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

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How are we doing?

Those of you who are Manchester United fans will have been pleased by their comeback against Newcastle over the weekend. However, in the excitement, you might have missed the news that former United star, David Beckham, and his wife Victoria have sold their Beverley Hills house (or mansion) which has six bedrooms and nine bathrooms, for $33million. They bought it eleven years ago for $22milion. At the other end of the scale, you might also have missed the report from the Social Metrics Commission, (SMC) putting forward a new measure of poverty for the UK.

Measuring the number of people in poverty is difficult. Some countries, such as the USA, focus on absolute poverty where an income is identified as the minimum needed to meet a family’s basic needs and those below it are deemed to be in poverty. A variant of this approach involves estimating a minimum standard above which people should live. An alternative, which has become the benchmark for the UK, is to focus on relative poverty (i.e. compared to other people) and consider those in poverty as living in households with incomes below 60% of the median.  However this is not straight-forward since there are two different ways of considering income (before and after housing costs are deducted) and the measure excludes assets people possess.

The SMC focusses strictly on measuring poverty, which, for them, is not having the resources available to meet current needs to be able to “engage adequately in a life regarded as the “norm” in society.”

To assess the number in poverty they consider the resources available to households, namely net income (net earnings from employment and self-employment, benefits and unearned net income (e.g. from rent or interest). They also include assets, such as savings which can be easily accessed and subtract any costs that the family must pay. These costs include debt repayment, housing costs (rent or mortgage payments), service charges in flats, building insurance, council tax, water rates, the community charge, childcare costs and additional costs faced by the disabled. Subtracting these costs gives an estimate of the resources available to a household. The next stage was to estimate the required level of resources needed to meet their benchmark and then set a poverty line at a threshold of 55% of the three-year median resources available measure.

Using this approach, their key findings, using 2016/17 data, were that:

  • 22% of the population (14.2 million) is living in a family considered to be in poverty. However 52% of people in lone-parent families (2.6 million) are in poverty.
  • Of those in poverty, 8.4 million are working-age adults; 4.5 million are children and 1.4 million are pension age adults.
  • The poverty rate for working-age adults is 21.6%; for children it is 32.6%; and for pension-age adults it is 11.4%. For pensioners, the rate has fallen from 20.8% in 2001 to 11.4% in 2017.
  • The majority (68.0%) of people living in workless families are in poverty, compared to 9.0% for people living in families where all adults work full time.
  • Those in poverty are not equally distributed across the country. Poverty rates in Scotland are lower and Welsh poverty rates are higher than in other UK countries. England has the highest child poverty rate and the overall poverty rate in London is more than 10% higher than in some other English regions.
  • The report also found that the number of people (2.5 million) above the threshold by 10% or less is almost identical to the number of people (2.7 million) below the threshold by 10% or less, suggesting that small changes in circumstances can either take people out of or put them into poverty. However 2/3 of those in poverty (12% of the total population) have been in persistent poverty, (being in poverty for two out of the last three years), suggesting that although they might be close to the benchmark, it is not easy to escape from poverty.

The SMC findings raise questions about the benefit system and how we deal with poverty.

Are we happy that over half of single parent families are in poverty?

Are we happy that 2/3 of those in families where no one is working are in poverty?

Are we happy that twice as many working age adults and three times as many children are classed as living in poverty compared to the percentage of pensioners in poverty?

Good news for the Chancellor?

Friday’s papers contained news which might make life easier for the Chancellor when he prepares for his budget on 22nd November. Government borrowing in August fell faster than expected, meaning that the Chancellor will have approximately £10bn more to spend on helping reduce student debt, boosting public sector salaries, spending on the NHS, improving our infrastructure, etc. At £5.7bn, the Government’s August deficit has fallen to its lowest level for a decade. The reason for the fall is twofold. VAT receipts have soared because of  high consumer spending while current government spending, particularly local authority spending, has fallen.

However all is not rosy. Firstly, when interest rates rise, which is likely to happen sooner rather than later, government debt interest payments will increase, as will interest paid on index-linked borrowing because of higher inflation rates (borrowing where the rate of interest is linked to the rate of inflation). Furthermore, there are certain commitments which have already been made, particularly with regard to public sector pay, which will necessitate higher government spending. If these factors are not to increase government borrowing then either taxes will  increase, other areas of government spending fall or the UK economy must grow sufficiently strongly to generate enough extra tax revenue.

Secondly Moody’s, one of the major ratings agencies, last week downgraded the UK’s credit rating from Aa1 (the top rating, sometimes referred to as triple A) to Aa2 on the grounds that leaving the European Union was creating economic uncertainty at a time when the UK’s debt reduction plans were in danger because of the decision to raise spending in certain areas. This follows a downgrading in 2016 by the other major agencies, Fitch and S&P. The downgrade might affect how much it will cost the government to borrow money, particularly on foreign financial markets. The Labour Party has called the downgrade a “hammer blow” to the economic credibility of the Conservatives.

Thirdly the stronger than expected level of consumer spending which boosted VAT receipts is unlikely to be sustainable as real incomes fall because of the low levels of wage increases combined with the higher levels of inflation. The forecast for the growth in retail sales compared to a year ago was 1.1% whereas the actual number was 2.4%, with last month showing particularly strong growth. There are many possible reasons for this. Possibly the weak pound caused more people stayed at home instead of going overseas for a holiday, possibly the falling unemployment had an effect and possibly the figures will reverse next month since they are extremely volatile.

Finally it is worth noting that the OECD (the Organisation for Economic Co-operation and Development, an organisation comprising the world’s major economies) forecasts that we will fall from being the second fastest growing  G7 economy to the second slowest as the other main economies improve and we do not.

If the UK economy is to flourish, an increase in the rate of growth, an improvement in productivity and a satisfactory agreement with the EU are all crucial.