Shrinking populations could actually be good for people in the world’s richest nations, according to a paper that examined the impact of the UK’s expected demographic slump.
(Bloomberg) — Shrinking populations could actually be good for people in the world’s richest nations, according to a paper that examined the impact of the UK’s expected demographic slump.
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 women choose to pursue careers and have fewer children, while 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.
Fertility rates in advanced countries are shrinking as parents wait later to start a family and housing and childcare costs climb to punitive levels. Birthstrikers are refusing to have children in protest at the damage mankind is doing to the planet.
Economists have warned that public finances will become unsustainable as workforces shrink relative to retired populations, because a smaller workforce generates less tax to pay for the escalating cost of public health care and state pensions.
In OBR forecasts prepared by Miles 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.
Quality of Life
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 benefits of an expanding population omits the cost of building new homes, schools, roads and making other public and private investment to meet future needs.
As a result, the outlook is very different when it comes to the living standards experienced by households. 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 populaton 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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