Why did our GDP growth leave the country?

It’s official then. Per capita GDP is now back to its pre-crisis level. Does that mean we can finally say the aftershock of 2007-08 is over?

Not quite. Alongside its GDP measures, the ONS also calculates Net National Disposable Income (NNDI) – the income payable to UK residents. This is effectively GDP minus income owed to foreign residents plus income from abroad owed to UK residents.

[N]ot all income generated by production in the UK will be payable to UK residents. Some of the capital employed will be owned by non-residents and they will be entitled to the return on that investment. Conversely, UK residents receive income from production activities taking place elsewhere, based on their investments overseas. Adjusting for these flows gives a measure which is better focused on income rather than production.

And, according to yesterday’s ONS figures, per capita NNDI is some way below per capita GDP and still short of where it was before the recession.

In Q2 2015, NNDI remained 2.5% below its pre- economic downturn level; this is compared with GDP per head which was 0.6% above its pre- economic downturn level in the same quarter.

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As the ONS explains:

Since late 2011, there has been a fall in the net earnings of foreign direct investment (FDI) (the difference between earnings from direct investment abroad and from foreign direct investment in the UK). This fall has resulted in net UK foreign direct investment earnings becoming negative for the first time since Q4 2008. This deterioration is attributed to both subdued earnings for UK residents from direct investment abroad and an increase in foreign earnings on direct investment in the UK.

Although GDP rose, once foreign residents took the profits from their investments, the amount left for everyone else barely moved. In short, much of our GDP increase left the country. This helps to explain why, despite economic growth, people weren’t feeling any better off.

In the last two quarters this gap has started to close and pay is rising, so more people are, at last, starting to see the benefits of the growing economy. But how come the gap between GDP growth and NNDI widened after 2010-11?

The ONS reports a jump in the percentage of UK-based companies owned by foreigners after 2010, which might explain some of it, but that just raises another question. Were more foreigners investing in the UK or did the British just lost their appetite for investment?

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If anyone can throw some light on this I’d be interested to hear your thoughts. Why, despite some years of economic growth, has it taken so long for UK residents to start seeing the benefits? Answers in the usual place, please.


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Living within our means

John McDonnell’s speech seemed to go down well with his supporters. Institute for Fiscal Studies boss Paul Johnson found it a bit confusing though:

There was quite a lot of nodding towards things, or directions that he would like to take. So, unlike what I had understood him to say on Saturday [that he would accept George Osborne’s fiscal charter], he didn’t say that he would be in favour of balancing the books by the end of the parliament. He didn’t say anything specific about a Tobin tax [the financial transaction tax]. He didn’t say anything specific about people’s QE. But he did talk in general terms about the need to support growth, to reduce corporate welfare, to raise money from people like Starbucks and Google and so on.

So what one got the sense of was a desire to raise taxes, as is often the case with politicians, from other people , be they multinational companies, or the 1%, or the rich or whatever. But, to make what he’s saying balance, that is a significantly large amount of tax in that.

That was the slightly confusing thing in a way. He did not really talk very much about spending cuts at all. To meet the fiscal charter, certainly to meet the government’s fiscal plans to get to balance by the end of this parliament, you either need really very significant spending cuts – and that’s what this government has laid out, and let’s be clear they are very significant spending cuts, we saw some of them announced in the budget, we are going to see some more in the spending review – or you need some really, really big tax increases. So, if he really does want to go down that route, then there’s a lot more to spell out.

It’s not just me then. (See yesterday’s post.)

Why the vagueness and confusion? Most of the post-mortems seem to be saying that Labour lost the election because it was not seen as being economically competent. I suspect this is behind all the “live within our means” rhetoric and the reluctance to say too much about borrowing.

As John Van Reenen explained:

Part of the problem was that Labour was reluctant to highlight its rather sensible pledge to eliminate the current deficit by the end of the next parliament. Instead of being proud to say that public investment should not be included in plans for eliminating the deficit as capital spending has a longer term return than current spending, it prevaricated out of fear of looking fiscally irresponsible.

The crazy part about all this is there’s a good story here, it’s just that the Labour Party was reluctant to tell it during the last election and seems to be just as reluctant now.

Before the election, the Institute for Fiscal Studies published a report on the fiscal implications of the major parties’ policies. The key difference was that the Conservatives wanted a complete end to government borrowing by 2019-20 whereas the other parties aimed to eliminate the current spending deficit while still borrowing to invest. This means that all day-to-day spending on public services plus social security and debt interest would be covered from tax revenue but capital investment projects, such as new railways and roads, would be funded from borrowing.

Given the growing pressures on public finances over the next decade, it makes sense to get back to a point where day-to-day spending is being covered by tax revenues. Even Simon Wren-Lewis, one of Jeremy Corbyn’s new advisers (congratulations Simon) and Jonathan Portes, who are certainly no cheerleaders for austerity, agree that the UK needs to reduce the public deficit. Just eliminating the current deficit would be enough to start reducing the UK’s debt-to-GDP level by the end of the decade. A paper by NIESR just before the election calculated that, by 2020, under Labour’s policy we would have higher debt and higher growth, under the Conservatives’s policy, lower debt and lower growth but under both plans public debt would start to fall relative to GDP. As the IFS shows, debt wouldn’t fall as quickly by reducing only the current deficit but it would still be on a downward path and we wouldn’t have had to wreck our public services to achieve it.

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This would still mean some spending cuts or tax increases. The Resolution Foundation calculated £7 billion, which sounds a bit light to me, given that the NHS will probably need  more cash before the end of the decade. Even so, it’s still nowhere near the amount needed to achieve George Osborne’s target of an absolute surplus.

If we must use household spending as an analogy for the national accounts, the current deficit is like your overdraft and credit card debt while borrowing for capital spending is like your mortgage or a loan for home improvements. It makes sense to clear your overdraft and pay off your credit card from your monthly salary. It doesn’t make sense to pay off your mortgage more quickly if by doing so you will damage your family’s health and future prospects. This is especially true of you can borrow at fixed rates on historically low terms.

Why cut down on the quality of your food, your trips to the gym or sports clubs and extra tuition for your children just to pay your mortgage off more quickly? If you could meet the repayments, surely it would make more sense to borrow money at today’s rock bottom rates to convert your loft, giving the children an extra bedroom or study. This would add to the value of your house and improve your children’s exam results and future earning prospects.

Covering day-to-day living expenses from salaries is what most people would consider living within their means. Trying to cover investments in things like houses or home improvements from day-to-day wages is something few families are able to do. And if they could borrow at fixed low rates, as governments do, it would be really crazy to bust a gut trying.

There is a good story to be told about living within our means while still investing for the future but Ed Miliband’s team didn’t tell it or, if they did, few people heard. A reasonable and sensible policy was squeezed between allegations of deficit denial from one side and austerity-lite from the other. The IMF and credit ratings agencies are saying that governments need to invest, both to build infrastructure for the future and to boost economic growth, and that now is the time to do it.

It makes sense to live within our means and to invest for the future. There is no contradiction between the two. It’s time someone on the opposition benches stood up and said so.

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Labour and the fiscal charter

Has John McDonnell really committed Labour to supporting George Osborne’s fiscal charter? A report in the Guardian at the weekend said:

To the possible surprise of some on the left, McDonnell will announce that Labour MPs will be expected later this autumn to vote for the chancellor’s fiscal charter unveiled in the budget in July.

It quotes the shadow chancellor:

“We will support the charter. We will support the charter on the basis we are going to want to balance the book, we do want to live within our means and we will tackle the deficit.”

Confusingly, the Guardian reports also says that Labour would borrow to invest, which suggests something similar to Ed Miliband’s policy of eliminating the current spending deficit while still borrowing for capital expenditure. That would give the government more leeway but it would still require cuts or tax increases. It was the policy condemned as austerity-lite by the left and it would be ruled out under the Charter for Budget Responsibility.

If John McDonnell signs up to the charter, he will be asking the Labour Party to back the chancellor’s plan to eliminate the deficit entirely by 2019-20.  

The Guardian piece goes on to say:

But McDonnell makes clear that he takes a radically different approach to the austerity measures of the Tories, whose deficit reduction plan is achieved mainly through spending cuts, as he says that Labour would ease the burden on low- and middle-income earners.

But you can’t get rid of the deficit without spending cuts and/or taxes on middle-earners.

According to the OBR, the government plans to take £17.9 billion in real terms from day-to-day public service spending by 2019-20.

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On top of this it is aiming for £12 billion worth of social security cuts. If that target is missed (which I think it will be) then the balance will have to be taken by more cuts to public service spending. Whatever the mix, though, this amounts to around £30 billion in cuts.

To prevent that happening, taxes would have to rise by a similar amount. The trouble is, raising £30 billion a year without hitting middle earners is damned near impossible.

HMRC figures show that the amount of revenue that would be raised just by taxing the rich isn’t very much. Increasing top rates of income tax or stamp duty on posh houses would hardly make a difference. Governments can only raise serious money by taxing the masses.

Tax revenues Jul 2015

Finding an extra £30 billion without increasing basic rate income tax, NI or VAT would be extremely difficult.

Ah but what about the tax dodgers?

Estimates of the UK’s uncollected tax range from HMRC’s £34 billion to Jeremy Corbyn’s £120 billion but, as Colin Talbot says, whatever the true figure, the problem is actually getting hold of the money.

It would be great if, by bringing a few Moriarty tax dodgers to book, the government could rake in billions of pounds. Unfortunately, most of the shortfall in tax revenues is not due to a small number of big-time evaders and avoiders. It’s the other way round. Much of the tax gap is made up of a very large number of very small amounts. Around 20 percent of it is due to error and carelessness. Digging into the HMRC figures it quickly becomes clear that there is no low hanging fruit, just a lot of small berries up a very tall tree.

As Colin points out, the situation is not that different in other European countries and so far, no-one has managed to do much about it.

Schneider’s latest estimates for the sizes of shadow economies illustrate the nature of the problem (see page 23).

On 2007 the UK shadow economy is put at 10.6% of GDP. In the same year he estimates the figure for Greece was 25.1%, Italy 22.3%, Spain 19.3% and Portugal 19.2. No real surprises there. But Germany was 14.6% and famously tax compliant Sweden was estimated to be 15.6% (other Scandinavian countries were at similar levels).

History also suggests this is an ingrained problem: for the UK the figure in 1980/90 was 9.6%; but for Germany it 11.8% and Sweden 15.8%. In the 21 countries Schneider analyses not one of them significantly reduced the size of the shadow economy in the almost two decades his figures cover.

Soaking the rich and catching the tax dodgers, then, will not be enough to ensure that the UK eliminates its deficit and “lives within its means” by the end of the decade. If John McDonnell really is signing up to George Osborne’s fiscal charter he must either be supporting the government’s proposed spending cuts or advocating higher taxes on middle earners. That’s the dilemma of the next five years. Either raise taxes, cut spending or extend the deficit reduction timetable. Anyone who says they can avoid all three is living in La La Land.


I forgot to mention Trident. The much-quoted £100 billion cost of replacing Trident is not £100 billion a year. It’s £100 billion spread over many years. It is likely that most of that spending will be in the next decade. Even if we were to scrap Trident tomorrow it wouldn’t make much difference to the deficit in 2019-20.

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Chart via Trident Commission


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Global greying and the great stagnation

A note from Morgan Stanley Research last week took an in-depth look at the implications of the global demographic changes over the next few decades. It’s a fascinating read. Duncan Weldon and Mike Bird have already covered the paper’s conclusion about inequality, which is essentially that proportionately fewer people of working age will raise the price of labour and offset the increase in inequality that Tomas Piketty predicts. I’ll leave that there for now because the note contains lots of other stuff which is worth a mention.

It starts with the demographic sweet spot, the point at which birth rates fall but the proportion of old people is yet to rise. Therefore, the proportion of old and young dependents falls while the proportion of the working age population rises, so the dependency ratio is at its lowest. The western economies went through this phase in the late twentieth century and many of the developing economies are going through it now. For more on this see Robert Arnott and Denis Chaves and my summary here.

Eventually, the falling birthrate that gave us the demographic dividend in the first place feeds through to leave us with an older population. Combine that with increasing life expectancy and you get a rapidly ageing demographic profile. That process has been underway for some time in the developed economies and will speed up in the emerging economies over the next three decades. Some of the upper middle-income countries are set to age at a fascinating rate. As countries get richer, their people live longer and their fertility rates fall. Therefore,  the proportion of the population of working age falls and the dependency ratios rise.

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There is, say the Morgan Stanley team,”unanimous agreement that demographic headwinds will likely slow growth down over the next two decades”. The demographic sweet spot gave the world higher levels of growth than it had ever seen. Now comes the hangover.

Might other factors offset the economic effects of the ageing population? Not entirely, says Morgan Stanley.

Greater workforce participation among the Over-65s will help but it is unlikely to happen quickly enough:

Participation of the over-65s in other advanced economies has picked up as well, suggesting a widespread response to the challenge of ageing, but there isn’t enough evidence that the participation is picking up fast enough to fully offset the overall trend of ageing.

Retirement ages have become culturally ingrained. People expect to retire at, say, 65 and don’t take kindly to the suggestion that the should work for longer. Generous pensions mean that many can still afford not to.

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What about immigration? Isn’t that going to save the ageing economies by bringing in a new wave of younger workers?


For all the fuss about immigration, there is simply too little of it to show any significant global economic impact at all on the kind of demographic changes we are discussing here. Much more would be needed, but this remains a politically charged issue, much like many of the other issues we discuss as part of the factors that could mitigate ageing flows.

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In any case, many of the emerging economies which are sending migrants to the developed ones will soon find their populations ageing at a faster rate. They will have fewer young people to export.

A few countries still have rising young populations though. Perhaps India and Sub-Saharan Africa will provide the new engine for global growth.

Again, unlikely say Morgan Stanley:

There won’t be another ‘China’ for a long time, if ever:

The starting point for these economies could also allow rapid growth for sure, but the ability of these economies to transform themselves into the next China is questionable. The rapid progress of China was in a no small measure possible because the US consumer played an important part in driving up demand for China to cater to. With overall growth in DM slowing, India, Africa and Latin America will provide a buffer for the global demographic headwinds, but will not be able to offset them fully, in our view.

In other words, much of China’s growth was due to demand from the developed economies. With growth slowing in these economies, another emerging economy will find it more difficult to expand at the same rate.

India may take China’s place but it will find things much more difficult:

India is the most promising candidate, but global demand through such a relocation of production will need to accelerate meaningfully: Perhaps the economy best suited to marry its generous demographics to an extensive inflow of capital is India. However, such a change is unlikely to occur over the next few years, and could only happen over the next decade with the help of significant tailwinds to the domestic and global economy, in our view.

Why? India’s economy is starting from an extremely low level of sophistication. This should allow rapid development, but it is presently in no shape to absorb a large flow of capital and put it to work in a short period of time. If India beats the odds and does transform itself into a manufacturing powerhouse, global demand will have to become much more supportive for such a transformation.

In any case, the rate population growth has slowed in India too. It’s only in sub-Saharan Africa where populations are still booming. The trouble is, says the report, “these economies do suffer from weaker human capital compared to India”.

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Although they may be the fastest growing parts of the world economy, say the Morgan Stanley team, neither India nor the African economies has either the administrative infrastructure or the human capital to offset the global slowdown in economic growth.

The overall conclusion:

The demographic headwinds that we describe in this note will likely prevail because the many offsets that one might think are available to directly reverse this powerful trend are themselves probably weaker than most imagine.

Global greying, then, will have a massive impact on the world economy and all the straws we have been clutching at won’t do much to mitigate its effects. The growth we thought was normal came about because of a demographic dividend that is now spent. We will now have to get used to a period of much lower growth just at the time when our economies have suffered long-term damage, public debt levels are high and the fiscal pressures of an ageing population put increasing pressure on state finances.

Of course, as Duncan says, there is one more straw to clutch at:

The factor that might change the above analysis is one on which Morgan Stanley describe themselves as “agnostic” – technological innovation. As they note, it is hard to predict and sometimes even harder to measure.

Demographics matter. And one look at the projections for the advanced economies is enough to make me ask if one of the great economic worries of the day is entirely placed.
Rather than fretting about the “robots taking all out jobs” (the worry that technology is destroying jobs quicker than we can adapt), it’s perhaps better to worry that “the robots aren’t taking our jobs fast enough”.

Or, as I put it a few months ago, Tech Yeah! is preferable to Tech Meh! At least if the robots take our jobs, the problem is then simply one of distributing the abundance. Without that leap in productivity, we are in for a long period of much lower economic growth than we have been used to over the past 60 years and there isn’t much we can do to stop it.

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Did the oldies steal your pay rise?

We tend to assume that rising productivity will lead to rising wages but it ain’t necessarily so, says the Resolution Foundation’s Gavin Kelly:

The productivity crisis of the last few years is far from over but economic recovery is now well-established and there are at least a few flickers of life in the official data on output per hour. The widely shared assumption, often unspoken, is that when productivity picks up then typical wages will grow at the same rate. But that’s not necessarily a safe bet.

Look closely at the relationship, as a new RF report does (building on an important earlier study for RF by the LSE’s John Van Reenen and João Paulo Pessoa), and we see that since the early 1980s productivity has risen by over 60 per cent while median pay increased by just under 40 per cent: a 23 percentage point gap.

Over the past ten to fifteen years, the relationship between productivity and median pay has come adrift.


The Resolution Foundation report gives four reasons for this:

  • The ‘labour share effect’ – which looks at what share of national output flows to workers and what share flows to non-workers. All else equal, a falling labour share increases the ‘wedge’ between productivity and pay;
  • The ‘compensation effect’ – which considers what share of overall employee compensation (the labour share) gets paid as wages and what share comprises non-wage compensation such as employer National Insurance and pension contributions. All else equal, a rise in non-wage compensation will mean wages don’t grow as quickly as productivity;
  • The ‘wage distribution effect’ – which focuses on differences between mean and median pay growth. Even if average wages are growing in line with productivity, rising wage inequality will serve to reduce the pace of typical pay growth; and
  • The ‘deflator effect’ – which accounts for the fact that the value of output is adjusted using a producer price deflator while wages are adjusted using consumer price deflators. If the consumer deflator rises more quickly than the producer deflator then the relative price gap that opens up lowers the real value of wages and increases the ‘wedge’ between productivity growth and median pay.

A combination of these factors has led to a decoupling of median wage growth and productivity. Of these, says the Resolution Foundation, the labour share effect has had the least impact and the deflator effect is probably temporary. The wage distribution effect and the compensation effect are the main reasons for the gap between productivity growth and median wage growth.

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The wage distribution effect is shown on this next graph. Mean pay has, until recently, more or less kept pace with productivity while median pay has fallen behind. To put it another way, the median wage earners’ share of the overall wage pot has fallen so, while pay as a whole has kept up with productivity, the highly paid have taken more of the rewards.

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The other major factor is the compensation effect, which means that, although the overall compensation paid by employers is rising, less of it is finding its way into pay packets and more is going into pension payments. The reason for this is that many employers now find themselves with pension deficits.

[R]ecent work from Brian Bell suggests that a significant share of this increase in pension contributions relates to unfunded pension liabilities in defined benefit schemes that are no longer open to new members. So, even as firms have reduced their pension promises to employees, they’ve increased the amount of money being set aside. The implication is that a sizeable part of the non-wage compensation recorded in the National Accounts is actually flowing towards pensioners, rather than serving as a deferred payment for today’s workers.

Older workers and the recently retired worked through a time when those on middling earnings had a greater share of overall pay and when employers paid into generous pension schemes. Their accumulated assets have enabled them to preserve that advantage into later life. Middle-earners from later generations not only have a lower share of the pay bill, they have also been shut out of final salary pension schemes.

It is tempting to blame the baby boomers for all this. Here’s Phillip Inman in the Guardian:

Maybe this should not come as a surprise after more than a decade watching those who own assets – mostly the over 55s – ringfence their booty from anyone planning to tax it or allow the market to diminish its value.

Baby boomers had successfully lobbied in the early noughties to protect their final salary pension payouts, even when it was obvious they were becoming unaffordable. It was never fair that one generation could secure its own pensions knowing everyone else would be left with a pittance in old age – as companies rushed to ditch their final salary-linked schemes – but we did not know it would also mean people sacrificing wage rises.

But is lobbying to protect pensions really so unreasonable when pension pots were part of the deal under which people were employed? Many people stayed in unrewarding jobs with the same company for years simply because they were due a good pension. They’d be bound to feel a bit aggrieved if they were told, towards the end of their working lives, that they weren’t going to get it after all.

Perhaps this is more to the point (my emphasis):

The blame lies with the retired baby boomer and their employers who failed to ensure enough funds went into their final salary schemes during their working lives. The deficit-ridden schemes must now be filled from company cashflows, denying today’s workers a proportion of the forecast wage rises.

Here’s something Phillip Inman wrote ten years ago:

Blame corporate Britain for the pensions mess. The TUC does. It says greedy directors, keen to cut costs, have seen employee pensions as an easy target.

In the 1990s many companies took the seemingly painless decision of stopping contributions to occupational schemes. The stock market was riding high and companies thought they could take “pension holidays” and still meet their obligations to pensioners.

Collectively, according to Inland Revenue figures, employers saved almost £18bn during the 1990s pension holidays – although staff were forced to carry on making payments. It was a time of booming corporate profits, although in hindsight much of that profit came directly from the savings in pension contributions.

£18 billion worth of missed contributions eh? And how much is the deficit now? Here’s the Resolution Foundation again:

Clearly this area is worthy of more investigation but, as a working – and highly indicative – calculation, Bell puts the potential size of pension deficit funding accounted for by the retired population rather than today’s workers at somewhere in the region of £6 billion to £16 billion.

So £18 billion invested during the 1990s would have more than covered it.

There’s more though. As Ros Altman says, some pension funds were used to fund the corporate restructuring of the 1980s and 1990s. Offering generous early retirement schemes meant firms could get rid of people without having the redundancy payments hitting their profits. Instead, the pension schemes paid, the headcount went down, the City was happy, the profits were untouched and those at the top were handsomely rewarded. I saw some of this first hand, though I don’t know if anyone has studied the overall impact it had on pension schemes. In her 2011 book Retirement Heist, the Wall Street Journal’s Ellen E. Schultz accused US firms of siphoning off billions from pension funds to pay for corporate restructuring. If anyone has any similar data for the UK I would be fascinated to see it.

The result of all this is that employers will need to shore up their pension funds for some time if they are to meet their obligations. This is likely to act as a drag on wages, preventing those on the median wage from feeling the benefit of any productivity improvement. As Gavin says, “the pay pot might get leakier at the same time as a reduced share of its contents flows to workers in the middle of the distribution.”

Today’s middle earners are understandably resentful but is this really just a question of intergenerational fairness? The boomers are comfortably off only because they lived through a time when those on middling incomes secured a relatively large slice of the pie. Most of the rewards from the pension scheme raids went to the very few. The relative decline in the median wage is due to pay hikes for those at the top and the reduced bargaining power of everyone else. As the pay prospects for many younger workers look ever more bleak, and the prospect of them owning their own homes recedes into the distance, boomer blaming is becoming fashionable. But rather than blaming their parents for stealing their pay rises, they might ask why the pension schemes ended up so short of funds in the first place.

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The healthy ageing challenge

The difference between life expectancy and healthy life expectancy might sound like something that is only of interest to healthcare professionals but it actually lies at the heart  of much of our political debate. Questions about the sustainability of public finances, how much tax we will need to pay in the future, how far and how fast public service spending should be cut, intergenerational fairness and even how many immigrants the country needs all depend on the rates of ageing and healthy ageing.

Our long-term fiscal challenge is essentially a health spending challenge. Every year, the OBR produces a report on the UK’s long-term fiscal sustainability which says that upward pressure on public finances means that, even if the government’s public spending cuts are implemented, the country’s debt-to-GDP level will start to rise again in the middle of the next decade. Michael O’Connor put the projections from the most recent report on a single chart. The OBR’s Central projection for public debt (the black line on the chart) is based on a number of assumptions. If these turn out to be wrong, that would change the forecast.  As this chart shows, higher or lower interest rates, different rates of migration and a change in pension policy could all increase or reduce the likely amount of debt over the next 50 years.

OBR key sensitivities

Of all the variables, though, nothing has as much impact as health productivity. The OBR’s central projection assumes that NHS productivity increases by 2.2 percent per year. Over the last 30 years or so, though, it hasn’t come anywhere near that. The OBR estimates health productivity has improved at 1.1 percent since 1979, a rate which, if it continues, will not be enough to counter the health service’s increased costs over the next 50 years. This would therefore push public debt up to around 190 percent of GDP (the pink line on the chart), close to the IMF’s fiscal danger zone.

Increased demand has made healthcare costs outstrip economic growth in most developed countries and most forecasts expect that to continue as populations get older. The OBR refers to the European Commission’s report on ageing which forecasts that the UK’s annual health spending will grow by only 1.5 percent of GDP over the next 50 years. (The OBR believes this is too optimistic.) The IMF, in its recent Fiscal Monitor report, forecast an extra 2.4 percent of GDP by 2030. The OBR’s central projection says another 1.7 percent by 2060 while its low productivity growth scenario has health costs rising by 7 percent of GDP over the next half century. Most forecasters agree that UK health spending will grow faster than its economy over the next few decades.

An ageing population is not the only reason for rising healthcare costs but the prevailing wisdom is that increased life expectancy will add ever more pressure to stretched health systems over the next couple of decades. As people live longer, they will spend longer needing more healthcare and will become in ever increasing fiscal burden on the shrinking proportion of the population of working age.

But this may not necessarily be so. A recent paper by the Campaign for the NHS Reinstatement Bill argues that the demographic time bomb is a myth.

The extent, speed, and effect of population ageing has been exaggerated by the government because the standard indicator—the old age dependency ratio — does not take account of the fact that people aged over 65 years are younger, fitter and healthier than in previous decades. In fact older people have falling mortality, less morbidity, and are more economically active than before. Some forms of disability are postponed to later years.

Old people ain’t what they used to be. People in their 60s are a lot fitter than they were when the retirement age was set. If we redefine what we mean by working age then the picture doesn’t look nearly as bleak.

Most acute medical care costs occur in the final months of life, with the age at which these occur having little effect. It is not age itself, ‘but the nearness of death’ or health status of
the individual in the ultimate period in the last few years or even months before death that matter most.

Jeroen Spijker and John MacInnes, writing in the British Medical Journal in 2013, showed that if we change our definition of old age from age 65 to less than 15 years of life expectancy, our projected dependency ratios don’t look as bad. As life expectancy crisis above 80, people of 65 are no longer classed as old and so the proportion of the population considered to be dependent and beyond working age does not rise as quickly.


But increasing the working age in line with increases in longevity assumes that, as well as living longer people will stay healthy for longer. The gap between life expectancy (LE) and healthy life expectancy (HLE) also determines how much care people will need at the end of their lives. Unless healthy life expectancy increases at a faster rate than life expectancy, the number of years for which people need care will increase.

Figures released last month by the ONS suggest things are moving in the right direction. Life expectancy is rising for both men and women but healthy life expectancy is rising slightly more so the years of ill health each person can expect has fallen slightly.

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Le v HLE1

Source: ONS

The findings of the Global Burden of Disease Study published in the Lancet yesterday were somewhat different. The good news is that the gap between life expectancy and healthy life expectancy isn’t as wide as that calculated by the ONS. The bad news is that it has been getting wider since the 1990s, as it has been in most countries in the world.  People are living longer but living sicker for longer too.

Le v HLE2

Source: The Lancet

The ONS and Lancet figures are based on different methodologies and I hope that some of the medics and health economists who read this blog will explain the relative merits of each one.

What we do know, though, is that life expectancy is increasing as the world becomes more affluent and all countries are faced with ageing populations. If the improvement in people’s health doesn’t keep pace with increasing life expectancy, then the rapidly changing age profile will present a serious fiscal challenge to all governments. But if we can stay healthier for longer too, the pressure on health spending need not be as severe.

The human race is at the start of a great experiment. For most of our history, only a tiny proportion of people survived beyond their 60s. By the middle of this century, the over 60s will be more than 20 percent of the world’s population. We have no idea what the implications of this will be but we will need to find ways of dealing with such a momentous change. One of them will be to keep ourselves a lot healthier for a lot longer.


The Economist has put some of the data from the Lancet report on a chart. It’s those orange bits that cause the problem.


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Gender equity and the demographic time-bomb

Another of those memes that refuses to die is the ageing society as an exclusively European or western problem. Demographic change is a global phenomenon. It may be at its most advanced in Europe but the rest of the world is not far behind.

Last month, the UN released its latest population forecasts. The projections for some Asian countries show the proportion of people over 60 rising at incredible speed over the next three decades. In South East Asia, for example, Singapore,Thailand and Vietnam go from having relatively young populations at the start of the century to age profiles similar to many European countries by 2050.

60+ population SE Asia

This isn’t just an Asian phenomenon either. Emerging economies around the world, having industrialised at a much faster rate than the advanced economies, are experiencing the resulting social change at a much faster rate too. The UN expects demographic change in the countries it classifies as upper middle-income to speed up over the next thirty years. (The definitions are in this document.)

60+ population by income

As countries get richer, people have smaller families and live a lot longer so the proportion of older people goes up.

Some of the upper-middle income countries are ageing at a fascinating rate and will overtake some advanced economies over the next few decades. By the middle of the century, Iran and South Korea will have a greater proportion of their populations aged over 60 than the UK, the US or Sweden, with Brazil and Vietnam not far behind.

60+ population selected

Sweden’s age profile is particularly interesting, showing a gentle upward drift over the next few decades. Those of Norway and Denmark are similar. A study by two American demographers, Thomas Anderson and Hans-Peter Kohler, suggests that this is no coincidence. They found that those countries which have done the most to advance gender equality have also stabilised their birthrates.

Increased work opportunities and the availability of contraception enabled women to choose how many children to have and when to have them. But, say Anderson and Kohler,  cultural norms didn’t change so women were still expected to look after the children and do most of the housework even when they were going out to work. Many women therefore chose to have fewer children or not to have any at all, which led to falling birth rates.

Then something happened. In the late 20th century attitudes began to change in the more developed economies so equality in the home began to catch up with equality in the workplace:

This enormous transformation over several decades is measureable using data on the relative and absolute division of household labor. Using time-budget surveys for the UK and the US, Gershuny and Robinson (1988) for example showed that women’s participation in household work declined substantially from the 1960s to 1980s, while men’s participation increased (though remained much less than that of women). Their findings closely paralleled similar findings for other first-wave developers, like Canada, the Netherlands, Denmark, and Norway, indicating fairly widespread progress during this time period toward a more egalitarian division of household labor in among first-wave developers.

Nearly 12 years later, Bianchi et al. (2000) found the trend toward household gender equity had continued so much so that household work had nearly been cut in half for women in the US since 1965, and doubled for men during this period. An international comparison of unpaid work trends by Hook (2006) revealed similar optimistic results: over-time increases in unpaid work by men in Australia, Canada, France, Germany, the Netherlands, Norway, and the UK. Other recent studies have found similar longitudinal advances in household gender equity throughout Western countries (e.g., Sullivan and Coltrane 2008; Bianchi et al. 2007). Lastly, a comparison of OECD countries shows that by and large, Northern/Western European and English-speaking countries have the smallest gap in the number of minutes women and men perform in unpaid work, while East Asian and Southern/Eastern European countries have the largest (Miranda 2011).

Add in improvements to childcare and the birth rates in some countries began to rise again. Anderson and Kohler call this the gender equity dividend.

The relationship between female labour force participation, gender equity in the home and fertility therefore looks like this:

Screen Shot 2015-08-24 at 16.18.19

In traditional societies where few women are in employment, fertility is high. When firms and governments start employing more women and there is more workplace equality, the fertility rate drops because attitudes within the home haven’t caught up. Once men start taking a more equal share of childcare then it becomes easier for women to work and have children so more of them do. As a result, the fertility rate rises again.

Many Asian societies, they argue, are still suffering from this cultural lag. Institutional equity in workplaces and schools has moved on but attitudes to roles in the home are still very traditional.

Th Anderson and Kohler study is quoted in this week’s Economist piece on the ageing of Asia:

Female literacy is nearly universal, and in Japan and South Korea female college graduates outnumber male ones. Female labour-force participation is also high. But women are still treated in the old ways. Until recently Japanese women were expected to give up work on having children. Working or not, Japanese and South Korean women do at least three more hours of housework a day than their men.

Such cultural lags are associated with ultra-low fertility because if you force women to choose between family and career, then many will choose their career. In Tokyo, Bangkok and other Asian cities, rates of childlessness are sky-high. Women are refusing to marry.

Combine high levels of female education and work opportunities with persisting traditional attitudes and many women choose their careers. Contrast this with some parts of Europe where attitudes to gender roles have moved on.

In Europe the cultural lag closed eventually. Social norms began to shift in the 1960s and have changed more rapidly in the past 20 years. Child care became more widely available. Men started to help with the laundry and the school run. Women therefore found it easier to have both a career and rugrats. In places where this process has gone furthest—France, Scandinavia, Britain—fertility rates are almost back up to the replacement level. In those where traditional male breadwinner/female homemaker roles have lingered, such as Germany and Italy, fertility rates remain low.

It is a persuasive argument and it goes some way to explaining the rapid ageing forecasts for parts of Asia and Latin America, the much slower ageing of Northern European and North American economies and the falling gender pay gap we see in Northern European countries, including the UK.

Even so, bringing birth rates back to replacement level isn’t going to make the problem of ageing disappear. It is caused as much by the top of the age pyramid growing as the bottom of it shrinking. People are living longer and there will be a lot more old people everywhere by the middle of this century. The UN forecasts that, by 2050, almost every country outside sub-Saharan Africa will have a greater percentage of its population over 60 than Britain has now. The rate of change will be most extreme in the emerging economies. As so often seems to be the case with economic data, the Scandinavians are the top of the class and seem to have come closest to getting their demographics under control. Perhaps those countries forecast to experience rapid ageing over the next thirty years should at least take a look at what they have been doing.

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