Philip Thornton: The policy that dare not speak its name has a big part to play in solving a £54bn crisis

Ask people to identify the greatest threat to their well-being and most would probably mention global terrorism, climate change or nuclear proliferation. Few outside the world of finance would list the pensions crisis - at least they would not have done before they heard the warning of a £54bn shortfall in the UK.

Ask people to identify the greatest threat to their well-being and most would probably mention global terrorism, climate change or nuclear proliferation. Few outside the world of finance would list the pensions crisis - at least they would not have done before they heard the warning of a £54bn shortfall in the UK.

Ask what we must do about this crisis and the most common answers would be work longer, save more and pay higher taxes. Not many people would suggest higher immigration as the solution, not least because this is one of the most explosive issues around.

Thanks to the myopia and, let's be honest, racism in the debate over migration, economics often has to take a back seat. But with globalisation growing, the view is taking hold outside the oak-panelled corridors of academia that the free movement of labour is as important as the movement of capital. A study by researchers at the Home Office concluded that migrants make a net contribution to the Exchequer of around £2.5bn a year.

This analysis includes neither the beneficial impact of job creation by entrepreneurs, nor the costs of a coping with social or criminal problems. It represents only the extra money they pay in taxes less the money they take in benefits and public services.

Obviously, the contributors are different people from the recipients. That point is quite significant.

In unreported comments a few days ago, Mervyn King, the Governor of the Bank of England, said that immigrants have - indirectly - helped keep inflation and interest rates low. He noted that the benign state of the labour market - low and stable growth in pay despite record levels of employment - was in part due to an influx of skilled workers. Employers had become adept at using migrants with certain abilities to fill specific gaps where they were suffering from skills shortages, he said. "I am sure that demand by employers for extra labour has been met not by raising wages but by targeted use of migrant labour."

The Government, for whom inward migration has been the policy that dare not speak its name, is also starting to come out on the issue. The Home Office, together with the Department of Trade and Industry, is going to use the Highly Skilled Migration Programme - a fast track to a work permit for postgraduates - to target shortage areas such as science and engineering.

But can these people really be asked to help solve the £54bn pensions crisis? A new study by two professors at City University's Cass Business School in London shows it is theoretically possible, although the numbers involved would cause palpitations at Labour Party HQ.

David Blake at the school's Pensions Institute and Les Mayhew at its Risk Institute start from the widely accepted background view that rising longevity and declining fertility will put the pensions system under extreme pressure within a generation.

While there was one pensioner in the UK for every four workers in 1990, Government figures show that by 2030 there will be two pensioners for every five workers. Meanwhile, the Government's actuaries project that the pensioner population will rise to 15.2 million by 2031, from 9.6 million this year, against an overall population increase of 5.6 million to 64.8 million. Pensioners will move from 16 to 23 per cent of the population.

Professors Blake and Mayhew have looked at how a combination of later retirement dates and greater immigration could be used to deliver a number of outcomes for pensioner income. Under their worst-case scenario, where neither productivity, activity nor pension payments rose, there would be a shortage of 10 million contributing workers by as early as 2016.

The Government's plan to align the retirement age for men and women at 65 by 2020 would delay the problem until 2024. Even a retirement age of 70 would leave a shortage of three million paying workers by 2030.

By tweaking the assumptions on wages, pension and activity levels, they can accelerate or delay the point at which the shortfall of 10 million kicks in, although that appears to be inevitable.

"These scenarios suggest increases in the state pension age after 2020 look more likely than not," they say. "The alternative, in the absence of any other policy changes, would be substantial and unrealistic increases in immigration."

Their intention is clearly to start a debate rather than offer prescriptions. "Pensions and immigration issues will increasingly dominate the political agenda on national resource allocation over the next half century," they conclude.

The permanent influx of 10 million people, equivalent to the population within the M25, raises wider issues. It would put pressure on housing, transport and education resources. It would also force politicians to face up to the wider question, raised in Prospect magazine this year, of whether Britain would become too diverse to support the mutual obligations that support the welfare state.

The economics would also come under fire, especially from the more sophisticated critics of current policy such as Migration Watch, which suggests policies to encourage procreation and boost productivity

A separate Home Office paper in 2001 said the impact of immigration in mitigating population ageing was acknowledged to be small because migrants also age.

"For a substantial effect, net inflows of migrants would not only need to occur on an annual basis but would have to rise continuously," it explained.

Whatever the rights and wrongs in this debate, it is clear we are going to have to entertain some radical ideas on the issues of both pensions and immigration.

Wanted: a good old barney at the Bank

Not so long ago, rival football fans used to chant "boring, boring Arsenal" when the club picked up trophies with a series of 1-0 wins. In the City, the chant is now "boring, boring Bank" as the Monetary Policy Committee continues to rack up unanimous votes for interest rate decisions.

The MPC notched up another victory for teamwork last week when it decided to keep rates pegged at 4.75 per cent for the third month in a row. "There was a range of views among members although the differences were small," the minutes said with time-honoured understatement. But up until the November Inflation Report settled the matter, there had been great expectations that the meeting would be a real humdinger.

Would the MPC stick with its tacit policy of raising rates every three months against a background of little spare capacity, rising oil prices and a tight labour market, or hold fast for fear of toppling the housing market over a cliff? A split vote was surely on the cards.

In fact the decision was the seventh uncontested result in a row and the ninth so far this year. A likely repeat next month will leave 2004, along with 2002, as the most consensual year since the MPC was set up in 1997.

This has led some analysts to speculate that the MPC has become more boring since Mervyn King became Governor halfway through last year. It was Mr King (an Aston Villa fan) who said it was a central banker's aim to be "boring".

This issue was picked up in Parliament. James Plaskitt, a Labour MP, said that since July 2003 the MPC had "hunted in a pack". "Have you got everyone into line?" he asked Mr King.

A committee of peers led by Lord Peston, a former economic adviser to the Treasury, took a different tack, saying there had been a "decline" in the number of major contributions by "external" MPC members.

It recalled the glory days of the late 1990s when the MPC included Willem Buiter - best remembered for voting for a 0.4 per cent cut - Sir Alan Budd, Charles Goodhart, DeAnne Julius and Sushil Wadhwani. By implication, it criticised - perhaps unfairly in some cases - recent appointments as not having the "expertise in monetary economics" of earlier members.

I say "unfairly" because research by Barclays Capital shows that Stephen Nickell stands out as the most contrary voting member, while Marian Bell is the most doveish, opposing rate rises.

But it is probable Mr King would secretly agree with the Lords' message that the MPC could suffer a loss of credibility if Gordon Brown were to pack it with experts in other fields than monetary policy. As the Governor put it a couple of years ago: "When I go to a hospital, I do not wish to meet an economist; I wish to meet a doctor."