The UK’s coalition government has wasted little time in getting to work on its flagship immigration policy – a cap on non-EU economic migrant numbers. The government has already introduced an interim cap, which should result in a small fall in the numbers of work permits issued in the current year. At the same time it has begun work on a consultation process with a view to setting a permanent cap to come into operation from April 2011.

There is little doubt that the policy – which was a key Conservative election commitment – is popular with voters. Simple to communicate, it enabled the Conservatives to appear tough but credible on migration. The Conservatives could also point to a number of other countries, including Canada, Australia and the US, which they claimed operated effective caps or quotas.

In contrast, coalition partners, the Liberal Democrats, struggled to explain their own idea of introducing a regional element to the non-EU economic migration ‘points based system’. Instead leader Nick Clegg spent much of the campaign on the defensive over the party’s separate plans for an earned amnesty for a limited number of illegal migrants.

But turning the rhetoric into reality will not prove so straightforward. The policy represents an uneasy compromise between elements in the Conservative party who want to make a significant cut in migration and the more business-friendly wing who are desperate to prevent anything that might prove harmful to the economy. It represents an attempt to even more tightly micro-manage the migration system than the outgoing Labour government and stands in contradiction to the Coalition’s claim to be reducing state intervention in the economy and society.

The coalition government faces two key challenges in seeking to introduce the new policy: the first is how to set a meaningful target especially since it wants to reduce overall migration rates, not simply the level of non-EU economic migration; the second is how it could reconcile any changes with preserving the competitiveness of the British economy.

In the run up to the election, the Conservatives indicated they wanted to reduce net migration levels to those before Labour took office in 1997. This implied reducing net migration from a figure of 148,000 in 2009 to around 42,000 (the average between 1990 and 1997). The government has subsequently backed away a little from such swingeing cuts in net migration levels. The consultation paper published at the end of June 2010 refers to reducing net migration to the levels of the 1990s – “tens of thousands, not hundreds of thousands” leaving a little more flexibility than the earlier rhetoric implied.

But this would still mean halving net migration from its level in 2009. Moreover, the government is reliant on a cut in non-EU economic migration to achieve this goal. Yet non-EU economic migration only represents around a third of all migration to the UK: asylum, EU migration and family reconciliation would all be excluded from the proposed cap. In fact, the government’s cap will be even further restricted covering just two elements of the UK’s points based migration system - which seeks to control non-EU economic migration by scoring immigrants on apparently desirable qualities, such as educational level and salary. Tiers 1 and 2 cover respectively the highly skilled who can gain entry without an immediate job or skilled non-EU migrants entering with a job offer. These two tiers accounted for 97,000 new permits (including dependents) in 2009. All things being equal, a surge in net migration rates through other entry routes, such as family reconciliation or from other EU countries, would force the government to completely shut Tiers 1 and 2 to meet its target. Such a move would provoke a fierce backlash from the UK business sector, especially the still powerful City of London which remains heavily reliant on skilled international labour.

Not surprisingly, the government has turned to outside help in its efforts to set this goal. It has asked the Migration Advisory Committee, established by the Labour government to provide recommendations on the operation of the points based system, to provide a figure. As the MAC notes its task is complicated not only by the limited scope for action but also by the time frame it has to work within. The government has to reach its migrant numbers goal by 2013 (starting in 2011) as this will be the latest available data at the election scheduled for May 2015.

The government has also called on experience from abroad, especially Australia, Canada and the US, in justifying its approach to the target. But there is little evidence that it can use a cap to substantially curb migration flows without harming economic competitiveness.  Both Canada and Australia operate targets that have the ultimate goal of steadily increasing their overall population, not reducing migration flows, and thus it is questionable that they provide useful comparisons. The Canadian Parliament sets a broad target for overall population growth – currently 1 per cent each year, rather than seeking to impose a ‘hard’ cap or quota on entry visas.

Meanwhile, Australia uses a processing target rather than a cap. This means that once the allocation is full successful applicants need to wait until the next year to gain entry. Both Australia and Canada are maintaining net migration rates that are substantially higher than that of the UK, approximately 0.8 per cent of the total population each year, compared with 0.27 per cent in the UK in 2008.

The US system employs a hard cap in the form of the 65,000 cut off for highly skilled visas (H1B). This is set by Congress, subject to repeated political wrangling, and bears no resemblance to business needs or the ability of the US to absorb migration. The allocation is normally filled within a day and has led to some companies seeking to relocate to more migration favourable countries, most notably Microsoft, which has moved some of its R&D operations across the border to Vancouver.

The US cap also makes little overall difference to migration flows. Migrants coming in under H1B represent just 6 per cent of the total migration to the US each year. Some 1.3 million workers enter each year through temporary worker or trainee schemes and intra-company transfers. Meanwhile, illegal immigrants make up around a third of all entrants into the US. The US experience suggests a hard cap does little to control overall migration flows and may damage economic competitiveness.

The underlying problem for the UK government remains that any target is invariably political and arbitrary. There is limited empirical evidence on ‘externalities’ both negative – such as the short term negative impact on public services and housing – and positive through enhanced productivity and income levels. The Migration Advisory Committee’s recommendations are likely to provide no more than fig leaf of respectability to the final target by seeming to provide impartial evidence on which to base the target upon. Any cap will either be set so loose as to be meaningless or will damage Britain’s competitiveness.

Not only is there no economic or social justification for introducing a cap, there is also probably no need. It already seems likely that net migration will drop below 100,000 as the surge of East European immigrants wanes and austerity measures reduce the demand for migrant labour from Britain’s public sector.

But if there must be a cap – and the political capital expended on the subject means that the government will have to deliver on its promise – it should be set in as flexible manner as possible. The government should set a ‘soft target’ - an indicative range for the numbers of permits it expects to be issued, and seek to influence overall numbers by adjusting the points system, for example through increasing or decreasing the required salary levels, rather than trying to impose an arbitrary quota. This would have the benefit of reducing the risk that businesses would be unable to recruit much needed migrants, who otherwise meet the basic requirements, simply because the quota had been filled. It would enable non-EU economic migration flows to continue to partly respond to changing economic circumstances. And it would ensure the UK’s migration policy does not wholly become dictated by meeting crude numerical targets.