Last week I was lucky enough to sit next to Göran Persson, Sweden’s former prime minister, at a private lunch. Persson ran Sweden for a decade until he lost a general election in 2006, during which time he was at the heart of all the big debates over the future of Europe. The lunch was off the record, so unfortunately I can’t pass on his insights into Tony Blair and Gordon Brown, both of whom he worked with closely during his time in office. But he did make one observation that prompted discussion at the table. He noted that in the future, the world could face increasing competition for immigrants – and that this could present a real challenge to Britain and the EU.
Two items of news this week reminded me how true this is. The first was official figures showing that two million Britons have left this country over the last ten years to settle abroad. The second was the last Home Office data showing that the number of Eastern and Central European migrants applying to work in the UK had fallen by almost 15% in the first three months of this year, compared to 2007, to the lowest level for three years. That supports recent research by the Institute for Public Policy Research, which calculated that half the one million migrant workers estimated to have come to Britain in the last four years have returned home.
This could be the harbinger of future problems for Britain. Immigration may be a hot political issue, stoked up by politicians such as Gordon Brown adopting British National Party slogans (‘British jobs for British workers’) to try to win votes, but we will miss them when they go. That’s partly because they do the jobs no one else wants to do. The hospitality industry has become hugely reliant on migrants. So too has farming, which depends on migrants to pick crops. Migrants are also to be found in large numbers in the health service and in care homes looking after the elderly.
But the more important reason we need migrants is to pay the taxes that not only pay for 5.4 million Britons currently of working age not to work, but also the pensions of the rest of the country. Britain’s pension system is, of course, a disaster area. A recent study found that a third of those aged between 16 and 65 had made no provision. With the closure of company pension schemes, ever more people are likely to face poverty in old age. Meanwhile, the country must brace itself for the increased demands on the health service of an ageing population.
The problem is that Britain is far from alone here. Almost every country in Europe has an ageing population, a generous welfare system and completely unaffordable state pension promises. All of Europe needs immigrants if they are to honour their promises and head off inter-generational conflict in the future. Yet Europe must compete for these immigrants against plenty of other countries. Russia, China and Japan, for example, all have declining populations and very low fertility rates well below the replacement rate.
All these countries will need to encourage immigration, yet none have made such extravagant promises to previous generations, so they can at least afford to offer immigrants more attractive deals in terms of lower taxes. We’re already seeing the effects of this competition in terms of tax policy as countries around the world try to lure businesses with attractive tax deals. The current row over UK firms threatening to move offshore shows what the Government is up against. The UK Government has clearly made a pig’s ear of tax reform, having lost the confidence of the business community, but its basic task – to preserve the UK tax base while continuing to ensure Britain remains internationally competitive – is far from easy. And in post-boom Britain, it will get even harder, as immigrants slip away from a slowing economy and an increasingly menacing political climate.
Don’t bet on reckless hedge funds
In American lives, there are no second acts, according to F. Scott Fitzgerald. But he clearly didn’t know much about hedge funds. Over the last few weeks, there have been reports of a number of hedge fund managers who have blown up spectacularly during the credit crunch plotting their way back to riches. Jeffrey Larson, who lost $1.5bn with Sowood Capital, is trying to raise fresh capital; ditto the team behind Drake, a US fund that blew $2.5bn. Now I hear that some of the team at Peloton, the most spectacular London-based blow-up, are also trying to get back in business.
I don’t blame them for trying. But I hope for the sake of the financial system that investors ignore them. The hedge fund industry already suffers from a perverse incentive system that encourages managers to ‘swing the bat’ by rewarding them with a share of any gains, but not penalising them for losses. If hedge fund managers are then rewarded with a second chance by the very investors whose money they have lost, then they should not be surprised if hedge funds respond by taking even more reckless bets.
Simon Nixon is executive editor of Breakingviews.com.
Email: simon.nixon@breakingviews.com