Sunday Times, 18th May 2024. https://www.thetimes.com/business-money/economics/article/why-falling-fertility-spells-a-growing-debt-problem-r6q2lbxkg
Ask economists to name the biggest shortfall in the UK economy, and you should get a common answer: output per hour. The productivity of the British workforce stopped growing around 2009 and is now perhaps 20 per cent below its rightful level.
Yet there is another way in which British productivity is disappointing: the number of babies born. The fertility rate has dropped steadily since 2010 and slipped below 1.5 children per woman in England and Wales in the latest data. It was the lowest level on record and well below the rate — about 2.1 — needed to sustain the population.
The demographic shift raises some well-trodden concerns. The biggest: who will pay the pensions of the older generations?
Other issues, such as the sustainability of local government services, are less obvious, but could be just as important.
It is easy to miss the fact that parts of Britain are shrinking; country-wide numbers obscure the local picture. Between the 2011 and 2021 censuses, the UK population as a whole rose by 4.3 million, or 7 per cent, but this was nearly all down to immigration. Even in the area with Britain’s most productive couple — Barking and Dagenham, in Essex — the fertility rate was below 2. (At the other end of the scale was Brighton, with a birth rate of just 1).
While the shrinking native population is happening nationally, the country’s new arrivals tend to be more concentrated. The result is an uneven patchwork, from Ceredigion in Wales, where the population was down about 6 per cent over ten years, to Cambridge, up almost 18 per cent.
The natural concern is for the most crowded areas, suffering as they do from high house prices and crammed GP surgeries. But we should worry about emptier places, too, especially those whose town halls have run up large debts.
Research from the National Institute of Economic and Social Research (NIESR) found that local authorities’ debts have been rising steadily since 2003. Birmingham council topped the debtors’ list at the start of this year, owing £3 billion. By headcount, Woking council in Surrey, at almost £2,000 per resident, is the nation’s most indebted.
Reeling from the 14 increases in interest rates since 2021, seven authorities, Birmingham and Woking among them, found they could not sustain their high interest repayments and issued “Section 114” notices — in essence, the local government equivalent of bankruptcy
One council, Northamptonshire, toppled even when interest rates were at rock-bottom lows, in 2018, and pleaded for a central government bailout. At least five more are now warning that they may do the same — a huge concern. As the NIESR research shows, servicing high debt gobbles up funds and puts vital services, such as support for children with additional needs, at risk.
More devolution appears on the cards in 2025; will it be undermined by a string of localised defaults?
History offers some comfort here, and a reminder of how centralised modern Britain is. Cities and towns in the UK have had far larger local debts in the past.
The story starts with London’s Great Stink. In the mid-1800s, the Thames was an open sewer and tackling the capital’s foul odour meant huge investments in sewers and water systems, including the river’s embankments. The infrastructure funds required were massive, so in 1869, London’s Metropolitan Board of Works offered bonds to investors. The IOUs were popular with savers looking for a return, and a new market sprang up as cities across the UK borrowed from their citizens. By 1900, according to a recent study by Ian Webster of Queen’s University, Belfast, £294 million had been borrowed. This was about half the size of Britain’s entire sovereign debt and 20 per cent of GDP. Today’s local debts are dwarfed by the central government’s and are closer to 5 per cent of GDP.
But the Victorians had demographics on their side in a way that we do not. Consider those London bonds of 1869, issued when the city’s population was 3.2 million. Knowing they were engaged in a long-term project, the Board of Works borrowed for 60 years — and by the time the bonds fell due, the capital’s population was almost eight million. The burden, now spread across far more Londoners, was lower. A fertility rate of almost 5 meant the pattern could be the same across the country; cities borrowed, cleaned up and grew.
Some authorities with sizeable debts — Leeds, Manchester and Peterborough among them — can rely on the Victorian solution. In each of these places, the population has grown by 10 per cent or more over the past decade. As a result, the councils have a far bigger pool of families and businesses on which to levy taxation.
For others, demography is a drag rather than a dividend. It is striking how places that seem similar look different under the hood: Camden and Lambeth in London both have sizeable debts, but while Lambeth’s population is rising, Camden’s is tanking. The greatest concern should be for places where debts are highest and population growth lowest. Cue red flashing lights at Wrexham council, which is one of the country’s most indebted and has a flatlining population. Blackpool is deep in the red and is shrinking.
For ideas on how debt should work, it is always worth remembering Alexander Hamilton, who pioneered America’s federal bond market in the late 18th century. He spent much of his life arguing for the benefits of a central, rather than state-level, debt; it would bind a nation together, he thought, ensuing nationwide investment. A fragmented system, by contrast, means that some regions (those less able to pay down debts) may fall behind, being unable to invest.
Financial localism can have costs. In Japan, regional government has been shaken by demographics, with polls uncontested in areas of population decline — for why stand for office if there is no one to represent? In the US, migration to southern cities such as Miami and Austin has left places like San Francisco and Detroit under-populated and over-indebted. Closer to home, the country to watch is Germany: at €500 billion (£430 billion), its regional debts are by far the Continent’s largest.
Japan started to take action in the early 2010s with its programme of “womenomics”, designed to get more women into the workforce and so maximise the productivity of its dwindling populace. France, meanwhile, launched its “quotient familial” tax system, which rewarded those with bigger families. Austria doubled parental leave to 24 months — a massive stimulus. But bar a fairly small increase in births in Austria, none of these measures seems to have had much economic impact. Added to which, fertility levels seem to be falling, with women having fewer children, on average, than they want, while sperm counts are falling.
Britain is not depopulating as rapidly as some countries, but preparation is vital. We must start managing the decline more actively; when you fall short on babies, the problems might show up in your bonds.
Sunk cost in Venice
If you are planning a half-term holiday, expect to queue, for Britain’s airports are busier than ever. Official data shows that flights were up more than 10 per cent in the first two months of the year, compared with the same period in 2023, suggesting that the 2019 record of 300 million passengers is likely to be pipped in 2024. Delays have been rising sharply, too, as airports get clogged.
Such summer tourist niggles — queues and congestion — are felt nowhere sharper than in Venice. The city is using some interesting economics in response.
While Spain gets more British arrivals, it is Italy that takes the crown for tourism economics. With 5.2 million bed spaces, the nation’s hotels and guest houses could house the entire population of Wales and Northern Ireland combined. And unlike the French, 80 per cent of whom take trips abroad, far fewer Italians, just 40 per cent, holiday away. So “The Boot” swells in summer and the newly popular Naples, which welcomes eight million visitors for a city population of just three million locals, has started to creak.
Italy has 4.5 million tourism-related jobs, by far the largest number in Europe. And since tourism is one way to sell things to foreigners, it accounts for 50 per cent of the nation’s services trade. Lose the visitors and Italy’s current account — the totting up of international transactions — would sink into the red.
Venice, its buildings lashed by the wakes of tourist-laden boats, is already sinking. “La Serenissima”, as it is known, welcomed almost six million visitors in 2023 and has just 50,000 inhabitants. So in April the city introduced a new tax: day trippers must pay a €5 entrance fee to visit Venice. Many have howled, but the idea rests on sound economics.
Piazza San Marco, the city’s prime public space, gets rammed and is damaged by the footfall. The problem is a fine example of the “Tragedy of the Commons”, first set out by the economics writer William Forster Lloyd in 1832.
Lloyd described how a public asset can end up degraded by self-interest. His example was public fields that were ruined when a small group of selfish farmers, thinking only of their own animals, put too many cattle out to pasture. Over-grazing destroys the grass, the herd goes hungry and ends up “puny and stunted”, and all the farmers lose out.
This “tragedy” was not about Venice — where grazing is rarely the problem — but the deeper trouble, overcrowding ruining a public space, is the same. At its root is the divergence of the costs to the individual and the costs to society. Each tourist sitting in a gondola fails to consider the public damage they do, so the costs on which they base their choices are too low and too many trips are taken. By driving up tourists’ costs, the tax aligns the interests of the individual and the group.
If the logic makes sense, the €5 rate is surely a steal. Official statistics put the average spend by foreigners visiting the region at almost €600 per trip. To tamp down numbers, the Venetians may need to add a zero to their tax.
Richard Davies is an economist at the London School of Economics. David Smith is away