Contributions for demography and macroeconomics from immigration towards 2100

This report analyses the contribution to the long term growth in national income per capita and fiscal sustainability from migration to Norway throughout this century.

The study is a part of a project carried out for the Norwegian Ministry of Finance as well as the government appointed committee Long Term Consequences of High Immigration (NOU 2017:2). It applies an updated version of the model DEMEC (described in chapter 3) to simulate and compare two types of scenarios for the Norwegian economy. The assumptions underlying the scenarios are identical except for those on migration:

1. The Migration Scenario assumes the same immigration and emigration as in the “Main Alternative” in the population projections published in 2016 by Statistics Norway. We regard this as the most realistic among the published projections. Here, the annual net immigration equals about 26 000 from 2020. An increasing share of immigrants is assumed to come from Africa and Asia.
2. In our alternative “0-Scenario” neither immigration nor emigration takes place after 2015.

Studies of economic growth have typically not emphasized the size of the population. However, compared to most other countries Norway receives substantial income from production of crude oil and natural gas, as well as returns to the accumulated savings of these petroleum revenues. These revenues are completely independent of demography. Thus, excess of births and net immigration will reduce their value in per capita terms. Moreover, most of these revenues accrue to the public through the central government. Thus, net immigration implies, cet. par, that parts of the petroleum wealth are transferred from natives to the extra immigrants. This takes place by raising the tax burden when more inhabitants are entitled to a given standard of tax financed services and cash transfers within the government budget constraint imposed by the fiscal rule for spending the petroleum wealth. Chapter 2 shows that realistic rather than no migration implies that the petroleum wealth in some decades has to be shared by a much larger number of residents. From the present 5.3 million, realistic migration causes the Norwegian population to pass nearly 8.5 million in 2100, which is nearly twice the 2100-level in the 0-scenario. From 2016 till 2100 the population share of residents with background from countries outside the EEA, North-America, Australia and New Zealand grows steadily from 10 to 29 percent, whereas the share of natives with at least one parent born in Norway declines from 83 to 64 percent.

In addition to the effects of population growth, migration affects living standards and government finances through changes in the composition of the population. Although realistic migration mitigates the growth in the demographic old-age dependency ratio, realistic migration reduces the average annual growth rate of real national income per capita from 0.5 to 0.3 percent in the period 2016-2060 and from 0.6 to 0.5 percent in the period 2061-2100. The slow growth in both scenarios is due to prolongation of the slow productivity growth experienced since 2005. If growth were about 2 percent – the average over the last four decades - we would have judged the growth effect of migration to be small, especially compared to the large population effect. However, with the bleak general growth prospects in our projections, realistic versus no migration makes a large difference in relative terms. For example, reducing annual growth from 0.5 to 0.3 percent raises the doubling time from 139 to 231 years. (It is 35 years with 2 percent annual growth.) In 2060 real income per capita is 47 000 2013-NOK (7.8 percent) lower than in the 0-scenario. The corresponding reduction in 2100 is 72 000 2013-NOK (9.6 percent). The share of the income reduction that can be attributed to lower per capita value of incomes which are independent of demography, increases from 17 percent in 2016 to 45 percent in 2060 and to 59 percent in 2100. The income generated by production in the non-petroleum industries depends mainly on the population size through employment. Measured in 2013-NOK per capita, this income is lowered by 27 000 in 2060 and by 33 000 in 2100 due to realistic rather than no migration. The main reason is that the age- and gender specific average labour income per person is lower for immigrants from Africa and Asia than for natives.

Independent of migration Norway faces a fiscal sustainability problem, mainly caused by population ageing: The deficient tax revenue needed to meet the budget constraint implied by the current fiscal rule grows over time in both scenarios, also as a share of GDP for the mainland economy. However, realistic migration enlarges this measure of the fiscal gap in each year after 2025 by approximately 10 500 2013-NOK per capita, or 2.5 percent of the Mainland-GDP. The most important reason is that the return to the Government Pension Fund is shared by more residents. With respect to the population dependent budget components, migration reduces both incomes and expenditures in per capita terms. Net income falls until 2047 and increases thereafter. From 2016 till 2060 the fiscal gap has increased to 4 percent of Mainland-GDP, of which 2.4 points can be attributed to realistic migration. However, this effect is nearly constant, whereas population ageing causes a wider fiscal gap year by year, passing 11 percent of Mainland-GDP in 2100. Thus, realistic migration reinforces the fiscal sustainability problems facing Norway due to population ageing, but the relative importance of migration declines over time.