Sunday, July 17, 2022
Economic supremacy? Not if our population is falling
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission

Population does not get as much attention as it deserves in economic discussions. So, to tear your attention away from the Tory leadership contest, let me try to fill the gap. A few days ago, the United Nations came out with new global population projections for China and India. They showed, not only that the world’s population will reach 8 billion on November 15 this year, which is scarily precise (and on its way to 10.4 billion by the end of the century) but that India will soon overtake China as the world’s most populous country.

This will happen, according to the UN, next year. The writing has been on the wall for China’s population for some time, mainly but not entirely because of the now-relaxed one-child policy. The country’s population will start to fall very soon, while India’s will continue to grow. By the middle of the century, on current trends, the UN estimates that India will have a population of 1.67 billion, China 1.32 billion. India will not close the economic gap with China immediately but, thanks to stronger population growth, will soon start to do so.

There is also some population news at home. The Office for Budget Responsibility (OBR), the government’s economic and fiscal watchdog, published its new ‘Fiscal risks and sustainability’ report earlier this month. There was a lot of interest in there.

For me, one striking finding was that the UK, like China, is heading for population decline. Before explaining why, we should remember how much this matters. The size of the future population is vital for civic planning, including how many new houses, school places, hospitals, and so on, we will need. It is a key metric for many businesses. It matters for the public finances and it matters for he economy’s ability to grow.

Three factors are weighing down on future population growth. The first is a declining birth rate. You may remember a couple of years ago, some people predicted a lockdown baby boom. The opposite, however, occurred. The UK’s total fertility rate fell in 2020 to a record low and appears to have settled there. The OBR now assumes a birth rate of 1.59, compared with 1.84 in its previous long-term assessment four years ago. A smaller number of births means that that the so-called young-age dependency ratio – those aged 15 and under as a proportion of 16-64 year-olds – will drop from 30 to 25 per cent, with implications for education, children’s services and businesses selling children’s products.

The second factor is a slowdown in the improvement in life expectancy. We have had features in this newspaper about babies born now routinely expecting to live beyond 100, but for a while now this has been going in the opposite direction. The OBR, for example, used to assume that women born in the 2040s could expect to live to an average age of 96. Now, based on changes already occurring, it is less than 93. The effect of low life expectancy, apart from reducing population growth, is to reduce the old-age dependency ratio in the short-term but raise it over time.

The third factor is, of course, migration, an important driver of population growth. The OBR now assumes net migration of 129,000 a year, compared with a previous forecast of 165,000 and the current assumption of 205,000a year used by the Office for National Statistics.

These are important changes and, as the OBR notes: “Taken together these three changes reduce population growth from an average of 0.3 per cent a year over the next 50 years in our 2018 projections to minus 0.1 per cent a year in these latest projections. 5 Indeed, the population peaks in 2044 at 68.4 million and falls to 65.9 million by 2072, the first time our projections have been based on a declining population.”

This is important. A few years ago I wrote a book, in one part of which I looked at this topic.I don’t want to seem like a desperate book plugger, so I won’t mention the title. When I wrote it, just ahead of the EU referendum, the UK appeared to be on course to become the biggest economy in Europe, driven by population. Projections then, from both the UK’s official statisticians and the United Nations.

The UK’s population was on course to reach 73 million by 2050 and 77 million by 2100, outstripping France and Germany by enough to compensate for this country’s productivity gap with our main competitors.

That, it seems, will no longer happen. Taking the OBR’s projections and combining them with new ones from the UN, Germany will continue to have a larger population this century. The UK’s dreams of population-driven economic supremacy in Europe look to be over, for this and other reasons.

There will be some people reading this whose response to the prospect of a gently declining UK population will be one of delight. We live on an overcrowded island, parts of which are sparsely populated but in others we live cheek by jowl.

It is a point of view, but it has to be set against the economic impact of a low birth rate and a reduction in the inflow of working-age migrants to top up the labour force and maintain the economy’s flexibility. Some would say that we have passed the point of no return on that already.

Meanwhile, though they might not live as long as previously expected the proportion of older people will grow. The old-age dependency ratio – the percentage of people aged 65-plus relative to the 16-64 population – is current just over 30 per cent. It is projected to rise to 50 per cent over the next half century.
Politicians would love the UK to be more like America or the faster-growing Asian economies in the future. The demographic outlook means that the UK risks “Japanification” and being more like Japan, with its ageing and declining population and slow growth.

It means, more than ever, that the next prime minister, whoever it may be, must have a relentless focus on productivity and growth.