UK’s Lower Birth Rate May Lift Living Standards, Study Shows

Shrinking populations could actually be good for the world’s richest nations, according to a paper that examined the impact of the UK’s expected demographic slump and counters conventional wisdom.

(Bloomberg) — Shrinking populations could actually be good for the world’s richest nations, according to a paper that examined the impact of the UK’s expected demographic slump and counters conventional wisdom.

A study into population decline by David Miles, chief forecaster at the UK’s Office for Budget Responsibility, found that “the economic impacts are likely, on balance, to be positive” and “predictions of dire effects are implausible.”

Many rich economies are facing huge demographic challenges over the next 50 years as fertility rates decline and people live longer. Japan, Germany and Italy already have contracting populations. Similarly, Spain and France will have fewer people in 2070 than today, according to the United Nations. 

The population of the UK, which Miles uses in his study, grew by almost 4 million to 67 million in the decade to 2021, according to the Office for National Statistics. But the OBR expects that figure to be around 1 million smaller in 2070.

Populations in advanced nations are ageing and falling as parents wait longer to start a family and as housing and childcare costs climb to punitive levels. Some people, like birthstrikers, are refusing to have children in protest at the damage mankind is doing to the planet.

Economists have warned that government finances will become unsustainable as the number of workers declines relative to the retired population because a smaller workforce generates less tax to meet the demands on public health care and state pensions from the elderly.

In OBR forecasts Miles helped prepare in July, the UK government’s fiscal watchdog confirmed the outlook. It said lower birth rates and longer life expectancy would punch a £250 billion ($313 billion) hole in the government finances by the mid-2070s.

Less Investment Needed

In his paper for “The Journal of the Economics of Ageing,” Miles again acknowledged the fiscal burden of ageing. However, he said standard analysis of the fiscal benefits of a growing population omits the cost of new homes, schools, roads and other public and private investment that will be needed.

As a result, the outlook is very different when it comes to living standards. The faster a population grows, the more expensive it is to maintain the stock of “capital assets per person,” which increases the claims on today’s domestic savings and leaves less income available for consumption, Miles said. 

The opposite is true when the population declines, as less investment is needed and real wages can grow faster. “Quality of life… can certainly be higher with a smaller population,” Miles said. He added that consumption is a “better and more direct measure of satisfaction” than GDP or GDP-per-capita.

If “capital assets per person” fall because the government fails to invest then “the fiscal position can improve with fast population growth while the quality of life may decline.” Miles said that already appears to be happening in the UK.

Britain “has not collectively invested enough to keep many of its capital assets – schools, the rail network, roads, some types of corporate assets – at a level that can keep up with the demands on them from an ever-rising population,” he said.

One country that has experienced population decline is Japan, whose population has shrunk by 4 million to 124 million, since 2010. So far, it has managed the process with few apparent ill side-effects. 

GDP per person has increased by 0.8% a year on average, according to World Bank figures, similar to France where the population has increased. Net debt to GDP in the decade to the pandemic grew more slowly than when the population was still expanding, according to the International Monetary Fund.

In a 2020 paper, two IMF economists said Japan’s demographic headwinds implied “insufficient workers to maintain current levels of economic activity.” However, that view was “more dire than Japan’s experience.”

Miles said social trends make shrinking populations inevitable in many rich countries. Besides lifting living standards, the benefits from a smaller population could be a reduction in “congestion and pollutants, more space, cheaper housing and fewer people to create environment damage,” he said.

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