The changing age structure of the population

Much of what goes on in economics has a short time span. Will economic growth accelerate or slow  this year? What will happen to inflation next month? What will be the impact of Brexit? However one of the most significant challenges we and other countries are facing is much longer term and has to do with increasing life expectancy.

Pre 1800, according to The Economist, no country had an average life expectancy of over 40 while today, every country does. In the UK today, life expectancy is 79.5 for men and 83.1 for women. Infectious diseases are now much less significant; people with cancer now survive for much longer than in the past and survival rates from heart attacks have improved.

Why the concern? Surely we can look forward to a long, healthy retirement, with a high standard of living provided by our state and private pensions, living in properties which we own (and with the mortgage paid off long ago), spending time playing golf, becoming a “silver surfer” and embarking on regular  SAGA holidays (the travel company catering for the older traveller).

Unfortunately the picture for the majority of the population will not be so rosy. A study by Public Health England, published earlier this year, suggested that the average woman has poor health from the age of 64 and the average man from 63½ and, although life expectancy has increased, much of it will be spent in ill health, with back pain, diabetes, obesity and dementia becoming common among older people. As people live longer in poor health, the demands on the NHS increase.  A BBC report (http://www.bbc.co.uk/news/health-38887694) suggested that spending per patient for a 65 year old was double that for a 30 year old while, for an 85 year old, the cost was five and a half times as much.  The Office for Budget Responsibility has suggested that spending on the NHS and care will rise from 6.1% of GDP in 2021 to 12.6% by 2066. In addition, there has much comment in the press recently about the rising cost of providing care homes for the elderly. And, finally, the spread of ill health is not uniform across the country. In the richest areas of the UK people enjoy nearly 20 years more good health than in the poorer areas. A survey by Canada Life, an insurer, found that three million more people think that they will need to work beyond 65 than did in 2016 and 10% of those surveyed expected to be working until they are 85 because of the increased costs of care home provision. Another issue to take into account is the way that low interest rates have reduced returns for pension funds and savers (many of whom save for retirement).

It is not just the elderly who will suffer. As people live longer, the amount of money needed to provide pensions increases and this money comes from the taxes paid by the relatively fewer working-age tax payers who find themselves supporting an ever-increasing number of retired workers as well as paying for the increased cost of NHS treatment for the elderly.  Three years ago, the Institute of Economic Affairs suggested that Britain faces significant tax rises and government spending cuts in order to meet the needs of an aging population in terms of pension payments and health care.

The situation is not restricted to the UK. In Japan, the country with the most rapidly aging society and where 33% of the population are already over 65, a report found that over half of live-in carers are themselves pensioners and the Prime Minister, Shinzo Abe, suggested that Japan’s declining birthrate and aging population was the major obstacle to economic growth. To reduce the problem, the pension age is gradually being increased to 65 and Mr Abe has set a goal of increasing the number of women, and hence taxpayers, in the labour force.

The Government has just announced that the state pension age for men and women will rise to 68 in 2037, seven years earlier than previously planned. However a retirement age of 68 compared with one of 65 in 1948, when the NHS was founded, does not fully take into account the much greater increase in life expectancy since 1948.

So what are the solutions? Do we all work even longer and is this viable in some occupations? Does part-time work become more common for older workers? Do we encourage migration so that there is a relatively larger working population? Do taxes increase to cover the rising costs of pensions and care for the elderly? Does the government encourage (or force) people to save more towards their old age or cut the real value of the state pension? This is something for the younger reader to decide. I am off to book a Saga holiday!

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UK water privatisation looks little more than an organised rip-off

Privatisation is an example of a market-based supply-side policy. Selling off public sector assets helps to raise funds to reduce the national debt and increases efficiency as firms respond to the profit motive. However, the record of privatisation has been rather patchy. The government has been accused of selling public assets at too low a price, reducing potential benefits to the taxpayers that funded their creation. In addition, the efficiency gains have been rather tepid. Instead, we have seen the growth of monopolistic and oligopolistic firms who deliver poor quality and charge high prices, enriching directors and shareholders in the process.

This article by the FT explores the dismal record of water companies and the regulator, OFWAT, in recent years. Households and firms often have no choice in who they buy from, directors know this, investors know this, and, as a result, consumers are exploited. Until the regulator takes a harder line or the industry is nationalised, a recent Labour party proposal, we can expect to see a lack of investment, high prices, ‘fat cat’ pay, and more “crappucinos”.

Source: UK water privatisation looks little more than an organised rip-off

 

Mini cheers for BMW

At the end of July there was positive news about the UK car industry. Production was 1.7 million vehicles, the highest since 1999, and  newspapers reported favourably on the decision by BMW to assemble the new electric mini at its Cowley plant, near Oxford, rather than in Germany or the Netherlands, when it goes into production in 2019.

Greg Clark, the Business Secretary, called this a “landmark decision” showing confidence in the Government’s intention to make Britain a key player in the production of the next generation of motor vehicles.

However it is worth examining this decision in more detail to see what it suggests about the UK economy. A key concept in the discussion of the gains from international trade is “comparative advantage” which relates to those goods and services in which a country has the greatest relative advantage in production over other countries. (In economic terms we are looking at focussing on the production of goods and services where a country has a lower opportunity cost than its trading partners).

Ideally, the UK would like to be involved in the high value-added aspects of the production process since this is where the most income is likely to be earned and hence workers’ pay, profits and living standards will increase. In car production this is in the development and production of such things as batteries and motors rather than the assembly of component parts into the finished product. The most important parts of the new Mini, the electric motor and battery, containing new technology, will be manufactured and assembled in Germany and then shipped to Oxford to be put in to the vehicles. While the assembly of the vehicles will ensure that jobs will remain in Britain, the greatest value-added is likely to occur in Germany since that is where the highly-skilled parts of the production process will occur.

Fifteen years ago James Dyson moved the manufacture of his vacuum cleaners to Malaysia because of the significantly lower labour costs while emphasising that the high value areas, such as research and development will remain in Britain. Similarly, Apple designs its products in the USA but the manufacture is outsourced to plants in China, Korea, Mongolia and Taiwan.

Is the BMW decision a sign that this is the way the UK economy is going?  Are we going to become a low-skilled assembly hub, trying to keep costs low in order to offset tariffs imposed on us by the EU? (With no deal with the EU, we could be facing tariffs of 10% on vehicles and 4.5% on parts). Alternatively do we look to the success of prestige British manufacturers such as Rolls Royce, Bentley and Jaguar which, although now foreign-owned, successfully manufacture high quality products in the UK?

 

The Economist | Deep trouble

The Economist | Deep trouble

The deep sea is a frequently used example of common access resources that is over-exploited  – a case of ‘The Tragedy of the Commons’ originally coined by ecologist, Garrett Hardin. It stems from a simple idea that the benefits of over-fishing (increased revenues) are private while the costs are shared. Unfortunately, such an approach is unsustainable as a result of over-consumption and subsequent market failure. Technology is both a cause of the problem and a solution too. Larger trawlers increase catch size reducing the number left to breed. However, new technology can help to monitor, collect information and enforce regulation. One extreme proposal is to ban fishing in set zones, this has been effective in some trials allowing fish to ‘restock’ and improve sustainability. Clearly, an international agreement is required, but this is hard, especially given the current rise in nationalism and self-interest. The WTO are working on something, but have been doing so for several years.

Productivity and the election

Many of my recent posts have focused on productivity and the UK’s poor record when compared to other countries. As mentioned before, in general terms, UK workers produce in five days what workers in the USA, France, Germany and Italy produce in four. Although GDP growth has been good until recently (only 03% in the last quarter) and employment data in the UK is extremely positive with the employment rate standing at 74.6%, the highest since data was first collected in 1971, it has been accompanied by poor productivity growth with the increase in UK productivity since 2008 (the period immediately before the recession) being only 1.1%. This means that pay, and therefore living standards, will be lower in the UK than in more productive countries. The Bank of England’s latest Inflation Report suggests that incomes will rise 2% this year and inflation will rise to 2.8%, therefore implying a fall in real incomes.
There are many explanations for this. One explanation, which neatly sidesteps the problem, is that the main issue is not that the UK has low productivity, but is that we are simply poor at measuring it in the service sector, a key area in the UK economy. In manufacturing, it is relatively simple. One can count the number of goods produced; however, in services it is trickier particularly as the digital economy grows. 10 years ago, if I wanted directions, I would buy a map and eight years ago I bought a satnav and put it in the car (both are easy to measure). Today I  use my smartphone and these additional services are not easy to measure.
Nevertheless, most economists accept that there is a  productivity issue in the UK. Andy Haldane, chief economist at the Bank of England, suggests that poor management is a key factor, particularly in sectors where competition is low, allowing x-inefficiency to flourish. Lord Browne, former Chief Executive of BP, suggests three key factors. Firstly our service economy is not sufficiently professional compared with the USA; secondly there is a shortage of finance available in the UK for entrepreneurs wishing to start new businesses and, finally, he cites the anti-science culture in the UK where it is acceptable to profess an ignorance of mathematics and science. However almost all economists would agree that the UK’s low level of investment is a contributory factor and the uncertainty around Brexit and the election itself could cause businesses to delay their investment plans until the future is more certain. There is already anecdotal evidence of many financial institutions looking to open offices overseas.
There has been little focus specifically on the issue in the election. Labour plans to increase Corporation Tax to 26%. (It is currently 19% but due to fall to 17% over the next two years) which might impact on investment in the future but some of their spending plans might, in the long term, improve productivity. They also intend to renationalise the railways, water, the national grid and Royal Mail and borrow £250 billion to create a fund for infrastructure projects. The Conservative’s statement that “no (Brexit) deal is better than a bad deal” and a reluctance to remain in the Single Market has also caused anxiety among businesses, while a focus on grammar schools is not the best way to tackle Lord Brown’s concern over the UK educational system. However they do present themselves as a more pro-business, low tax government and hope that such sentiments will encourage investment. They are also committed to spend 2.4% of GDP on R & D by 2027 and to create a national productivity investment fund of £23 billion.
The IFS, an independent think tank focus on Labour’s additional infrastructure spending which would boost GDP in the near-term and would increase the productive capacity of the UK economy in the long term, although their increased labour market regulations such as a higher minimum wage would have the opposite effect as would four additional bank holidays and their higher rate of corporation tax. The Conservatives’ commitment to reduce net immigration would also weaken growth, although no specific timescale has been announced. Most disappointingly, the IFS suggest that there will be NO overall impact on productivity from either party. It is difficult to take into account the impact of Labour’s plans to take significant parts of the economy back into public ownership, not least because of the time which such measures would need to come into effect.

Roll on Thursday!