Article / 17 December 2015 at 14:00 GMT

Calculating the fiscal contribution of refugees

  • Migration will be a key topic at the upcoming European Council meeting
  • Swedish and German politicians to discuss how to reduce refugee inflow
  • Politicians and economists differ on refugees' fiscal contributions 
  • Deutsche Bank's chief economist thinks welcoming migrants will pay off
  • Positive as well as negative net contributions are presented
  • Nobody really knows how qualified the refugees already are 


Berlin
Asylum seekers and visitors in Berlin. Photo: iStock

By Clemens Bomsdorf

The number of refugees fleeing from terror-torn Syria and similarly troubled states increased yet further in the second half of 2015. Now as we head into the end of the year, leading politicians and economists in both Sweden and Germany – the nations initially most open to providing help – are beginning to doubt whether they can cope (financially and otherwise) with the influx. 

Today and tomorrow the European Council will meet in Brussels and migration is one of the main topics on the agenda.

Welcoming and helping those seeking asylum comes with a financial cost but similarly, the new arrivals represent a potential workforce. While Deutsche Bank's chief economist says the refugees are "the best thing that could have happened to Germany", Think Tank IfW calls it “the greatest fiscal challenge since reunification.”

As it is often the case in economics (and politics), opinions differ. That is largely due to the fact that assumptions about the refugees' qualifications and their potential integration into the labour market differ. In order to give an idea of the possible outcomes and thus provide some food for thought, we will present a few different scenarios.

While these forecasts focus on Germany, the challenges and opportunities are similar across Europe.

Best-case scenario or huge challenge?

Presenting Deutsche Bank’s World Outlook 2016, chief economist David Folkerts-Landau told reporters that the arrival of the refugees is “the best thing that could have happened to Germany”. 

Food for thought
We give you some German food for thought. Photo: iStock
 
Apparently, refugees will also play a big role in the years to come. However, the actual report is less forthright than Folkerts-Landau's remarks to journalists. In the outlook, in fact, it only says that “the controversial decision on a quota for the redistribution of refugees and the lack of full application of European rules has provided some evidence for the different interests and the respective understanding of solidarity on this topic”.

German Federation of Industries (BDI) head Ulrich Grillo says that though investments are needed, refugees could contribute to society in the long run. 

(For more information, you can read the BDI release about his speech at this year's migration-focused Industry Day here and an interview with him here – both are in German.)

However, when it comes to more concrete expectations – i.e. ones expressed in terms of GDP numbers – one has to turn to the research community.

A positive impact, at least in the short term

The aforementioned IfW Kiel Institute for the World Economy released its latest forecast (available in English here) on December 14 and the most important news relates to the influx of people: the 2016 GDP growth forecast for Germany has been raised slightly to 2.2% from 2.1% due to refugee-related spending. 

Last Friday, IfW published a forecast focusing solely on the costs associated with refugees (available in German only). It was then that Matthias Lücke, a professor at IfW, spoke of "the greatest fiscal challenge since reunification”. His base assumption is that the state has to invest €13,000 each year to support each refugee – a figure derived from German municipal data.

The annual cost of supporting refugees is estimated at between €23.3bn and €25.7bn next year. Depending on both the number of refugees arriving in and leaving Germany – and on the labour market integration of those staying – the costs are seen as ranging from a potential €19.7bn to a high of €55.0bn in 2022 (see table below).

IfW
Source: IfW The top four rows with years 2016-2020 show the estimated inflow of migrants in the four different scenarios while the last six rows show the respective annual costs. The values between 9.0 and 68.0 in the middle are the share of refugees on social welfare after 2.5 and 10 years.

The big question

Lücke foresees some refugees finding jobs, but he does not see them as noticeable contributors to welfare. "We assume refugees that found work [will] earn just as much as is needed for themselves and their families. Their taxes and social contributions will just finance the state benefits they directly or indirectly receive," Lücke told TradingFloor.com.

As such, GDP will grow but the average income for those already living in Germany won’t and the costs will exceed the financial benefits.

According to Lücke, however, the state can influence the costs imposed by refugees. 

These can be lowered if:

  • An additional €1,000/refugee is invested into integrating newcomers into the labour market (while such a move increases costs in the short term, this would pay off fast).
  • Asylum decisions would be made faster so that those allowed to stay would be integrated faster and those who have to leave would do so sooner. 

However, Lücke does not see a realistic scenario in which helping refugees ultimately pays off in a financial sense. Bernd Raffelhüschen, a professor at Freiburg University, comes to similar conclusions.

Economists at DIW Berlin, however, see a positive net-impact. Having simulated various scenarios based on different assumptions, researchers report, the investment was seen as paying off over the longer term in every projected scenario. Thus, concludes the institute, successful integration will increase the per capita income of Germany’s current population.

DIW assumptions
 


 




























“Refugees who are able to find jobs stimulate the economy, even if they have minimal skills,” explains DIW president Marcel Fratzscher. “They strengthen the supply side by contributing to corporations’ success and revenue and simultaneously increase demand. As consumers themselves, they contribute to more investment and higher incomes for other households.” 

All in all, economic growth will increase says DIW – it’s just a matter of when. In fact, the institute looks much farther into the future than does IfW  While the latter has predictions reaching into 2022, the former looks to 2035. 

Some investments, after all, take more time to pay off. 

DIW outcome scenarios
Source: DIW Berlin

“[T]he current debate focuses too much on the governmental costs of supporting the refugees, thus ignoring the positive economic effects that will come about as a result of two mechanisms: First, refugees who find work stimulate the economy on the supply side by contributing to corporate production. Second, the refugee-related expenditures are accompanied by positive economic demand impulses, because higher demand helps businesses overall,” states the DIW paper.

Learning the language and more

DIW assumes an initial annual cost/refugee of €12,000/year, or €1,000 less than IfW, but also maintains a scenario involving double that number.

Daimler
Getting things done in Germany: Can refugees help to boost productivity? Photo: iStock
 
Again, the costs and benefits of the influx ultimately depend on refugees' integration into the labour market, which in turn depends on the qualifications that refugees arriving already have and the ones they can get once they arrive.

The latter can be increased by investing in refugees; teaching them the language, allowing them to acquire skills and things like that. Generally spoken, refugees who are quickly integrated into the education system and the labour market have a higher chance of becoming net-contributors.

They are also, itmust be imagined, more satisfied with their new lives.

When it comes to the qualifications refugees already have, opinions differ as well. While some researchers (as well as politicians) see refugees mainly low-qualified migrants with few prospects for improvement, others are more positive. 

However, no extensive study exists as of yet and hence only the future will tell what the financial impact is.


— Edited by Michael McKenna

Clemens Bomsdorf is a contributing editor at TradingFloor.com

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