UK Economy Faces £37bn Deficit with Zero Net Migration

A future with zero net migration could shrink the UK economy by 3.6% by 2040, forcing the government to implement major tax increases to cover a ballooning budget deficit, according to a new forecast from the National Institute of Economic and Social Research (NIESR).

The think tank analyzed a scenario where falling UK birthrates are compounded by a complete halt in net migration, a trend that began to accelerate last year.

A Stagnant Population and a Smaller Workforce

Under this projection, the UK's population growth would flatline around 70 million in 2030, up only slightly from the 69.3 million recorded in 2024.

"Net zero migration leaves the economy 3.6% smaller by 2040 and this reflects slower employment growth and a smaller workforce," stated Dr. Benjamin Caswell, a senior economist at NIESR.

The core issue is demographic drag. "Imagine it as like freezing the population where it is, and then just having a continually ageing population," Caswell explained.

Short-Term Gains, Long-Term Economic Pain

While the headline figures are concerning, the report notes that the immediate economic effects wouldn't be entirely negative. Initially, a smaller labor pool would force companies to invest more in machinery and technology, boosting productivity.

This shift would lead to a rise in real wages and disposable income. NIESR projects that GDP per capita could increase by 2% by 2040 under this scenario.

However, these gains would be overshadowed by weaker overall economic growth. An aging and shrinking population generates less tax revenue, creating a widening gap between public spending and government income.

"In the short to medium term, it's not too detrimental," Caswell noted. "But over 20 years this gap [in spending and receipts] becomes continually larger and larger."

A Widening Budget Deficit and the Threat of Tax Hikes

NIESR forecasts that the government would have to fill this fiscal hole with more borrowing. This would cause the budget deficit to swell by approximately 0.8% of GDP, equivalent to £37 billion, by the year 2040.

This forecast is built on the assumption that government spending and tax rates follow the path outlined by the Office for Budget Responsibility (OBR) until 2030, after which the share of government spending relative to GDP remains constant.

While some payments like child benefit or jobseeker's allowance would adjust to the demographic changes, the think tank believes government investment and consumption would not significantly alter.

Caswell concluded that unless the UK's fertility rate increases, a zero net migration scenario "would not be fiscally sustainable... unless there were significant tax rises, and significant tax rises could potentially choke off economic growth."

Policy Shifts Driving the Migration Downturn

The NIESR analysis comes after net migration to the UK fell sharply in 2025, dropping from 649,000 to 204,000 in the year to June following a tightening of work visa requirements by the Conservative government.

The report adds that further measures from the Labour government concerning the recruitment of foreign workers in health and social care could push migration levels down even more. With the number of births and deaths in the UK now roughly equal, migration has become the primary driver of any change in the nation's population.