Another day, another government report warning of demographic collapse. This time, the finger is pointed at the UK’s falling birth rate, which has now dropped below the replacement level of 2.1 children per woman. The Treasury might be celebrating lower spending on child benefit, but the long-term ledger tells a different story. A shrinking working-age population means a shrinking tax base, and that is a fiscal time bomb ticking beneath the gilt market.
Look at South Korea: a decade of aggressive pro-natalist policies has failed to reverse its fertility decline. Seoul spent billions on cash handouts, housing subsidies, and fertility treatments, yet the birth rate hit a record low of 0.72 in 2023. The lesson is clear: you cannot bribe people into parenthood. The costs of childcare, education and housing far outweigh any government handout. The same logic applies here in Britain.
The UK’s economists have been lulled into a false sense of security by immigration, which has masked the demographic trend. Net migration has propped up GDP growth and kept the dependency ratio manageable. But as the Home Office tightens visa rules and public opinion sours, that tap will be turned off. When it is, the Office for National Statistics projects the population of working age will shrink by 2 million over the next 25 years. That is a hole in the economy’s engine block.
And let us talk about the real cost: the public finances. An ageing population means higher spending on healthcare and pensions. The Office for Budget Responsibility already projects that by 2070, public spending on health and social care will rise by 8 percentage points of GDP. Meanwhile, the tax base shrinks. The only way to square this circle is higher taxes, lower spending, or a debt spiral. Given the government’s track record, the last option is the most likely.
The market is already pricing this in. Look at the yield curve: long-term gilt yields are rising relative to short-term ones, a classic sign that investors demand a premium for holding UK debt in a shrinking economy. Inflation may be falling, but the real risk is a debt trap. If growth does not pick up, the debt-to-GDP ratio will continue its upward march, and at some point, the bond vigilantes will take notice.
The government’s current approach is to ignore the problem and hope technology or immigration saves us. But as South Korea shows, there are no silver bullets. The only real solution is a fundamental rethink of how we value family, work and the welfare state. Yet in today’s political climate, that is as likely as a balanced budget.
So here we are, sleepwalking into a demographic crisis. The Treasury can kick the can down the road, but the road is getting shorter. And when the can stops, the sound will be that of a gilt market in revolt.
