The hidden motor of our spiralling spending and deficits is population

‘You can have small families or a small state, but the evidence of our economic predicament suggests you cannot have both’

When I was studying economics in the 1980s, if someone had told us we would have nearly 15 years of interest rates close to zero, constant government deficits and inflation barely flirting with 1 per cent per annum, we would have concluded that the rules of economics had been suspended. But it has happened. And the hidden reason is population.

The clue is the first country into the vortex of this new economic universe: Japan. On the cusp of the 1990s, Japan suffered a stock market crash. Since then economic growth, inflation and interest rates have been on the floor while government debt – now twice as high relative to GDP as the UK’s – has gone through the roof. It is no coincidence that all this happened after decades of small family size.

The Japanese fertility rate fell below the technical replacement level back in the 1950s and has been well below it since the 1980s. Today, if you lined up the population of Japan by age, the person in the middle would be getting on for 50. In the 1960s, that person would have been barely half that age.

This makes a big difference economically. When a population gets older and more and more money is in the hands of the elderly, you find that that money looks for a safe haven. Often it finds its way to the safest borrower of all – the government. And so it is that, despite the dizzying heights of its debt-to-GDP ratio, the Japanese government can still borrow for next to nothing, thanks to elderly

Japanese, unwilling to risk their capital in their autumn years, queuing up to lend to the state. Where Japan has led, the rest of the West is not far behind. Today the median Briton is over 40 and, just as in Japan, the queue to lend to the Government has allowed the Chancellor to borrow and spend.

The UK Government does not just borrow domestically, but this is part of a larger international pattern. Ageing is a phenomenon throughout the rich world and, increasingly, beyond it.

This is the very opposite of inflation. A huge purchasing hole would appear in the economy if all this capital channelled through the state were not to be funnelled into spending by anyone. The state is therefore obliged to pick up the slack, to borrow and spend and to offer wealthy, cautious older folk a haven for their money.

Massive government deficits are bound to come down after the hyper spending during the time of pandemic, but I suspect that anything like a balanced budget is nowhere in view as long as our population is old and getting older. Some call it “postmodern monetary theory” – the idea that governments can spend and spend until they hit an inflationary wall. I call it perpetual Keynesianism – the idea that a government boost is required for the economy not on a temporary basis but on a permanent one because, with an ageing population, the animal spirits which Keynes expected to rebound in the course of an economic cycle simply do not.

The upshot, it seems, is that you can have small families or a small state – but you cannot have both.