Last week, one Labour MP told us that we should leave the EU because the shrinking working age population in the Eurozone is a “ticking time bomb” which means that taxation inside the Eurozone will need to rise to pay for an ‘army of retired people’. She’s right on the demographic issue, that’s undeniable, but what is unclear to me is why anyone would not understand that the UK faces exactly the same issue, or why leaving the EU makes any difference. It is a simple fact that a falling birth rate coupled with increased longevity will create a problem for any country, including the UK, where the state pension is paid for out of current revenue rather than out of past savings.
Such a pension fund has some similarity with a giant, state-sponsored, Ponzi scheme, where payments to the increasing numbers of pensioners depend on recruiting ever more people to contribute to the scheme. The logic of that is that maintaining the level of the state pension requires that the population continues to grow (which is, incidentally, one of the ways in which immigration by people of working age brings a net fiscal benefit); that the level of taxes paid by those of working age continues to increase; or that the age at which people can claim their pensions continues to rise. The real question should be about how we move away from a Ponzi scheme towards a properly funded pensions system, but that would be a major project requiring long term political consensus rather than the regular chopping and changing which characterises UK Government pension policy – under both parties.
The issue of population growth, or lack of, was also referred to in the recent Government Expenditure and Revenue Wales (GERW) report. The report drew attention to the disparity between the population growth in Wales since 2008, at 2.2%, and that of the UK as a whole, which was 4.5%. This has a number of impacts for those of us concerned about the fiscal gap in Wales. A higher proportion of pensioners coupled with a lower proportion of people of working age means both that the demand for public expenditure (on pensions and health) is disproportionately high, whilst the revenue raised from people in employment is disproportionately low (without even considering the wage differential).
The fiscal problem in Wales is exacerbated by a flow of retirees into Wales and a flow of young people out. Some claim that we cannot be independent until we have resolved that issue; but I’m in the other camp which is inclined to believe that independence is actually a key part of the solution.Given the impact of humanity on the planet, and the aspiration for ever-higher material living standards, an overall policy which depends on continual population growth is pure folly. I’m not alone in believing that the falling birth rate in developed countries is a good thing rather than a bad thing; stabilising the world population is a sensible, not to say necessary, aim. But much of what passes for economic policy seems to be ignoring the demographic, and implicitly assuming that falling population growth is a temporary problem. In reality, it’s a long term opportunity, but it requires adaptation.