CPP has long explored how policy should tackle questions of inclusive growth - from gender equality to childcare, from cost-of-living to parental leave. This blog documents how these are also important drivers of demographic change in the UK. Taking a data-driven approach to the fertility trends of the last decade, we also discuss the role of policy action, drawing considerably from international evidence in this area.

2022 saw a decline in the number of births in England and Wales to the lowest level in two decades, which coupled with an aging population, underscores the significant demographic challenges facing the UK [1]. Without increasing migration, low fertility leads to an aging population, which, as highlighted in CPP’s Funding Fair Growth report, is projected to put a lot of pressure on the public finances in future. Policymakers must now grapple with this overarching concern, which, while not as acute as has been the case in South Korea and Japan, hints at a potentially similar trajectory in the years ahead. Tackling low birth rates is hard, but without sufficient policy attention the decline in birth rate may accelerate in future, posing more significant economic challenges down the line. How did we end up in this situation? And what can be done to help our economy escape this demographic crunch?

The fertility enigma

During 1998-2007, work-family reconciliation policies became a new and central feature of the British welfare state. Reforms to the income-tax system and increased child benefits elevated incomes of the most economically disadvantaged families by up to 10 percent [2]. There is some evidence that these measures boosted fertility by as much as 15 per cent among the group affected by reforms [3]. Consequently, the UK saw one of most dramatic turnarounds in total fertility between 2002-08 of all countries in the European Union [4].

Post-2011 however, the story is very different. Between 2010 and 2020, the total fertility rate (TFR) in England and Wales declined from 1.94 to 1.58, its lowest level ever recorded [5]. This trend in fertility during 2010–20 was common among many European countries such as France, Italy, and Sweden, as well as in the United States, but the drop was particularly sharper for the UK (see Fig 2). Since then, multiple competing hypotheses have been put forth to explain the fertility reversal.

One very common argument is that these falling fertility rates are due to more women going into higher education and entering the workforce [6]. However, this doesn’t explain why fertility has declined for all groups in the past decade, irrespective of education levels [7]. Given that net migration increased post-2010, it can also be easily ruled out as a potential factor explaining these trends. What could, then, possibly answer the UK’s fertility enigma?

The missing piece?

Drawing from a range of literature that highlights the effects of financial crises as well as public spending on fertility, we set out to investigate whether and to what extent the Great Financial Crisis of 2008-09 and the subsequent austerity program had an effect on fertility rates in the UK, and if this effect was more pronounced for socioeconomically deprived areas, by employing a method of statistical analysis known as the ‘interrupted time-series’ (ITS) design [8][9][10].

Our results suggest a large, potentially causal impact of events that took place during the period 2009-11 on fertility trends in the UK. Moreover, this decline was much more pronounced for UK’s deprived areas, who experienced a 10% higher annual rate of fertility decline than their affluent counterparts (see Fig 3).

There is more to these results. ITS helps us to distinguish whether the effects of an intervention or event were more immediate, sustained or both. Interestingly, for both least and most deprived authorities, as well as the UK economy as a whole, there are no short-term (known as ‘level’) but only sustained, longer-term (known as ‘trend’) effects. It is important to note that 2009-11 were monumental years for the UK economy, primarily due to two factors: the global financial crisis as well as onset of the austerity program. Empirically, it is difficult to untangle which of these was responsible for declining fertility trend afterwards. However, economic theory suggests that reduced public spending may have had a greater role to play here. First, financial crises have typically been associated with immediate and short-term effects on fertility [11]. Second, the primary channel through which they affect fertility is unemployment [12], which didn’t turn out to be a concern for the British economy. In the words of UK Commission for Employment and Skills (2014), “For such a sharp and serious recession, the UK saw only a moderate increase in unemployment” [13].

Reduced public spending, particularly on benefits and non-statutory services delivered by local councils such as youth and family services, has reduced resources available to families. High housing costs and the recent period of high inflation will only add to these pressures. There is emerging evidence on the topic that highlights how the rising cost of living and subsequently lower real incomes may put a downward pressure on fertility [14][15][16]. While trying to analyse differences in how fertility has evolved across local authorities in the UK, we discovered that this is indeed the case, with areas characterised by high disposable household incomes performing better on fertility rates than their lower-income counterparts [17].

The path of pronatalism

An aging population leads to strains on pension and health systems, and the situation is projected to worsen in coming years (for more, see CPP’s report Funding Fair Growth). This presents a formidable challenge, not just for the UK but several developed economies that have experienced a decline in fertility rates to concerning levels. But if there is one lesson that the above analysis highlights, it is that UK’s current demographic state may partially be a result of conscious policy choices and therefore, can be ameliorated to some extent through state action. The next question, then, is how do we formulate policies that will put us on a path of rising fertility? Unfortunately, there are no easy answers here.

Though advanced economies showcase notable variation in their pronatalist strategies, both in terms of policy mix as well as the amount of spending, most common policies adopted by high-income countries to boost fertility include a mix of cash benefits, tax support, early childhood education, parental leave allowances, childcare provision and flexible work arrangements [18]. Evaluating the effectiveness of these policies, however, hasn’t been easy. It is challenging to establish a causal connection between pronatalist policies and fertility rates, especially as it takes a long time for policy interventions in this area to have an effect. Also, several studies that claimed to have found an effect of pronatalist interventions failed to distinguish the impact of policies on completed fertility from impacts on fertility timing [19].

Nevertheless, there is some convincing quasi-experimental evidence that highlights how pronatalist policies indeed hold the potential to impact fertility in a positive direction [20][21][22]. It is crucial to highlight that examined studies evaluated the impact of pronatalist measures that, for apparently random reasons, were accessible to certain families while unavailable to others. This element of randomness reduces the risk of bias seen in other studies in this area.

In Austria, a doubling of paid maternal leave from one year to two years was found to have had a large positive effect on the likelihood of a woman having a second child, while finding no long-run negative impact of extended maternal leave on women’s earnings and employment. Similar effects were seen after the introduction of child benefits in the Canadian province of Quebec. Another study assessing the Israeli child subsidy program concluded that changing the cost of having an additional child can be an effective way for governments to influence fertility decisions, as it found a strong co-directional relationship between lower child benefit spending and lower fertility.

Lessons to be drawn

Simply put, public policy has an important role to play in boosting fertility across economies. Current international literature on the topic offers some pertinent lessons in terms of policy formulation. First, any policy that aims to boost fertility must take a holistic approach by employing a mix of different measures. For instance, an approach that involves solely cash transfers is likely to fail as having a child involves considerable time costs as well. Therefore, pro-family policies such as parental leaves as well as flexible working policies make more sense from a broader social and economic point of view. This argument is best exemplified by the case of Central and Eastern European economies that adopted a cash benefits-only approach under communist regimes and saw only temporary boosts to their fertility rates that dissipated later [23].

Second, instead of short-term gains, policies should focus on longer-term consequences. Such policies could include improved childcare provision, high-quality early education services as well as health facilities. CPP’s previous work on childcare explores the need for and the nature of such policies in greater detail. Russia’s story exemplifies why such an approach is important. In 2007, Russia introduced pro-natalist short-run policies that were more focused on reducing both monetary and time costs borne by families only around the time of birth, and consequently didn’t enjoy much success [24].

Conclusion

It is important to be cognizant of the fact that policies aimed at boosting fertility require resources, and the question of whether the state should intervene in matters of procreation is debatable. However, not only are pronatalist policies beneficial for child and parental wellbeing, but they may also have sizable economic benefits. In the case of aging economies, a substantial portion of the future economic contributions of an additional individual extends beyond the family, benefiting the broader society. As adults join the workforce, they contribute to the production of goods and services and pay taxes to government. From an economic viewpoint, this implies that the societal value of children surpasses the private value. This scenario forms a key rationale for public policy intervention in fertility matters.