Why bother with GDP?

Modern GDP statistics (“the value of goods and services produced in a given period”) have their origin in the USA around the 1930s with the work of Kuznets, who produced the first national income data in order to see the impact of the Great Depression on the US economy. They became more important during the Second World War when the UK government, prompted by Keynes, and the US government needed to be able to manage the war effort to maximum effect while still providing enough resources for consumption.

A major criticism of GDP is that it takes no account of what is produced, merely its value. As a result,  disasters can be good for GDP if they involve countries reconstructing roads or buildings damaged in the disaster. War is also a good way of boosting GDP since it will involve producing more tanks, weapons and aircraft! Similarly, two forks are, in GDP terms, as useful as a knife and fork, but less useful in reality when trying to spread butter. GDP and GDP per capita also take no account of how the income is shared among the population. A rich oil producing country might have a high GDP per head but, if the income is concentrated in the hands of a few, the standard of living of the majority might be below that of a country with a lower average of GDP.

Measurement of GDP is difficult since it is impossible to measure every transaction and therefore relies on surveys e.g. the Living Costs and Food Survey for about 5,000 households and monthly surveys of approximately 45,000 businesses. The development of technology has made the measurement of GDP more difficult. The UK Government set up an inquiry under Charlie Bean – OB and former Deputy Governor of the Bank of England – who identified activities which are now much harder to measure and value such as using Google Maps rather than buying a paper OS map or streaming films rather than buying or renting DVDs. Another problem is that many things have become cheaper and better – my new DVD recorder is easier to use and records more than a previous model but, in GDP terms, it is less valuable because it is cheaper.

There have been many debates over what should be included in GDP and although these might seem largely irrelevant, they matter when trying to compare countries’ GDP. In the past certain things, such as the sale of cannabis in cafes in Holland were legal and therefore recorded while a similar purchase in Romford would not be counted. However Eurostat wanted consistency among its members and decided that all transactions for goods or services involving money were to be recorded, whether they are legal, illegal, good or bad. Therefore, in a purely numerical way, those who argue in favour of increasing GDP as being a key government objective, could argue that encouraging the sale of drugs or prostitution is as valid as increased spending on education or health – something even an economist would find hard to justify! More relevantly sales of guns in the UK are part of the shadow economy but in the US they are legal, widespread and contribute to GDP.

GDP data is particularly suspect in developing countries where a significant percentage of production takes place in the hidden economy; for example, in Zimbabwe only 6% of the labour force is formally employed. Similarly, my purchase of bottled water from Sainsbury’s is counted in the UK’s GDP, but the effort of an African villager who spends hours walking to and from a stream to collect “free” water has no value according to GDP statistics. There are also basic measurement difficulties in LDCs, such as obtaining accurate population figures, accurately measuring inflation and valuing the hidden economy, e.g. only half the maize produced in Nigeria is sold in a shop or market.

There is now a consensus that we are trying to measure too many things in our single GDP number and, although we can improve it by using GDP per head or median GDP or NNP, it is still deficient.

Economists have therefore started both to consider other possible methods of estimating economic activity and to develop alternative measures which go beyond simply the output of goods and services. One way of tackling the former is to look at light intensity to indicate economic activity in different areas with increases in intensity over time indicating growth. Such methods indicate that the proportion of economic activity occurring in villages, and not always measured, is more significant than thought and therefore the GDP of many developing countries is, similarly, larger than previously calculated. It also provides a fascinating snapshot of the difference between the North and South Korean economies.

However a major concern is how we measure the damage which our focus on output is doing to the environment. China’s focus on growth has resulted in 40% of its river water being undrinkable and one cannot always see the stars at night because of pollution. GDP does not take into account depreciation of natural resources lost to build houses and factories and damage to the environment but this is not easy to do. How does one put a monetary value on a rainforest, beautiful view or footpath by a river? One way is to make an estimate based on how much people pay to see them and, for things which benefit the environment, how much it would cost to replicate them. The UK government in 2012 formed the “Natural Capital Committee” to advise the government on things such as ‘forests, rivers, minerals and oceans’ and by 2020 the ONS must include a measure of natural capital in the UK’s national accounts. The aim is to move towards sustainable growth. Along the same lines, a US think tank has invented Earth Overshoot Day – the date when the earth used up its regenerative capacity for the year. In 2018 this occurred on 1st August.

Other measures include the Genuine Progress Index – a measure of economic welfare which is currently in use in Maryland. GDP is the base but invisible “goods” e.g. leisure time, volunteering, & housework are added while “regrettables” e.g. crime prevention spending such as burglar alarms, pollution and commuting time are subtracted. The Happy Planet Index tries to measure what matters – namely sustainable wellbeing for all and tells us how well nations are doing at achieving long, happy, sustainable lives.  Some countries have followed Bhutan which developed a Gross National Happiness index which sets out priorities such as psychological well-being, health, education, living standards, good governance and ecological resilience. Before adoption, all new projects must undergo a GNH impact review. We carry out an annual happiness survey as does the OECD and many of its members. These focus on six key variables which determine happiness – GDP/head, healthy years of life expectancy, having people to turn to, trust in others, freedom to make decisions and donations to charity.

Advertisements

An Ageing Population

The world is getting older and this has significant implications for the working population, those who have retired and those about to enter employment. The country facing the most immediate crisis is Japan with its rapidly ageing population. Those over 65 years old now account for 28% of their population and their life expectancy is 84 – the highest in the world. It is predicted that over half of the babies born there today will live to over 100 years old.  In addition, it has the lowest birthrate since its records began 120 years ago and therefore its population is falling. In the UK the population is ageing. The proportion aged 65 or over in 2016 was 18% of the population (11.8 million) and the ONS predict that by 2066 this figure will have increased to 26% of the total population (20.4 million).

We can expect this to result in an increasing budget deficit as pension payments increase because of longer life expectancy. Governments will face increasing costs of health care as people live longer and consume more health care which is becoming increasingly expensive for those in later life as medical science has improved. Linked to this, the tax burden on those of working age will increase as the proportion of the population not working increases. Partially offsetting this, there has been an increase in the proportion of older people working as their health has improved; for example, in the UK, the proportion of over 70s working has more than doubled in the last ten years but it is still only one in twelve. However if people are working longer, their ability to provide care for elderly relatives will diminish. A key concept to consider is the “Old age dependency ratio” (OADR) – the number of people of State Pension age (SPA) per 1,000 people of working age. In the UK this is forecast to increase significantly beyond 2030, therefore suggesting either increased taxes, reduced levels of care, increased immigration,reduced real pensions or making the elderly pay an increased proportion of costs currently paid by the state.

The impact on the structure of the economy is also significant. Many older people live in houses which are too large for them, bought when they had children who have now left home. A shortage of suitable smaller accommodation, combined with the relatively high costs of down-sizing prevents some of them from moving, thereby restricting the supply of housing for younger families. There is also an increasing need for workers in the NHS and care industries to look after the rising number of elderly people. There is also a regional impact since proportionately more elderly people live in rural and coastal areas, placing a proportionately higher burden on local authorities and the NHS in those areas. Another issue is that over the past few years, the relative income of UK pensioners has increased due to the introduction of the “Triple Lock” in 2011 – a government commitment to increase pensions annually by the highest of average earnings, the rate of inflation or a minimum of 2.5%.  Since then both inflation and earnings growth have been low and the 2.5% increase has therefore increased pension incomes relative to earnings. This is supported by a government study which looked at the percentage of people in 2015/16 of different age groups reporting it “quite or very difficult to get by financially” which showed that the lowest percentage of those in difficulty were the two highest age groups, 65 – 74 and 75 and over, which reported 3.1% and 1.4% respectively. These returns compare with the next lowest, the 16 – 24 age group, who reported 5.8% in difficulty.

 

A look at the world economy.

Recently there has been considerable attention given to the current, positive economic indicators for the UK economy. The three months to February showed the number of people in work reaching a new high of 32.71 million, or 76.1%, the highest for 48 years, the unemployment rate falling to 3.9%, the lowest since 1975 and average weekly earnings increasing by 3.5% in the year to February. With March CPI inflation unchanged at 1.9% (and core inflation also unchanged at 1.8%), real incomes are increasing although there is  concern that inflationary pressure will increase as earnings continue to rise while productivity remains weak.

However for the UK, which is a very open economy, what happens elsewhere has a significant impact on our performance. Three areas are significant – Europe, China and the USA.

Europe is struggling. Its strongest economy, Germany, has cut its growth forecast for 2019 for the second time in three months, now predicting growth of only 0.5%. The reasons cited for the slowdown are the continuing trade dispute between the USA and China, a general world slowdown, Brexit uncertainty and falling car sales. Italy is also a cause for concern. Not only is it predicting growth of only 0.2%, its financial situation is worsening and there is concern that it will breach the targets agreed with the European Commission for government borrowing and its national debt. While the Eurozone was able to deal with a financial crisis in Greece, if Italy, a key member of the Eurozone, continues to run excessive deficits, the implications for financial stability would be more serious.

The Chinese economy appears to be doing well. Over the first three months of the year, GDP grew at an annual rate of 6.4%. However there is concern over the impact of the continuing trade dispute with the USA, worry about the increases in China’s debt, which is financing the growth, and, possibly most importantly, fears over the sustainability of its growth because of its reliance on infrastructure spending. In most countries, high infrastructure spending would be a positive feature but there is concern in China about an infrastructure “bubble” with reports of new cities being constructed which have few people, cars or shops.  One way of appreciating the scale of the spending is to consider a Washington Post report that China used more cement between 2011 and 2013 than the USA used during the entire 20th century. These concerns coincide with China’s diminishing balance of payments surplus as the Chinese buy more foreign goods and travel overseas more and its exports are falling. In 2007, the surplus was 10% of GDP, it is now only 0.4%. While this is good for the UK if Chinese consumers buy more UK exports and decide to visit UK tourist destinations, if it heralds a slowing of China’s growth, the positive impact might be short-lived.

The third pillar of the global economic triangle is the USA and US economic growth slowed to an annual rate of 2.6% in the last three months of 2018. The high growth in 2018 was partially caused by a large tax cut and an increase in government spending and it is expected that once the effects of the stimulus wears off, growth this year will fall towards its long-term level which the Federal Reserve suggest is between 1.7% a year and 2.2%, some way below President Trump’s target of 4%. USA prospects are likely to be influenced by the impact of trade negotiations with China and the EU which are unknown at present but if we are unable to strike a trade deal with the US and UK businesses find tariffs placed on their exports, the impact on the UK could be severe.

Brexit, the WTO and the Irish Border

The World Trade Organisation was established in January,1995 to promote free trade since it believes that it provides benefits in the form of greater choice and lower prices, stimulates economic growth, raises incomes and promotes world peace. It also acts as a forum for negotiations to reduce tariff barriers,  provide technical assistance for developing countries and  resolve trade disputes between its 164 members. For example, in August 2018, Turkey complained to the WTO about US sanctions on Turkish exports of aluminium and steel. If, after investigation and consultation, the WTO believes a country has broken its rules, it can authorise retaliatory tariffs.  Until the Brexit referendum, the WTO had not featured  in UK newspapers. However since the vote and the lack of progress in  talks with the EU, there has been increased interest in its role in regulating world trade  since, if no agreement is reached, the UK will fall back on WTO rules following its departure from the EU on 29th March.

Anyone wishing to join the WTO must agree to accept all its rules, particularly the  ‘Most Favoured Nation’ agreement whereby countries  must apply the same tariff to similar goods, irrespective of the exporting country, unless there is a free trade agreement between the importing and exporting countries. Thus if we leave the EU without an agreement, the EU will apply the same 10% tariff on UK car exports into the EU as it does to those coming in from other non-EU countries. Similarly, if the UK government were to announce a unilateral move to zero tariffs on agricultural products from the EU, without a trade deal, we could not levy tariffs on agricultural goods from elsewhere.

A significant concern is that WTO rules do not reduce regulatory barriers. At present, because of the Single Market, a UK car manufacturer can sell products as easily in Rome as Romford. This will cease if there is no agreement with the EU and therefore we would expect UK goods to be inspected when entering the EU, in the same way that British goods entering  Japan are currently examined to ensure that they meet EU standards. This might not seem a major problem but exporters fear that administrative burdens of completing customs forms and the delays to drivers at borders will be significant, therefore increasing costs.  This will be particularly important for those trading in perishable goods, some medical products which need to be refrigerated, and companies currently operating with minimal stocks in order to reduce costs.

A third concern is that WTO rules do not currently provide as much freedom for trade in services as they do for trade in goods. At present, for example, UK banks provide services for individuals, businesses and other banks across the EU without needing to duplicate all of their physical locations overseas. Leaving the EU will make trade in services, which make up 80% of the UK’s GDP, far more difficult and explains why UK financial consultants, bankers, accountants, etc are moving staff and  have established physical locations overseas.

Some in favour of leaving the EU argue that these arguments will not be significant since much non-EU trade is done under WTO rules. However the Economist pointed out (4th August 2018) that the UK would be the only large country trading solely on WTO rules and many other countries have arrangements in place to reduce the administrative customs burdens which hinder trade.

The problem with the border between the Republic of Ireland and Northern Ireland is also causing difficulties in our negotiations with the EU since two almost incompatible ideas need to be reconciled. On the one hand, the EU is insisting that, unless there is a new  form of customs union between the UK and the EU (which some pro-Brexiteers resist since it will reduce our ability to sign other deals), there must be a border between the UK and the EU to allow for customs checks to ensure that goods pay the appropriate tariffs and meet regulatory standards. For England, Scotland and Wales, this will be a sea border. However between Northern Ireland and the Republic, it will be a land one. Not only will this be  hard to enforce since there are many possible routes between the two, there are also very major political difficulties in re-establishing a hard border which relate to historical issues between the two countries. The idea of a “back-stop” which would allow free trade between the two countries would involve a different regulatory regime for Northern Ireland compared to the rest of the UK, something which is equally politically difficult to accept.

It is difficult to predict what the effects on our trade will be until the Brexit agreement is reached. As part of the EU, we currently benefit from free trade treaties between the EU and other countries and we do not know whether we will be able to negotiate to keep these agreements. A recent example of this is the recently-signed EU-Japan trade deal which we hope to replicate. However the Japanese have made it clear that it will not be ready to be signed by 29th March and, given the importance of Japan-UK trade, this is potentially a serious issue. Indeed, Dr Fox’s claim in 2017 that  the UK would be able to replicate up to 40 EU free trade deals, immediately we leave the EU is not going to happen. So far we have signed  agreements with Australia, Chile, the Faroe Islands, some African nations, Israel,  Palestine and Switzerland. The failure to sign agreements is already impacting on British businesses trading with Asia since goods now being shipped will not arrive until after 29th March and exporters do not know whether they will be liable to tariffs or potentially might even be sent back to the UK. If there is no deal by 29th March, then 18th April becomes the next key date since, by then, the UK must confirm whether it will make contributions to the EU’s 2019 budget which are due by the end of April. A decision to make these payments will  require a vote in Parliament. If we do not make these payments, then our relations with the EU will deteriorate further and the chances of a trade deal will diminish even further.

A Brexit Update

It is now 23 days to Xmas and 117 days to Brexit on 29th March 2019. While one of these events is certain, the other is less so and this post looks at the Brexit picture in the run-up to the vote in Parliament on 11th December.

What happens in the vote is crucial. One possibility is that Mrs May wins but this is looking increasingly unlikely since there are two key groups likely to vote against her. Firstly, there are those seeking a “Hard Brexit”, such as the members of the European Research Group, on the right wing of the Conservative Party who are not happy with the way the deal ties us to Europe. On the other side are those who would wish to remain in the EU or seek the softest possible Brexit deal and might oppose it, hoping it will open up the possibility of a second referendum. If the government does lose the vote much will depend on the scale of the loss. It is possible that after falls in the value of sterling and of UK shares as markets take fright and, maybe, some small adjustments in the terms of the UK’s departure arrangements, (said by the EU not to be on offer), that there is a second vote and the government’s deal is accepted.

Alternatively, it could be that there is no majority for the current deal and this leads to Parliament opting for either a “People’s vote”, the UK leaving with no deal, a general election or the current or a new prime minister seeking a new agreement during an extended transition period. A “People’s vote” has difficulties – it is likely to take at least five months to organise and there will be significant disagreement over the question or questions to be asked. Is the choice between the current offer and no deal or should we include the possibility of remaining? Finally, what might the effect of a second referendum voting to remain be on those who voted to leave previously who were told that the 2016 vote was a “once in a generation” decision.

A no deal Brexit, whether adopted deliberately or drifted into is another possibility. The view of the KPMG Head of Brexit is that the government is not prepared for this and, while some sectors, such financial services, pharmaceuticals and the motor industry are ready for this, many others, particularly those dominated by SMEs (small and medium-sized enterprises) are not. A key area which the government will have to address is the transport of goods into and out of the UK. At present 17% of UK trade and 1/3 of our trade with the EU in goods uses the port of Dover. It is the shortest crossing, making it the cheapest and fastest way to import and export to nearby countries, particularly important for perishable products and those companies adopting ‘just in time’ production methods. It has been estimated that a 2 minute delay at the Dover ferry and Eurostar terminals would cause a 20 mile tailback on the motorways into Dover.  This would arise because lorries which are currently able to enter and exit at Dover do not face checks because of our membership of the single market which, among other freedoms, allows the free movement of goods. The government has suggested that other ports might take part of the traffic but, not only would this result in longer and therefore more expensive crossings, pushing up prices, other ports lack the necessary infrastructure for customs checks and do not have the capacity, and possibly not even the space, to expand in the short term.

While we can be certain, or fairly certain, that the impact of a ‘no deal’ would be mitigated by the government for essential industries such as water and pharmaceuticals, those which are less essential will suffer. Newspapers are already reporting stories of firms building up stocks of components and finished products; for example, a major pharmaceuticals company is planning to build up 6 months stocks of products and raw materials on both sides of the Channel and even Fortnum & Mason, the luxury Piccadilly grocer, has built up an extra two months’ supply of champagne! However, such actions are costly for firms and impossible for some which might lack the space or cash to build up stocks. Another area of concern is our import of fresh food. At present the ratio of fresh: frozen food imports is 9:1 and a result of ‘no deal’ might be to increase the proportion of frozen food imports. Although this seems relatively straight-forward, it would require an increase in refrigeration capacity, not currently available.

No deal will mean that tariffs are placed on UK goods entering the EU so, for example, the 54% of UK car exports which go to the EU would face a 10% tariff, making them less attractive to EU consumers, and thereby reducing sales and employment in the car industry and possibly even encouraging firms, particularly foreign ones, to relocate from the UK to the EU to avoid the tariffs. At a recent FT conference on Brexit, the Senior Vice President of Honda Europe suggested that, as well as tariff barriers,  non-tariff barriers, such as the need for physical inspections of  vehicles being exported and components being imported at customs, would be equally important for the company, which operates a ½ day Just In Time production model with components being delivered straight to the production line. The Economist recently reported on the BMW Mini plant in Oxford where 200 lorries deliver 4 million parts to the factory EACH DAY. Therefore, border delays of even a few hours  might impact significantly on their ability to produce smoothly. Because of the threat of a hard border, some UK chemical and pharmaceutical firms are considering opening a second testing facility in the EU so that its products can be sold there without difficulty. Such adjustments are costly and will be passed on to consumers in due course.

Supporters of a no deal see our departure from the EU as a matter of moving from EU to WTO rules on trade, reinforced by our ability to sign free trade deals with many countries. (It is worth noting that we have not yet been able to negotiate independently all the deals that we, as members of the EU, had with 3rd countries). However the CBI point out that this would mean both taxes on our exports and us levying taxes on imports from the EU. Also important will be such things as checks on food products which will be introduced on our exports. Another concern is that the WTO focuses more on trade in goods than in services, which has explained why a number of financial institutions are establishing bases in the EU. Interestingly, the FT conference referred to above was partially sponsored by Paris and Luxembourg, both using the opportunity to promote themselves as attractive places to set up. We do not know the effect which ‘no deal’ would have on sterling, with some talking of it even dropping to parity with the dollar, as holders of short-term sterling assets sell them. Bearing in mind that a 10% fall in sterling causes an increase in inflation of 2%, the effect of such a steep fall would lead to significant falls in real incomes. We also do not know whether the Bank of England would increase interest rates in order to protect sterling or cut them to boost GDP if a recession loomed (and the scope for the latter is seriously limited by their current low levels).

Even the impact of Mrs May’s deal, which involves maintaining the single market in goods but not services, is not totally clear since although the documentation on the UK’s departure is extensive, it is not clear exactly what will happen for the UK when the transition period ends in December 2020, since there is still much to be decided, hence, for example, the need for a backstop to prevent a physical border between Northern Ireland and Eire if a trade deal is not signed.

In the last two weeks, a number of estimates have been published. The National Institute for Economic and Social Research, a well-established think tank, suggests that Mrs May’s deal will leave the UK’s GDP per head 3% smaller by 2030 than if we had remained in the UK. Another think tank, ‘The UK in a changing Europe’, published research from the Institute of Fiscal Studies, LSE and King’s College, suggesting GDP per head would be between 1.9% and 5.5% smaller by 2030, depending upon what happens to productivity. The Bank of England and the Treasury have also published forecasts. The latter looks at the impact on the UK economy in 2035, 15 years from the end of the transition period (a longer period than the previous two forecasts) and suggests that, under a no deal scenario, GDP might drop by 10.7% while under Mrs May’s deal, the fall would only be between 0.2% and 1.4%.

A different option which is being proposed by Nick Boles MP is called ‘Norway for Now’  or ‘Norway Plus’. This involves the UK negotiating to join the European Free Trade Association (where we have free trade with the member countries but, unlike a customs union, there is no common external tariff). We would also negotiate a customs deal with the EU. This would allow unrestricted access to the EU market but would allow the UK to escape the jurisdiction of the European Court of Justice, be outside the Common Agricultural and Fisheries Policies and pay less to the EU than at present. However EU immigration would not be restrictable unless there were significant problems and we would not be able to sign trade deals with other countries outside EFTA and the EU.

All that is clear at the moment is that nothing is clear! Hopefully, after 11th December, we might know a little more but even that is doubtful.

Is the next financial crisis round the corner?

It is now 10 years since the financial crisis and concern is beginning to be expressed that we could be heading for another in the near future. If it does occur, how well-placed is the UK to withstand it?

The IMF recently examined the finances of 32 countries, comparing what governments owe, e.g. pension liabilities and national debt, with what they own, e.g. land, buildings and natural resources, and concluded that, by this measure, the UK has a net liability of more than £2 trillion – over 100% of GDP. This is not the usual way of looking at a government’s indebtedness, which compares government debt to GDP, but, for example, it does highlight the difference between Norway and the UK in terms of making use of the revenues received from North Sea oil. Norway used them to build up a large stock of financial assets, currently worth over $1 trillion, or almost $200,000 per person which has generated income, while the UK used its North Sea oil revenue for current consumption and tax cuts.

Just as the IMF was undertaking its analysis, the Financial Policy Committee of the Bank of England warned of excessive world-wide lending by banks to businesses and the danger that banks are relaxing their lending standards, particularly in the US, and compared the current situation to the approach to the 2008 crisis. However, a big difference between now and 10 years ago is that commercial banks’ capital reserve rations have increased, and they are now more closely monitored with regular stress tests which examine the way different scenarios, such as rising inflation or unemployment, will affect banks’ ability to withstand shocks. The results of UK stress tests will be published in December.

Worryingly, it is not only business borrowing which is an issue. UK household debt has also increased dramatically. The ONS suggests, not surprisingly, that it is the poorest families who are most in debt. Their analysis showed that, in the 2016/17 financial year, the lowest 10% of households spent two and a half times their disposable income   while the richest 10% spent less than half of their disposable income.

A National Audit Office report in September suggested that average UK household debt (including mortgages) was £58,540 in June, and, overall, people owed nearly £1.6 trillion at the end of June 2018, up from £1.55 trillion a year ago. British households are now among the most indebted in major western countries, with credit card debt and payday loans climbing to record highs. Another source of debt which is potentially worrying is car finance where PCPs (personal credit plans), which allow one to buy a new car with a very small deposit but pay for it over three to four years, are becoming popular.

A key question which worries the Bank of England is what will happen to debt if interest rates continue to rise. Will zombie businesses and poorer households be able to afford higher interest payments or will they, like the sub-prime mortgage borrowers of the last decade, end up defaulting on their loans? On the positive side, wages are growing at their fastest rate since the financial crisis, up 3.2% in the three months to September, but faster wage growth, indicating that the labour market is finally tightening  in response to record low levels of unemployment, might encourage the Bank of England to raise interest rates sooner than they otherwise would have done, possibly hastening a crisis.

The Population Crisis

According to popular legend, the science of economics was christened “the dismal science” by Thomas Carlyle following the publication by Thomas Malthus in 1798 of “An Essay on the Principle of Population”. In this he suggested that poverty and hunger would be a country’s natural state since increases in population would tend to outstrip increases in food supply. Fortunately he was proved wrong as birth rates fell and new techniques increased the supply of food and the science of economics moved on.

We are currently focused on short-term issues such as Brexit but it is worth taking a longer perspective following the publication of a report in ‘The Lancet’ which has highlighted falling fertility rates across the world between 1950 and 2017. The reasons behind the fall include better education and employment prospects for women, improved access to contraception, better maternal education for mothers and prospective mothers and improvements in infant mortality. As a result, 91 out of 195 countries have been identified as having a fertility rate below 2.05 – the minimum necessary for stable population growth. For example, in Britain over the period, the fertility rate fell from 2.2 to 1.7.

The implications of falling fertility rates in richer countries, partially masked by inward immigration, focus on the conflict between increased life expectancy, creating an increased number of elderly pensioners receiving benefits and increasingly needing expensive medical care, and a falling supply of workers who are paying taxes to support the elderly. These workers will therefore face a greater burden in terms of the taxes they will need to pay to support the elderly.

This is already significant in Japan where 28% of the population are over 65, the highest proportion in the world, compared with 18% in the UK and 22% in Germany. One offsetting feature in Japan is that people often work on beyond their retirement age – 3% of their labour force is over 80! Although it is not suggested that working until 80 becomes the norm, the retirement age in many countries is being increased as a result of increased life expectancy and, in the UK, it will reach 66 by October 2020 and 67 by 2028 for both men and women. This will reduce pension payments and increase tax revenue but, alone, is unlikely to be enough to prevent developed countries facing increasing budget deficits to finance care and benefits for the elderly.

As this crisis unfolds, the people who will suffer most are not the elderly but younger generations who will not only be working longer and paying higher taxes but will face student debt and higher house prices than experienced by their grandparents