Global population slowing and ageing, low economic growth, high taxation and the grey vote. IF supporter, Philip Yorke, explores the many drivers holding back young people in the UK.
Population Peak
There are many studies as to when the world population will peak, with forecasts broadly ranging that it will peak between 2040 and 2100, from just under 8 billion to a little over 12 billion people, with outlying estimates way above and below. After the peak comes a reduction in the global population, as levels of education improve, along with living standards. This is undoubtedly good news for the environment, but what about the current economic principles based on growth? Or the associated societal issues that will come from the tripling in the number of the very old. According to the United Nations (UN), the number of persons aged 80 years or over is projected to triple, from 143 million in 2019 to 426 million in 2050.
Ageing – the elephant in the room
Whilst quite a few countries around the world are already shrinking, including Britain, with a birth rate of 1.6, Japan has been a living socio-economic laboratory over the last few decades. Japan has: double the national debt of other G7 countries; its population has already shrunk by millions from its peak and this is forecast to become tens of millions due to a reducing fertility rate of currently just 1.3; the potential labour force has reduced from 70% to 59%; and the proportion of elderly/retired is increasing. This drastically affects the old-age dependency ratio. Japan’s problems are exacerbated by a very low immigration rate of 2.2%. In Britain, the old age dependency ration (excluding school age and younger dependent children) is forecast to decline from approximately 300 per 1000 working age to 400 per 1000 people, according to the Office For National Statistics. This is not simply because we are living longer, which of course is welcome news, but because the birth rate is declining. The result is greater and greater pressure on a smaller and smaller proportion of the population in work.
Shrinkonomics
The world’s leading economies are based on economic growth, measured by gross domestic product (GDP) and sometimes gross national product (GNP). With a squeeze on natural resources and a near future squeeze on the labour force (after the peak) as the world population declines, growth will become harder to sustain. Put simply, two people working are more productive than one person working and those two people pay double the amount of tax. There is of course a premium in taxes to be gained from a higher educated higher functioning population.
So how do we get more from less? Can the economics of growth survive a shrinking population? Japan is putting its faith in robots and AI as its working population is increasingly overworked and people less and less want to have families.
World competition for intellectual and basic labour
With this phenomenon becoming a worldwide issue, countries will be forced to shrink or compete fiercely for the best of the best workers worldwide. Would it be better to be in the EU with freedom of movement, or outside so that we can be flexible and unencumbered by EU policy? Why come to Britain, rather than go to Germany, Australia, America, etc? The countries that offer the best standard of living and opportunities will no doubt win. That means plentiful and affordable housing, a decent wage, reasonable childcare costs and school places, and all the other infrastructure required for a well-run society.
Burden – a growing chasm between the retired and those working
Not all countries can win with a shrinking population. As we can already see in Japan, the working population as a percentage of the overall population is decreasing, meaning that those working are supporting an increasing percentage of the elderly and retired. This means financially those in work either have to work ever harder, work for longer, or get less of the nation’s economic pie. There is of course a limit to how hard people can work.
The result of this could be:
- Productivity declines;
- Taxes increases and tax receipts decline;
- State expenditure on services such as health care declines;
- House prices plummet, as supply outstretches demand;
- Disposable income and living standards decline.
This may sound dramatic, and for my children’s sake I hope this does not happen, but there is no point in putting our heads in the sand. At some point the world population will peak and decline.
Time frame
With estimates ranging from 2040 to 2100, the time frames in socio-economic terms are short to medium. Changing society and economic principles is like turning the proverbial tanker before it hits the cliffs. To meet 2040 or even 2050 will mean action now.
A system staked against British graduates
Economic policy has an accumulative effect. In England we have tax on earnings, council tax (a mandatory bill), and graduate loans to repay at an enforced 9% repayment on earnings above a threshold of repayment. Current graduates therefore have an average effective tax rate of 41.25% when income tax (20%), national insurance (12%) and student loan repayments (9%) are accounted for. That is before council tax or auto-enrolment or repayments from post-graduate study. Our younger generations are very highly taxed. Compare that to international workers encouraged to work and/or emigrate here. Those without student loans to pay off will have a cost-of-living and disposable income advantage. Long-term political decisions made over the last few decades have created an unbalanced economic environment where some of us are encouraging the next generation to leave Britain for a better standard of living elsewhere. Surely we should be giving our graduates an even playingfield with the rest of the world instead of staking the system against them in their own country?
Politics of change
As the working population shrinks as a percentage of the retired, so the elderly gain more political power. The Intergenerational Foundation has explained how political institutions at a national and local level are ageing in its Grey Power report. Self-interest when voting, invariably for the policy that benefits the individual most, will mean that political parties that promise to look after the elderly best will get their vote. This will be to the detriment of the young and middle aged. I do not want to see a society like Japan where the working population is becoming economically enslaved to support their parent’s generation. How do we as a democracy ensure parity for the young in decision making, the future is theirs; should they have a weighted vote? My fear is politicians will be too afraid to act now to prevent future problems, as theirs is a popularity game. For the next generation this could be the biggest ticking time bomb.
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