admitted that accompany or are sponsored by the Express Entry immigrants.
The fiscal cost will probably continue to grow as more immigrants are admitted. At a per capita net fiscal cost of $5,329, the 260,000 to 285,000 planned immigrant admissions announced by the Immigration Minister for 2015 should add from $1.4 billion to $1.5 billion to the cost, with a similar increment every year thereafter as long as the high targeted level of immigration is maintained subject, of course, to the proviso that there is no dramatic further improvement in the labour market performance of new immigrants that is sufficient to offset their growing numbers.
The net fiscal cost of immigration has continued to increase in spite of the extremely ambitious immigration policy reforms introduced by a Conservative Government committed to ensuring that immigration produces benefits and not costs for Canada. Reforms to immigrant selection like those introduced since 2006 by the Conservative Government can be and have been successful in reducing the per capita cost of immigration. Nevertheless, based on the results so far, it is hard to see how such reforms can produce large enough reductions in the per-capita fiscal cost of newly admitted immigrants to stem the mounting fiscal cost of mass immigration, particularly since they only apply to the principal applicants admitted and not to the related family class immigrants who are much more numerous and tend not to be as economically successful.
* This paper updates the estimates presented in two earlier papers. The first of these papers attracted a lot of public attention and was cited in the Wikipedia article on the "Economic Impact of Immigration to Canada." The second made some minor corrections to the estimates based on criticisms made by Javdani and Pendakur (2011) and presented our arguments as to why the lower estimates of the net fiscal cost of immigration presented in their paper are wrong.
Friedman, Milton (1999). Quotation from an interview at the 18th Annual Institute for Liberty and Policy Analysis (ISIL) World Libertarian Conference, San Jose, Costa Rica (August 20–22, 1999).
Government of Canada (2015). “Express Entry.”
Grubel, Herbert (2005). "Immigration and the Welfare State in Canada: Growing Conflicts, Constructive Solutions". Public Policy Sources 84. Fraser Institute.
Grubel, Herbert and Patrick Grady (2011). “Immigration and the Welfare State 2011.” Fraser Institute, Study in Immigration and Refugee Policy, May.
Grubel, Herbert and Patrick Grady (2012). "Fiscal Transfers to Immigrants in Canada: Responding to Critics and a Revised Estimate." Fraser Institute, Study in Immigration and Refugee Policy, March.
Hawthorne, Lesleyanne (2011). Competing for Skills: Migration Policies and Trends in New Zealand and Australia, prepared for the New Zealand Department of Labour with funding from the Australian Government/Department of Immigration and Citizenship.
Javdani, Mohen and Krishna Pendakur (2011). “Fiscal Transfers to Immigrants in Canada.” Metropolis British Columbia Working Paper No. 11-08.
Kenney, Jason, (2014) “Speaking Points for the Minister of Employment and Social Development at the Toronto Region Board of Trade,” November 6.