The British are having more babies. Let's start planning for it.

So when does Britain pass Germany to become Europe’s largest economy? That might seem a bizarre question right now, when our own recovery is so uneven and Germany seems to be striding ahead. But it is one that is raised by some data on our two countries’ very different fertility rates from Eurostat, the EU’s statistics agency. It is also a most relevant question when you consider concerns about pensions, housing, migration and, of course, the elephant – the deficit.

The point is that we focus so much on tiny details, GDP statistics for example, that we tend to ignore wider socio-economic trends. If, thanks to relatively high fertility rates and reasonably strong inward migration, our population goes on growing, it becomes much easier to support an elderly population and hold down the national debt. If, on the other hand, population shrinks, as is starting to happen in Germany, those burdens become even harder to sustain.

The size of a country’s population is determined by changes in migration, longevity and fertility. There is clearly huge pressure for inward migration and it is hard to see that declining.

Longevity – well, we do not score particularly well by European standards. Life expectancy is higher in Sweden, Italy, France and Spain. French women born now are expected to live to 85, whereas in Britain it is 82; for men, Swedes seem particularly long-lived at nearly 80, against our 78. But longevity is going up everywhere and that raises the issue of whether the pensionable age should be linked to it, something the Government is evidently pondering.

But the surprise is what is happening to fertility. Ireland, France and the UK are all close to the replacement rate of 2.1 babies per mother – Ireland is above it. (And, yes, I am aware it is an obstetric impossibility to have 0.1 of a baby; this is an average.) At the other end of the scale comes Germany, with fewer than 1.4 babies. In most of Europe, rates are turning up but in Germany they have barely budged at all.

What does this mean for population? Well, the UN’s forecast for Germany in 2050 is around 75 million, with the UK at 72 million, so Germany would still have an edge. But the Population Reference Bureau estimates Germany will be down to 70 million and the UK up to 77 million. If that were the case the cross-over would come before 2040.  All this is conjecture, and if there is uncertainty about population how much greater the uncertainties about the size of the economy? But the projections are sufficiently plausible for us all to think pretty hard about what we should be doing.

Some of the issues are practical public policy ones. Take planning: how do we fit the people in and make the country a nicer place to live? Or how do we build more homes and at the same time make sure they are decent ones rather than little boxes? It certainly affects education and health care. And it affects financial policy, for the larger population will require more services but also provide the revenues to help supply them.

There is, however, another element: the way we should and will see ourselves. I don’t mean in a silly “mine’s bigger than yours” way, though I could imagine a strutting politician taking that pose. I mean in a more thoughtful and measured way about our relationship with Europe and other fast-growing economies, particularly the Brics. It is about self-confidence as a nation and how to deploy that in a way that is helpful to the world.

Inflationary Confusion

Somewhat better inflation figures yesterday – 2.5 per cent on the consumer price index – gave a bit of comfort to expectations that inflation might be below the rate of increase in earnings by end of year. The effect would be that real earnings might at last start to rise again. The other measure, the retail price index, was 2.9 per cent, so if you take that measure the squeeze will still be on.

But which measure should one take? Both have flaws. The CPI makes very little allowance for housing costs, which seems a bit rum. But the RPI, though tried and trusted, used an arithmetic mean, which some statisticians feel overstates inflation.

The Government is moving public pensions and benefits to the CPI for obvious reasons: it has to contain costs. The Government cannot however do anything about contracts legally linked to the RPI, such as the payment on index-linked gilts. But it can try and modify the RPI formula.

Yesterday the authorities launched a consultancy exercise. Since any change would almost certainly reduce the return on index-linked gilts, investors will presumably oppose it. The Bank of England has to decide whether any change is material and if so, then the whole business goes to the Chancellor. It sounds messy.  I could see this ending up in the courts.