The Treasury on the government’s plans to reward migrants to the regions

The sadly inadequate quality of New Zealand’s immigration policy, and official advice around it, is on display again today.

In late July, as the headline announcement in the Prime Minister’s National Party conference address, the government announced a number of immigration policy changes.  One of those changes was to offer materially more points to people applying for entry as skilled migrants if they had a job offer outside Auckland.  The relevant Cabinet paper hasn’t been released, and nor has there been any regulatory impact assessment published.

But the Herald asked for a copy of Treasury’s advice on these changes.  The Treasury’s view on the proposal to grant permanent residence to certain low-skilled workers was withheld (we might reasonably assume the comments were quite sceptical), but the Herald reported what they got here.  My thanks to Kim Fulton at NZME who passed on a copy of what was released.

Here is what Treasury had to say about the proposed scheme.

tsy 1
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Cabinet must have agreed with them to some extent, since the final announced version of the policy was twice as generous as the version of the proposal Treasury was commenting on.

I entirely agree with them that the proposed changes –  and even the amped-up approved version –  is unlikely to do anything useful for regional development.  It is just another “subsidy”, and subsidies are both costly and aren’t what the regions need.  A sustainably lower real exchange rate –  and perhaps some comprehensive reform of capital income taxation – is much closer to the heart of what would make a difference.

But what I found surprising and disappointing was how blasé Treasury seemed to be about the whole proposal: “won’t do much good, but not many risks either”, which is pretty much a message from the government’s chief economic adviser that Cabinet might as well go ahead.

What are the risks?  Well, first and foremost, as I noted here, any person who just gets across the points threshold and secures permanent residence will beat out some other potential migrant who was objectively better qualified (whether on age. education, employment or capital investment –  Treasury’s own list).  And contrary to what Treasury suggests, this proposal isn’t just affecting a small number of people. On Treasury’s own numbers around half of migrants go somewhere other than Auckland, so the potential for debasing the average (and marginal) quality of New Zealand’s migrants is quite real.  As I’ve been highlighting in the last few weeks, a large proportion of our migrants (and temporary workers) are already not that skilled at all.  As Treasury has struggled to produce any convincing evidence of the gains from the large scale immigration programme, we might have hoped that they would be rather harder-nosed in pushing back against changes that worsen the chances of real and tangible gains to New Zealanders ever showing up.

And then Treasury observes that there isn’t much risk of competition with people at the lower end of the New Zealand labour market because the skilled migrant category rewards high-skilled people.  Yes, and very high-skilled people will easily cross the threshold already, and won’t represent competition for people at the bottom end of the market.  But this change is about making things easier for people who just aren’t that highly-skilled –  they are the marginal cases, and they get in only because they manage to get the extra points that will come from securing a job offer outside Auckland.  At the margin, it is those people –  the ones who directly benefit from this policy –  who are most likely to be competing with people at the lower end of the New Zealand labour market. I’m not suggesting they’ll be competing with shelf-fillers and checkout operators, but there are plenty of immigrants who don’t appear to rank very high up the spectrum of skills. There will be more under this policy.

As I read the advice I wondered why Treasury was not rather harder-nosed in its advice.  As we saw in previously released papers, they seem much less sanguine about the economic benefits of immigration to New Zealanders than their chief executive has been.  Perhaps they just didn’t have much time to look at the proposal and the weaknesses in the proposal just slipped through?  Perhaps they just knew it was all about politics, and the headlines in the media after the Prime Minister’s speech?

The permanent residence approvals programme, and especially the skilled migrant category, is seen by the government as an “economic lever”.  It operates on a very large scale, and has significant effects across the country.  We should expect a rather more rigorous critique –  and some of that rare free and frank advice – when ministers want to debase the currency (points), in ways that must, if the policy works at all, debase the average quality of the new migrants.  Productivity growth isn’t so abundant in New Zealand that we can afford a cavalier Treasury when proposals turn up that will, if they do anything, worsen our productivity prospects.

What economic gains are New Zealanders getting from older immigrants?

The New Zealand government’s permanent residence approvals target is 45000 to 50000 per annum.  The target hasn’t changed for quite a long time, although actual approvals fluctuate from year to year.

As I’ve noted previously, even though the immigration programme is explicitly described as an “economic lever” only around half the permanent residence approvals have been under the skills (or business) stream, and even that total includes the immediate family of the primary applicant.

It is well-known that it takes many immigrants years to reach the earnings that a New Zealander with similar qualifications would achieve.   Here is how Julie Fry summarised the evidence in her 2014 Treasury working paper.

However, they also face language and adjustment barriers, at times including discrimination, which on average take 10-20 years to overcome. In common with overseas patterns, recent New Zealand immigrants have poorer outcomes than others in the labour market, although those outcomes improve over time.  Immigrants who are from culturally similar source countries (such as Australia and the United Kingdom) adjust more quickly. On average, migrants from Asia take longer to adjust, and migrants from the Pacific Islands never reach parity with the New Zealand-born, reflecting the fact that they enter mainly on family reunification grounds and non-skills-based quotas.  University-qualified migrants also adjust more quickly.

Ten to twenty years is a large chunk of a working life, and if the New Zealand immigration programme is really going to boost productivity and per capita incomes of New Zealanders that adjustment period is a significant hurdle to get over (as for much of their working lives here many of the migrants can’t even match the earnings New Zealanders reach).  That probably wasn’t the experience of migrants to New Zealand in the mid to late 19th century.

The issue is even more acute in respect of older immigrants, and is likely to be particular so for those from countries that are not (in Fry’s words), “culturally similar”.  A migrant arriving at age 55 has only perhaps 10-15 years left in the workforce, and that expected time in the workforce drops as the arrival age increases.

Unfortunately, although the permanent residence approvals target has not changed, the proportion of it being used up by older immigrants has been steadily increasing.  Unsurprisingly, not many people 55 and over come on work visas (around 275 in the latest year, not much changed over the previous decade). By contrast, 3279 people aged 55 and over arrived on residence visas in the year to June 2015, just over double the number who came in the year to June 2004 (the first year the data are reported).  The chances of many of these people making any material contribution to boosting productivity and incomes of New Zealanders seem small.  And yet they now make up 7 per cent of our total (skills-focused) permanent residence approvals target.

If there is little obvious economic reason to allow in most of these older arrivals –  and, in fairness, the arguments made for doing are not typically economics ones –  there are fiscal reasons to be quite uneasy about doing so.  As I’ve highlighted previously, someone who moves to New Zealand need only live here for 10 years before becoming eligible for full New Zealand Superannuation entitlements, and once granted residence they are eligible for our public health system (and time spent in Australia counts as time spent in New Zealand for NZS eligibility purposes).

The New Zealand Superannuation issue is less severe in respect of those coming from advanced economies.  Pensions earned in those countries are set off against NZS entitlements, so that New Zealand pays only a portion of the total retirement income cost.  But for people from poorer countries where there is no public pension entitlement, or nothing that can be claimed abroad, the full cost falls on New Zealand once the ten year residence period has passed.   Considered from a fiscal perspective, it is perhaps unfortunate that most of the increase in the number of older arrivals has been of people from India and China (numbers from the UK are significant, but have not increased materially).

plt arrivals 55+

Of course, there is a much larger fiscal risk in the possibility of large numbers of older New Zealanders returning from Australia (in particular) at around retirement age, having paid few New Zealand taxes and now claiming full NZS and health entitlements.  The number of older New Zealanders returning from Australia has been increasing (around 2700 of those 55 and over in the last year, about 800 of whom are 65 and over), but are still modest compared to the total number of New Zealanders living in Australia.

The average migrant to New Zealand probably makes a net positive fiscal contribution over the course of their time in New Zealand.  But that average is dragged materially downwards by these older arrivals. It tends to reinforce the argument that any real economic gains from the immigration programme could be obtained with a much lower permanent residence approvals target.

Without even touching the refugee component of the target (perhaps even increasing it), restricting permanent residence approvals to the sorts of high skilled positions illustrated in yesterday’s post, and prohibiting any permanent residence approvals for people aged over 55[1], would enable us to capture most of the putative gains with a permanent residence approvals target of perhaps 10000 to 15000 per annum.  Reducing the permanent residence approvals target by two-thirds would materially reduce the demand pressures associated with a fast-growing population.  Doing that would materially ease pressures on real interest and real exchange rates, which would allow New Zealanders and the remaining highly-skilled immigrants to take advantage of the new tradables sector business investment opportunities that would become much more attractive as a result.

As a comparative benchmark, the average annual net inflow of non-New Zealand citizens was 8500 in the 1980s.  If we are serious about lifting economic performance, and using a skills-focused immigration programme as part of that we need to get much more hard-headed about the sort of people we allow in (refugee issues aside).  In fact, over the last decade or more we’ve been going in the wrong direction, as the highly skilled have made up a decreasing share of migrants.  Many of our business migrants seem to be attracted more by the lifestyle than by the prospect of building high productivity businesses here. And the immigration programme was diluted against just recently with the decision to award more points to people moving to places other than Auckland, which will squeeze out other better-qualified applicants.

[1] With an exception perhaps for a small number of people who are entirely self-funded for their lifetime.