The Royal Society’s latest intervention on the UK’s birth rate is a stark reminder that the numbers are moving against us. They warn of a demographic crisis that will strain public finances and reshape the economy. But to understand what lies ahead, we should look to a country that has already run the experiment: South Korea.
South Korea’s fertility rate has fallen to 0.72 births per woman, the lowest in the world. The consequences are a shrinking workforce, a rising dependency ratio, and a government that has spent over £200 billion trying to reverse the trend. The results? Nothing. South Korea’s story is a cautionary tale for Britain, where the fertility rate now sits at 1.49, well below the replacement rate of 2.1. The Royal Society is right to sound the alarm, but the solutions are not straightforward.
The market implications are clear. A smaller working-age population means lower potential GDP growth, higher tax burdens on those who remain in the workforce, and increased demand for government spending on pensions and healthcare. This is a recipe for fiscal pressure and higher gilt yields. Investors should be watching the Office for Budget Responsibility’s long-term projections like a hawk.
Central banks will also have a role. A shrinking labour force puts upward pressure on wages, which could stoke inflation if not matched by productivity gains. The Bank of England is already walking a tightrope with inflation still above target. A demographic drag could make its job harder.
What can be done? The South Korea experiment suggests that throwing money at the problem doesn’t work. The UK government’s efforts, such as increasing child benefit and expanding free childcare, are worthwhile but unlikely to shift the needle significantly. The real levers are immigration and productivity. On immigration, the debate is polarized. But the numbers do not lie. Without net migration, the UK population will begin declining before 2030. However, immigration alone is not a panacea. It must be accompanied by investment in housing, infrastructure, and education to ensure that new arrivals contribute to the economy.
Productivity is the other escape route. If each worker can produce more, a smaller workforce can still support the economy. But UK productivity growth has been abysmal since the financial crisis. The Royal Society is correct that we need a national conversation, but we also need action. That means prioritizing R&D spending, reforming the planning system to build more homes and transport links, and encouraging business investment. The Treasury must shift its mindset from short-term deficit reduction to long-term growth.
For now, the demographic time bomb ticks on. The Royal Society has done its duty by highlighting the issue. The question is whether politicians will have the courage to act before the numbers force their hand. The bottom line: Britain’s future prosperity depends on reversing this trend, and the market is already pricing in the risk.
