Ukrainian displaced people - economic impact of migration: discussion paper

Illustrative economic and fiscal impact of Ukrainian displaced people 

Potential short run implications

Almost 16,400 working age Ukrainian displaced people had arrived in the UK with a Scottish sponsor by 31 December 2022 (Department for Levelling Up, Housing, and Communities, 2023). At the same time, administrative data from HMRC indicates that only 1,950 Ukraine nationals who recently received a national insurance number were in payrolled employment in Scotland in September 2022.

In the short run, an inflow of Ukrainian displaced people could play an important role in filling vacancies in sectors experiencing recruitment difficulties, which is evident in uptake of employment in accommodation and food services and some areas of the manufacturing sector. 

Due to data limitations, quantifying the impact on Scottish Income Tax receipts, and hence the Scottish Budget, is challenging at this stage although the revenue implications are likely to be modest in the short term. As a broad illustration, and assuming all Ukrainian displaced people employed in Scotland in September 2022 (almost 2,000) were earning the full time Real Living Wage, Income Tax receipts would increase by up to £3 million in 2023-24, or 0.02% of total receipts. This assumption is not unreasonable in the light of the barriers to work and sectoral employment patterns discussed above although there is a high degree of uncertainty.

However, is also important to note that, in order to contribute towards Income Tax receipts, an employee would have to reside in Scotland for tax purposes and earn more than the UK-wide tax-free allowance which currently sits at £12,570. For someone earning the Real Living Wage (10.90 per hour), this would require working 22 hours each week for the entire tax year. Or, to put this into context, an individual would have to earn around £1,000 per month for 12 months. Since this might not apply to all UDPs in employment, the above revenue estimate might represent an upper bound.

Potential longer run implications

There is considerable uncertainty around the extent to which those displaced by the conflict in Ukraine could remain in Scotland, and the length of time they may choose to stay.  In part, this will be influenced by the duration of the conflict, and by its outcome.  It may also be influenced by the extent to which those displaced integrate within Scotland during the conflict.

Over time and with successful integration, assuming Ukrainian displaced people stay in Scotland, there could be a shift towards sectors better aligned with the experience and qualifications of this group. As noted above, some were previously employed in high paying industries, such as Financial services. As a simple illustration, a migrant earning the Scottish median wage in Finance would be an Intermediate Rate taxpayer and pay around £4,300 per year in tax.

The above analysis looks at some implications for the Scottish Budget on the revenue side. However, migrants also pay NICs, and other reserved taxes, which will flow to the UK Government (some of which might be redistributed back to Scotland through higher Barnett settlements and thus increase our funding envelope).

Were a substantial portion of Ukrainian displaced people to choose to permanently settle in Scotland, there could be a small but positive impact on the Scottish economy.  As an illustration of the overall impact of increased labour supply on the economy in the long run, and assuming all Ukrainian displaced people employed in Scotland in September 2022 (almost 2,000) settle in Scotland, GDP could be 0.09% higher (equivalent to £160 million), with total government revenues raised in Scotland (including devolved and reserved taxes) increasing by £50 million. This scenario assumes that Ukrainian displaced people will match labour market outcomes of the existing workforce through a successful integration process.

Furthermore, if all working age displaced people from Ukraine who have arrived in the UK with a Scottish sponsor so far matched the economic activity rate of existing migrants (over 70%) and assuming all arrivals settled in Scotland in the long run (over 10,000 of economically active migrants), GDP would be 0.5% higher (equivalent to £810 million) with total government revenues £260 million higher. Given that not all Ukrainian displaced people will be able or choose to settle in the UK, this is mostly likely to represent an upper bound estimate of the impact.

It should be noted that the impact on revenues in these scenarios does not translate into a 1:1 impact on the Scottish budget position, which will be affected through the operation of Fiscal Framework.

Estimates from an illustrative modelling exercise above are similar to the findings from the literature in this area. For example, a recent OECD study explored the potential economic impact of Ukrainian inflows in European economies (OECD, 2022). It found that Europe’s labour force is expected to increase by about 0.5% by the end of 2022. However, an OECD study was informed by data on Ukrainian arrivals by April 2022, and the UK was estimated to see the smallest increase of all European countries.

A range of other studies explored the impact of refugees on economic growth in European economies. For example, a 2016 study by the IMF estimated that EU GDP could be 0.25% higher in the medium term (over 5 years) as a result of high inflows of asylum seekers from Syria and other regions over 2015-2017 (accounting for around 0.10-0.15% of the total EU population), assuming new inflows become well integrated in the labour market (IMF, 2016).

A recent study explored how well previous cohorts of refugees integrate into labour markets of high-income countries and found that refugees have substantially lower employment rates than other immigrants in the first decade after arrival, but the gap shrinks substantially during the second decade (Brell et al, 2020).

The above analysis should be viewed as an illustration of what could happen rather than a prediction of what might happen. This is due to uncertainty around how many Ukrainian displaced people will settle in Scotland in the long run, how successful their integration process will be, as well as the types of occupations and industries they will work in once employed. The overall conclusion is that Ukrainian displaced people could play a small but important role in supporting the economy, particularly in the short term.