Rafael Behr of the New Statesman argues that ‘Loongate’ shows that Tory MPs want to be insulted by Cameron in order to justify perpetual rebellion against him.

Possible thanks to Miliband’s rescue
(Credit: Loewyn Young)

Simon Nixon spells out how the Bank of England’s outgoing governor, Mervyn King has failed in his battle against British banks, seeing this as resulting from the “problematic relationship between Mr. King and the U.K. Treasury”.

Alex Warsnip, writing on the Prospect Magazine blog, reviews a book that tries to make the secular case against gay marriage. He finds that their arguments “are no less flimsy than those of other anti-gay marriage crusaders”. 

David Miliband, writing on the Project Syndicate site, criticizes the current UK direction with regards Europe.

Graphic images of the senseless tragedy in Woolwich on Wednesday were displayed prominently by the mainstream media.

Should the media have shown the images of the Woolwich attacker? For me the simple answer is ‘yes’, but that each of these cases must be put in context and each publication framed in a way to minimise risk.

I don’t believe in an absolute right or obligation to publish everything. I know that newsrooms saw imagery from Woolwich that they did not put on screen or in their pages. Imagery that is full of gore may be a realistic portrayal of an appalling act but showing it all can actually stop people from watching and distance them from the act itself.

It’s also not good enough to say that these images would be published online anyway, though that is certainly true. The video and photographs of the immediate aftermath were taken by citizens and some were broadcast on social networks as well as offered to the news media. But journalists still have to reflect on their ethical, social and political responsibilities before using them.

When I asked this question on Twitter [@CharlieBeckett] I got a range of replies.

Journalists tended to say that the public should see tough images of what was a shocking event:

Some pointed out that once an image is published on one platform other media will follow:

It was also pointed out that it’s the words that go with the pictures that can make the impact better or worse:

While others said that broadcasting the attacker’s message was wrong:

While others worried about the impact on the relatives involved and on the wider population:

My view is that you can’t understand what happened without hearing and seeing both the attacker, the banal location, and the upset witnesses. That image and that voice is the essence of the horror. Of course, warnings and caveats are needed. Care must be taken with the use of descriptors such as ‘Muslim’ or the word ‘terrorist’ or ‘terror’. I agree with the BBC’s Mark Urban that it is a technical rather than moral term. This was a terror attack, but a white person killing an elderly asian man a few weeks ago was not – it was racist.

On the ‘oxygen of publicity’ question I can’t see how news can continue if we worry too much about inspiring support or imitation of ghastly acts like this. But it is important to show the context. That is why we need to hear reaction from the eye-witnesses and others in the various communities who are affected. Sometimes those reactions can feel pious or cliched, but it is important to say the obvious and even sententious sometimes. In that sense, David Cameron’s response has been exemplary.

[There's a good alternative view here from Sunder Katawala who says the media has given the terrorists a 'megaphone' but I think that is a simplistic view of how people react to the messages and their ability to contextualise. Though I agree that it's up to the media, politicians and so-called community leaders to articulate the alternative to the terrorists.

Less surprisingly, media prof and former tabloid editor Roy Greenslade agrees that the images should have been published]

This article was originally published on Charlie Beckett’s POLIS blog.

Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting.

About the Author

Charlie Beckett is director of Polis, in the department of media and communications at the London School of Economics. He has 20 years of experience with LWT, BBC and ITN’s Channel 4 News. He broadcasts and writes regularly on media and political affairs and is the author of SuperMedia: Saving Journalism So It Can Save The World (Blackwell, 2008). He teaches at the LSE and LCC. He tweets at @charliebeckett.

Outrage over tax avoidance has bubbled up this week with the visit of Google’s executive chairman Eric Schmidt, who is speaking at the LSE today.

Google’s executive chairman Eric Schmidt will stand up to give a talk at the LSE this evening after a week of unprecedented criticism of the search giant. I wonder if he still feels the same way today as he did last October, when he told journalists:

Doing no evil: Eric Schmidt
(Credit: Guillaume Paumier, CC-BY.)

“I am very proud of the [tax] structure that we set up. We did it based on the incentives that the governments offered us to operate…It’s called capitalism. We are proudly capitalistic. I’m not confused about this.“

Last Thursday Matt Brittin, the company’s vice president, was told “I think you do evil” by the chair of parliament’s Public Accounts Committee when he made a second appearance to defend what he had openly admitted were the company’s tax avoidance activities.

Coverage of a pre-G8 summit meeting for business leaders at 10 Downing Street on Monday, attended by Schmidt, focused on the tax avoidance questions, and whether the company’s tax practices had been discussed. David Cameron and Nick Clegg did indeed claim to have challenged Schmidt for his aggressive tax position. Just yesterday, Ed Miliband took the fight to the belly of the beast, throwing the company’s own words back at it. He said:

“I can’t be the only person here who feels disappointed that such a great company as Google, with such great founding principles, will be reduced to arguing that when it employs thousands of people in Britain, makes billions of pounds of revenue in Britain, it’s fair that it should pay just a fraction of one per cent of that in tax.”

The political consensus appears to be that the international tax system is broken and needs to be fixed by governments – to change those incentives identified by Schmidt – but also that, in Miliband’s words, responsible companies should “do more than obey the letter of the law.”

Here’s the problem with this analysis: the reason that Google (and Amazon, Apple and Starbucks for that matter) pay so little tax in the UK is not simply a matter of exploiting weaknesses in the system. It’s also because that’s how the system is designed. We’ve built a set of global rules that define a company’s tax liability not by how much stuff it sells in Britain, but by where it locates the business functions that add most value to the things it sells.

And the reason we did this is because we thought it suited us. On the global stage, Britain is a reasonably sized, but not huge, consumer market. But British businesses have a lot of customers overseas. So we figured that we would be better off with a system that’s biased towards – in the language of international tax – a multinational company’s place of residence, rather than the source of its revenue. It’s that bias that allows US companies to sell billions in Britain while incurring a relatively small tax liability here – a liability that they can reduce further through tax avoidance.

What our political leaders rarely mention is that the difficulties that e-commerce would create for our tax system were foreseen as early as 1997, and supposedly resolved as early as 2001 (pdf). The crucial agreement here was that the sale of a product over the internet would be treated just like the sale of its physical equivalent. If I stand on the other side of the UK-French border, stretch my arms across it and sell you a book, I’m running a business in France and my profits are taxed in France, even though you, my customer, are in the UK. The same would be true no matter how many books I sold. Under the rules agreed in 2001, exactly the same rule applies if I sit in an office in Luxembourg and transfer a book to your Amazon Kindle, no matter how far away I am.

At a meeting debating international tax rules last year, the UK and US opposed efforts by India and other developing countries to change precisely this kind of rule. They wanted to be able to tax the profits of foreign companies that sell services into their huge and growing markets without needing a physical presence. The UK said no, outright, because it would be a “fundamental change in the balance of source and residence taxation.” The OECD, which is in charge of the current review of international tax rules, says it isn’t aiming to change this balance.

The system as it stands suits countries like the US and UK, which are home to large multinationals that sell services abroad without needing a big physical presence.  Many companies selling services into developing countries are either British or providing the services from Britain, and our government doesn’t want to surrender the right to tax these companies. A side-effect of this decision is that it also means getting less tax from the foreign companies with the biggest consumer presence and visibility here.

David Cameron says he’s going to sort the system out, and no doubt there will be some changes that tighten up some of the areas most exploited for tax avoidance. But untangling the costs and benefits of international tax reform is complex, and it’s unlikely that the outcome will put an end to all of the counterintuitive tax results.

Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting.

About the Author

Martin Hearson is a doctoral researcher in the international relations department of the LSE. He focuses on the political economy of international taxation in developing countries. Until recently, he worked on tax policy for the development NGO ActionAid. He blogs at http://martinhearson.wordpress.com.

Rather than enact policies to reduce inflated housing prices which many are calling for, the government is doing everything in its power to prop up prices. 

House prices in the UK are too high. How much too high they are depends on where you are: house prices have been rising in London because rich Asian businessmen and French aristocrats are buying up prime real estate as a safe haven investment for their filthy lucre, apparently. But outside London and the South East, house prices have actually fallen over the last few years, a bit. But not much. Certainly not enough to make them affordable for young people on median incomes.

The trouble is, there are a lot of people out there who already own houses. Many of them are relying on the value of their property to top-up their pensions. And all of them have votes. The total voting power of homeowners in the UK far exceeds that of the young people who are being priced out of the housing market. It would be electoral suicide at the moment for any political party to sign up to policies that would cause a significant fall in house prices.

However, there is future electoral benefit in making it possible for young people to buy houses. At some point many of these elderly property-owners are going to want to sell their houses, and if young people can’t afford them then they are in for a big shock. It is not in older homeowners’ interests to sit on an appreciating asset whose value is not realisable in practice. Writing down the value to something more affordable is a far more sensible strategy for older homeowners who have paid off their mortgages. Young people and old people therefore have more in common than they think they do. The people who really stand to lose from a major fall in house prices are those with mortgages, particularly those who over-borrowed prior to the financial crisis and are only just managing to service their debts. A fall in house prices could force many of these into negative equity. Painful though that would be, it would enable the housing market to readjust to a more sustainable level, and provided interest rates remained low, borrowers would be able to continue to service their loans. Yes, a lot of young families would be trapped in houses too small for them because the amount of their mortgage exceeded the value of the house – as I was in the early 1990s, the last time there was a significant house price correction in the UK. But repayment mortgages are forgiving things: eventually the outstanding amount would drop below the house value and they would be able to move.

So engineering a fall in house prices looks like a good economic strategy for the medium-term, although possibly not a wise one for politicians hoping to get re-elected in 2015. But the Government is not even discussing it. On the contrary, it is doing everything in its power to prop up house prices. It is not liberalising planning laws to enable expansion of private sector building programmes, as some have suggested. Nor is it sponsoring public sector building programmes. And on the monetary side, it now has two schemes designed to make it easier for first-time buyers – the Funding for Lending Scheme, which provides cheap funding to banks on condition that they lend more to house-buyers and small businesses, and the Help to Buy scheme, which guarantees part of the purchase price of a house, thus making it possible for people to buy a house without much in the way of a deposit. Both of these schemes have been criticised for potentially increasing house prices.

This apparent short-termism is not entirely due to electoral considerations, though those are clearly a factor. A fall in house prices is not the easy solution it appears to be. In fact at the moment it would have disastrous effects on the economy. The reason is, of course, banks. And building societies. And indeed any financial institution that lends against property.

House price falls are disastrous for mortgage lenders. Mortgages are secured loans: the house that is bought is the collateral for the loan, and the loan is granted on the basis of the value of that collateral. As with all forms of secured lending, the value of the collateral usually exceeds the amount of the loan: the difference is made up with the house-buyer’s own funds. Since the financial crisis mortgage lenders have reduced their loan-to-value (LTV) ratios considerably, which has made it very hard for house-buyers with limited resources to find the money needed for deposits (this is the stated justification for the Government’s Help to Buy scheme). Good quality loans typically have a LTV ratio of less than 80%: the risk associated with the loan increases as the LTV approaches 100%. Above 100%, part of the loan is effectively unsecured. Without going into details about how bank capital ratios work, the higher the LTV, the greater the amount of bank capital required to support it, more-or-less. When house prices fall, LTV values rise – exceeding 100% for borrowers in negative equity. Falling house prices therefore eat up banks’ capital, not because they took on risky loans but because their supposedly safe low-LTV mortgages become much riskier. Banks and building societies are already damaged from the financial crisis of 2007-8. A large fall in house prices could bankrupt many of them. Particularly at risk would be building societies and small retail banks, who tend to have lower capital levels than large universal banks because most of their lending is in supposedly “safe” mortgages. There is nothing “safe” about mortgage lending in an overblown and fragile housing market.

Improving the supply of houses without causing a major fall in house prices seems to be almost impossible. An extensive private sector house building programme would help the recession-hit construction sector, but it would force down house prices. That would apply whether those houses were for sale or for rent. Landlords borrow to finance the purchase of homes for renting out, and they carry the value of their rental properties on their balance sheets: and as rents tend to be set in relation to house prices, falling house prices would be likely to force rental values down. A major fall in house prices would therefore potentially bankrupt many landlords. And construction companies who borrow on the basis of expected returns could also be bankrupted if those returns fail to materialise because of falling prices. This is what happened in Ireland.

A social house-building programme similar to that after World War II might improve the supply of homes for rent without causing house prices to fall. Or it might not, if the effect was that people who might otherwise have tried to buy substituted into new social housing. And what if those houses were then sold to their tenants under the Right to Buy scheme? This would also cause house prices to fall, though perhaps more slowly than large-scale private sector house-building. Of all the options for improving the supply of housing without wrecking the financial sector, this looks the best. But it would require government not only to spend money, thereby increasing the fiscal deficit, but to abandon its ideological commitment to private-sector solutions and admit that we need an increased role for publicly-owned housing at the moment. I suspect hell would freeze over first.

So forcing a house price correction would have horrible effects on the economy at the moment. But for many people, housing is at the limits of affordability. The rise in the price of houses in the last two decades has far outstripped incomes, which have actually stagnated in the last ten years. Low interest rates have encouraged people to take on mortgages that stretch them financially. A rise in interest rates would force many people into defaulting on mortgages or other loans, which would also have a serious impact on the financial sector. A sudden rise in unemployment would have similar effects. And as real incomes decline due to below-inflation pay rises, benefit cuts, tax rises and underemployment, more and more people are becoming financially overstretched. They don’t default on their mortgages, but they cut spending in other areas. This depresses demand for goods and services in the economy, forcing companies to cut costs – which usually involves reducing jobs and/or wages – and even go out of business. It is a moot question whether the real problem here is low pay or high inflation: perhaps it is a bit of both. But the solution is not easy. Raising interest rates to counter inflationary pressures would cause financial distress to many households and businesses. Raising wages without an equivalent rise in GDP would be likely to create higher unemployment. And raising real incomes through higher benefits and/or cutting taxes would increase the fiscal deficit.

So we cannot force down house prices, we cannot force up real incomes and we cannot vastly increase the fiscal deficit. The housing conundrum resembles one of those games of the “there’s a hole in my bucket” variety – a mind puzzle, if you like. Many people solve it by leaving out some of the pieces – which of course is not a solution at all. Others want to do something dramatic such as a large rise in interest rates or a massive state-funded construction programme to “shock” the system into correcting – the idea being that the short-term pain would be worth it to achieve a sustainable correction. I understand their frustration, but I am not sympathetic to their solution. This Gordian knot cannot be simply cut with a sword. It must be painstakingly unpicked – and I fear that will take a very long time.

This article was originally published on Frances Coppola’s blog, Coppola Comment.

Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting.

About the Author

Frances Coppola has an MBA from Cass Business School. She designed risk management systems for Treasury and Capital Markets at NatWest, and a group consolidated financial & regulatory reporting system for RBS Group. She writes on her Coppola Comment blog and is also the author of the Singing is Easy blog, where she writes about singing, teaching and musical expression. She tweets from @Frances_Coppola.

The IMF today published its assessment of the health of the UK economy. It urged the government to adopt the recommendations made by the LSE Growth Commission by boosting public investment. Professor John Van Reenen, though wishing the IMF could have been even more critical of the failures of the government’s fiscal plans, welcomes the assessment and hopes that it will encourage a long overdue change of policy.

Today the International Monetary Fund (IMF) published the summary of its “Article IV” report, their annual investigation into the health of the UK economy. It makes ugly reading. The IMF points out that “per capita income remains 6% below its pre-crisis peak, making this the weakest recovery in recent history… Capital investment (as a share of GDP) is at a post-war low, and that youth unemployment is high.” To top it all, the government’s austerity programme is another “headwind” against future growth and the risks remain “tilted to the downside.”

Follow the LSE Growth Commission
David Lipton, IMF’s deputy managing director (credit: BBC)

Although the ever-diplomatic IMF did not explicitly call for an abandonment of the Chancellor’s fiscal Plan A, they call strongly for more public spending on investment severely slashed since 2010. The IMF’s deputy managing director, David Lipton, was more upfront in the London Press Conference “It would be, in our view, useful for the economy for infrastructure and other measures to be brought forward to reduce the drag of austerity measures… and provide more support for the economy.” In addition to demand boosting public investment, the support that is needed are the supply side policies recommended by the LSE Growth Commission

The IMF and the Chancellor: The Special Relationship

George Osborne has been a nervous man these last few months. IMF Managing Director Christine Lagarde is a friend, not least because the Chancellor pole-axed Gordon Brown as a contender for the IMF’s top job even though he was a fellow Brit. Ms. Lagarde paid him back through offering support for the Coalition’s austerity programme. Even as the IMF as a whole was getting cold feet over the scale, shape and speed of UK austerity, the Coalition could rely on Ms. Lagarde – this time last year she presented the Article IV with much more enthusiasm for the government’s policies than the report itself. This year she was unfortunately unavailable, so it was left to her deputy to deliver the bad news.

Over the past year the IMF has become increasingly critical of the UK. In its April meetings IMF Chief Economist Olivier Blanchard said the UK was “playing with fire” with its current austerity programme. The Treasury’s spin doctors have been working overtime ever since to say the IMF Article IV was likely to be very critical of the government due to internal politics. Hence when it came out as merely critical, the report can be dutifully hailed again as a ringing endorsement of government policy.

Article IVs are almost never directly critical of large countries like the UK and they are always hedged in careful diplomatic language. Nevertheless the message is clear enough if you can read the runes – for example, see Jonathan Portes’ decryption of last year’s statement. This year is no exception.

Supply Side: A pressing need for structural policies

The strongest message was a ringing endorsement that “A number of initiatives identified by the LSE  Growth  Commission….. should be pursued with greater vigour”. These included

• Improving the human capital of low skilled workers through better training and education.
• Overhauling the way infrastructure decisions and made and delivered through, for example, sharing development gains much more generously
• Increasing competition in the retail banking sector

The IMF stressed that these types of supply side reforms have benefits in the long-run for raising potential growth, but also in the short-run by improving expectations of future growth. Hence there is a double dividend for moving on these immediately instead of prevaricating as the government has done over airports and energy, chilling private investment.

The government’s policies to stimulate housing through “Help to Buy” is rightly criticised for stoking demand which would “ultimately be mostly house prices increases that would work against the aim of boosting access to housing.” What’s needed is for the government to increase infrastructure spending to boost the supply of entry level housing.

Demand side: more public investment, please

The IMF argues the UK is suffering from a persistent output gap, i.e. that the potential of the economy is far above current output levels. The implication is that monetary or fiscal measures to stimulate the economy will cause real growth and jobs, and not just higher inflation as supply side pessimists have been falsely arguing. The IMF also makes the point that monetary policy has rightly been very aggressive, but this is not making its way through to credit. Since “planned fiscal tightening will be a drag on growth” the implication to be drawn is that some fiscal relaxing is possible, especially if used to bring forward capital investment. This is what is meant by “near term support for the economy”. When “labour is under-utilized and funding costs are cheap, the net returns” to public investment are very high. In other words, public investment right now is a no brainer.

Our anaemic growth over the last five years and chronic spare capacity obviously harms the UK economy in the short term, but also damages our medium term growth prospects as people lose their skills and motivation and beneficial investments lay unrealised.

The Wrap-up

The bottom line is that the IMF is endorsing an increase in public investment spending, as many of us have been pushing for years. The most effective way to address deficient demand would be for the government to directly spend at least £20 billion on infrastructure over the next two years as analysed in studies by the IFS, NIESR and CEP and the IMF now seem to agree.

I wish the IMF could have been even more critical of the failures of the government’s fiscal plans. They are too willing to accept the argument that “credibility” has been purchased by an excessively frontloaded deficit reduction plan, for example.

But it is clear that the Chancellor’s (formerly?) favourite international think tank have signed up to the public investment programme we so sorely need. So perhaps we will finally get some real action.

This article was commissioned by The Conversation UK.

Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting.

About the Author

Professor John Van Reenen is Director of the Centre for Economic Performance at the London School of Economics.

Barry Sheerman MP

Walking the streets of any town or city in the UK and one can’t help but be struck by the prevalence of betting shops on our High Streets. What is less striking to the unfamiliar eye is the proliferation of gaming machines within these shops over the past ten years.

In 2001, Gordon Brown, as Chancellor of the Exchequer, struck down duties on individual bets in favour of taxing bookmaker’s gross profits. This seemingly practical policy step, and by no fault of Mr. Brown, paved the way from almost no gaming machines- or fixed odds betting terminals (FOBTs) by their technical name- to more than 35,000 today. In the year leading up to March 2012, an estimated £40 billion was staked on FOBTs accounting for roughly £ 1.4 billion in annual profit; approximately 50% of betting shops’ total profit.

This would all be well and good if not for the method of obtaining these profits. The class-B2 FOBT can take up to £18,000 of a player’s money in a single hour by allowing stakes of up to £100 each turn, every 20 seconds. Natasha Schull, an associate professor at MIT, has found that the transition from gear-driven handles to electronic buttons has doubled the number of ‘plays’ per hour and provides virtually no opportunity to process the ramifications of a loss. Along these same lines, Jon Grant, a professor of psychiatry at the University of Chicago, has found that electronic machines can cause players to believe they’ve won by using false ‘bells and whistles’ to trigger the reward mechanism in the brain. In 2010, the Queensland government in Australia enacted regulations forbidding these ‘false wins’.

To compound these problems is the rise of betting shops in areas of high unemployment. Research commissioned by Channel 4’s Dispatches recently found that there are twice the number of betting shops in areas of high unemployment than in areas of low unemployment. While the industry’s trade group argues this is a matter of population density, it is nonetheless a disturbing trend that likely correlates to the targeting of the most vulnerable. With the most recent British gambling prevalence survey in 2010 finding problem gambling increasing 50% in three years and with only 1 NHS clinic for problem gambling in the country, the current state is unacceptable and unsustainable.

There is currently a public consultation underway as part of the revived triennial review of stake limits and the B2 FOBT has arisen as a flashpoint.  The industry is arguing for maintenance of the status quo and thus far seems to be tacitly supported by the Conservative government.  They argue that the category B2 machine, which are said to be the most dangerous, is critical to their economic viability. The presence of these machines has grown at a rate of 22% since 2008/09 and accounted for 49.4% of income in 2011, up from 39.9% in 2008.

However, while the presence of these machines and their importance to the industry has grown, their users remain a small fragment of the betting public. From the 2010 Gambling Prevalence Survey, 73% of the adult population in Great Britain participated in gambling within the previous year, while only 13% of adults played on slot machines and a mere 4% played on FOBTs. One can easily extrapolate from this that an increasing percentage of income is coming from a very small group of losers.

The government and the industry insist that a more concrete causal relationship must be established between problem gambling and FOBTs prior to meaningful changes.  This is the wrong approach. Delaying action to reduce the stakes of these machines and their proliferation in our cities and towns will only result in damaging more lives and destroying more families.

One of the UK Gambling Commission’s three licensing objectives is, “to be fair and open.” In the case of FOBTs, this requires payback percentages to be clearly displayed. Yet, the only way to verify this percentage is to have an accurate accounting of the turnover per machine, which is unreported. There has thus been a woeful shortage of the necessary data from these machines to verify their openness and fairness or to know the exact manner in which they are impacting individual customers.

The onus is on the betting shops to prove that their products are not damaging the lives of British citizens and in doing this they have fallen short. Change can begin immediately with a full accounting of the number of users per machine, the total amount staked at each machine, and the amount paid out at each machine. In time, this information will allow us to develop an informed perspective on the relationship between these machines and problem gambling.

However, until such a time, the Government should take action to protect customers from what may be the predatory targeting of the disenfranchised. This should include an immediate reduction in the permissible stake, not maintenance of the status quo.

Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting.

About the Author

Barry Sheerman MP has been the Labour and Co-operative Member of Parliament for Huddersfield since 1979 and currently Chairs The Skills Commission. He is founder and chairman of Policy Connect, a cross-party, non-profit think tank based in London and is a member of the Court of Governors at the LSE. He tweets from @BSheermanMP

While the UK is a rich and affluent nation, it is also a very unequal one. Previewing a new book written with colleagues and published today, John Hills discusses the political and economic issues raised by wealth inequalities, and how these are an important factor in inequalities of life chances. The information that their research details, and the analysis of current policies that are exacerbating inequalities may contribute to the change that would serve our society well.

Household wealth in Britain is huge: £5.5 trillion according to the Office of National Statistics. This is four times national income, compared with only twice it in the 1950s and 1960s. If you add in rights to future pensions from employers it adds up to £10 trillion – £415,000 for each household.

But the way it is distributed is hugely unequal. In 2008-10, median (middle) wealth was £232,000 – only just over half the ‘average’. A tenth of households had less than £12,600 – even including all their personal possessions – but a tenth more than £967,000. The ratio between the two, a measure of inequality called the 90:10 ratio, was 77 to one. For incomes or earnings in the UK, which are already quite unequal, the equivalent ratio is around 4 to one, so wealth is far more unequal than this.

In all, the top tenth had 850 times the wealth of the bottom fifth. The top one per cent of households had an average of £5 million. And if you go to the stratospheric heights, according to the Sunday Times ‘Rich List’, 1,000 people shared – or possibly didn’t share – £450 billion. If you show the wealth distribution as a graph, with each 1 centimetre representing £10,000, the wealth of the middle household would be 23 centimetres high and that of the top 1 per cent an average of 5 metres. But the top thousand in the Rich List would be an average of 450 metres – one and a half times the height of London’s Shard.

Those thousand raise political and economic issues of their own, but wealth inequalities between the rest of us raise plenty of issues to be going on with. We discuss these – and analyse the way wealth is distributed and accumulated in a new book published today.

Published 22 May 2013

Some wealth inequality is, of course, a result of the life cycle. We tend to enter adulthood with nothing (or nothing much), and we leave the world with nothing (although probably something for our heirs). In between, up to retirement, people build up savings, buy houses and pay off the mortgage, and build up pension rights, if they are lucky. Then in retirement, they run down savings.

Households aged 25-34 had median wealth of £76,000 in 2008-10, but those aged 54-64 median wealth of £431,000. But even if you look within age groups you see huge inequalities – it’s not just a simple matter of wealthy baby-boomers and poor members of the ‘jilted generation’. A tenth of households aged 55-64 had more than £1.46 million, but a tenth less than £29,000 to see them through retirement. This gives a 90:10 ratio of 50 to one – so the overall inequality is not only a result of life-cycle saving.

Those inequalities have consequences for people’s own lives and those of their children.  This is most obviously through inheritance – itself very unequally distributed, with for instance half of all inheritance going to just one adult in fifty between 1996 and 2005. But it also helps in many other ways – such as the ability to buy a home in the catchment area of a popular primary school (see Steve Gibbon’s blog on this site here).

In the book Abigail McKnight and Eleni Karagiannaki show how having wealthier parents and having more of one’s own financial assets early in adulthood are both associated with improved outcomes in education, employment and health, even after controlling for a wide range of other factors. They show, for instance, a positive association between early asset-holding and subsequent general health and psychological well-being ten or even 20 years later. Such outcomes can themselves lead to further accumulations of wealth, increasing the gaps still further, as well as directly improving quality of life.

So wealth has grown in relation to the economy and people’s incomes, inequality in it is much wider than that of incomes, and wealth inequalities are an important factor in inequalities of life chances. However, the tax system has moved steadily away from treating it as a major revenue source – back in the 1940s, for instance, inheritance taxes raised twice as much in real terms as they did in 2010-11 – despite the huge increase in the value of wealth and inheritance since then.

Looking across public policy from tax to means-tests for social security benefits and long-term care, the systems seem as often designed to widen wealth inequalities as to narrow them. We tax substantial wealth lightly, sometimes barely at all, while those with small savings are heavily penalised in benefit rules and have been in access to long term care. Some people, at some stages of their lives, are strongly encouraged and helped by the tax system to accumulate wealth in particular forms such as pensions or housing, while others face strong disincentives from means-testing to do so.  Some people face both at the same time.

One might have thought that there were some policy areas that those on the Left, and those with strong beliefs in efficient markets on the Right, could agree on. This might include taxing receipts of wealth from inheritance or from lucky capital gains more heavily than earnings, for instance. Or running the Council Tax (local property tax) on the basis of up-to-date relative valuations rather than ones that were 20 years out of date, and with more relationship between the tax charged and the value of the property than there is now.

But wealth taxes are well off the political agenda – with unhappy lessons from Labour’s proposals in the 1970s surveyed in the book for an annual wealth tax, while a promise to raise the Inheritance Tax threshold to a million pounds at the Conservative party conference in 2007 was a decisive moment in the move towards the 2010 election. Does that mean nothing can be done – and that the vested interests reflecting precisely the inequalities we describe in the book are too powerful to allow anything to be done?

Not necessarily. Perhaps there are lessons from the long-drawn out processes that led to Britain’s current round of pension reforms, and those which will lead to at least a partial reform of the way means-testing of assets works when people need long term care from 2016. For things to change, people have to agree there’s a problem. For people to agree that, they need better information about the position we are in. We hope that our book provides at least some of that information.

Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting.

About the Author

John Hills is Professor of Social Policy and Director of the Centre for Analysis of Social Exclusion.

Wealth in the UK: Distribution, accumulation and policy by John Hills, Francesca Bastagli, Frank Cowell, Howard Glennerster, Eleni Karagiannaki and Abigail McKnight is published by Oxford University Press on 22 May 2013.

A 6 page summary, CASEbrief 33, is available here. Details of the public lecture on 22 May can be found here.

There has been a substantial fall in rates of property theft and violent crime in the UK, according to a recent global analysis by the Institute for Economics and Peace. The statistics tell a consistent story: crime has fallen according to both the measure officially recorded by police and the measure based on ‘crimes committed’, as reported by individuals in the British Crime Survey (BCS). In particular, property crime fell by around 40-50% between the late 1990s and late 2000s. And while recording changes make it harder to pin down long-run trends in violent crime, there were still very clear drops in the late 2000s as well.

This is at odds with public perception of crime rates and discussion of crime in the popular media. A series of studies we have done at the Centre for Economic Performance (CEP) at the London School of Economics shed light on this transformation – what BBC home editor Mark Easton has labelled the country’s ‘riddle of peacefulness’.

There is no single factor that can be isolated as the main cause of falling crime rates. Our research shows that increased spending on police resources reduces certain types of crime, especially when linked to the introduction of new police practices. Crime reduction is also helped by policies that improve the education and labour market position of the unskilled, including the introduction of the national minimum wage and increases in the school leaving age.

More Police?

Increases in police numbers, combined with new policing strategies such as the Street Crime Initiative, have reduced crimes. While it is intuitively obvious that more police should lead to lower crime the size of this effect is hard to determine. Empirical researchers face the challenge of distinguishing causation from correlation. In most data there is a strong positive relationship between police and crime. This is because policy-makers allocate more police to high crime areas.

However, research by myself, Steve Machin (LSE/UCL) and Robert Witt (Surrey) used the ‘natural experiment’ of police deployments in the wake of the July 2005 London bombings to estimate the causal effect of police on crime. We estimated an elasticity of -0.3, that is, a 10% increase in police could be expected to reduce crime by 3%. Other work by Steve Machin (LSE/UCL) working with Olivier Marie (Maastricht) analysed the ‘Street Crime Initiative’, a programme of extra police resources in selected areas. This led to substantial falls in crime of around 20% with a net social benefit of between £100-170 million per year. Given that overall police resources increased in the past 15-20 years we can expect that this had a major effect in lowering crime rates. Whilst it is hard to account for the effectiveness of every dollar spent and every programme implemented, our research shows strong effects due to some common and representative policy tools wielded by the police.

‘Tackling Causes of Crime’?

In the mid-1990s, Tony Blair repositioned the Labour party crime policy by declaring his government would be ‘tough on crime and tough on the causes of crime’. This was a powerful idea for crime policy and I would argue that it is a forgotten part of the debate on crime that should have more focus. Government policies aimed at improving education and ‘making work pay’ have indirect effects on crime reduction and while the size of the effects is hard to judge, the available evidence suggests that this could be an important factor in answering the ‘riddle of peacefulness”

One of the key findings of the research is that it’s not unemployment that matters for crime as much as wages. The crucial insight is that wages summarise the state of the labour market and the ‘outside opportunities’ of people who might decide to commit a crime. Research by Steve Machin (LSE/UCL) and Costas Meghir (Yale/UCL) showed the state of the low wage labour market matters. The key figure here is local wages at the 25^th percentile of the labour market, that is, the wage at the top of the band for the 25% lowest paid workers. The research by Machin and Meghir (2004) showed that crime rates were lower by 0.8% in areas where wages at the 25^th percentile were higher than the average.

Hence policies such as the minimum wage are well-positioned to have an impact on crime rates as well as living standards. A similar story applies for education. Improving young people’s education opportunities works in two ways: first, by increasing people’s potential future income; and second, by reducing crime participation while individuals stay involved in the education system. Further work by CEP researchers found that a 1% fall in the proportion of men with no qualifications was associated with a fall in crime of between 0.85% and 1%. This work used the big institutional reforms of the school leaving age in 1947 and 1972 as a setting to develop this causal estimate of the impact of education.

Crime Policy for the 2010s?

The state of the evidence shows that there is no definitive answer to the ‘riddle of peacefulness’. I have focused on two factors here: police resources and the socio-economic structure. These two factors are very important for contemporary debates. High income inequality and low education opportunities have emerged as critical for explaining the causes of crime. Certain policies introduced over the past 15 years to tackle those causes appear to have had an indirect beneficial effect of reducing crime rates. In turn, as the economy struggles to emerge from recession and  inequality worsens we can expect crime rates to level out and potentially rise. Similarly, as the big increases in police resources of the 1990s and 2000s are scaled back it is inevitable that ‘something will give’ on crime rates.

It is therefore important to consider the short- and long-term impact on criminality when considering cutting funding or entirely discarding these policies to relieve the current pressure on the public purse.

Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting.

About the Author

Mirko Draca is a Research Associate at the Centre for Economic Performance, London School of Economics and a Lecturer in the Department of Economics at Warwick University.

As the partisan debates around legislation on gay marriage wend their convoluted way through the Commons this week, exposing once again huge fissures between Conservative MPs and activists on the one hand and the PM and leading government modernizers on the other, so speculation about the end of the coalition government and the date of the next general election has revived.

This Sunday, against the background of the Conservative party’s continuing implosion over membership of the EU, the Daily Telegraph reported on a recent Total Politics interview with David Cameron. Here the Prime Minister raised the possibility that the coalition with the Liberal Democrats might not last until the next election, currently scheduled for May, 2015. Cameron said:

“What matters to me, though, is can we get things done? Can we improve the state of the country? Can we fulfil our manifesto?… The best way to do that is to continue with the Coalition, but if that wasn’t the case then we’d have to face the new circumstances in whatever way we should.”

Yet why might the Coalition not be able to continue? A front page splashed report in The Times last week pointed to concerns among senior Conservatives that Nick Clegg may not be able to hold his party within the coalition through to 2015. If the coalition did become unworkable – and recent rifts over policy areas such as Europe, gay marriage, and child care reform give some idea that it might – then we may be headed for a pre-election split.

Geoffrey Howe’s comments that the Conservative ‘nervous breakdown’ over Europe was continuing, was matched by Peter Mandelson’s adept comment that Cameron was now in hock to the ‘provisional wing’ of his party, and edging towards the UK Isolation Party (as he dubbed UKIP). With UKIP already surging in local elections this year, the combined Euro elections and local elections due to be held on 31 May 2014 already look as if they could be a disaster for the Conservatives, with UKIP perhaps outpolling them convincingly. One way to head off such a possibility, and all the renewed intra-party Tory tensions it could generate, would be to call a general election either for same date, or perhaps earlier in May. Cameron might hope in this way to suppress UKIP support back to the 6 – 8 per cent general election range forecast by Strathclyde political scientist John Curtice.

At the same time, the slump in Labour’s support in many polls in response to the recent UKIP surge has dented the confidence of an upcoming majority that had been bolstered by earlier stronger polls for almost nine months. The Independent reported Peter Hain as urging his leader to create the basis for a possible coalition government with the Liberal Democrats if the next election produced a ‘hung Parliament’, and deploring the Labour unpreparedness on this front in 2010, documented by Lord Adonis.

Counting down to the next general election

But how soon might this split occur, and what might it look like?  In February 2012, on this blog, Patrick Dunleavy of LSE predicted that we were very likely to see an election in June 2014 – barely 13 months from now, and just four years from the last one. He argued, that although the coalition parties had tried to outlaw an earlier election (at the PM’s discretion) by legislating for a five-year fixed term for Parliament, the law still allowed for an earlier election if no one could form a government and 2/3 of Commons agreed.  Rather than hang on to the bitter end, the coalition would be likely to ‘unzip’ in the months leading up to May 2015, in order for the parties to take advantage of regained independence whilst campaigning. But once unzipping starts, it will be hard to stop the unravelling from speeding up. Since no PM has called an autumn general election for 41 years now, if not 2015 then the logic for Cameron of calling a May/June 2014 election was strong, assuming the economy improves somewhat in the interim.

Responding to this argument, Chris Hanretty of East Anglia University argued that the coalition would be most likely to fall in October 2014. Using modelling and data from other countries in Europe, Hanretty found that coalition cabinets are liable to breaking up earlier than those of single party governments. Using his model, he predicted that the current coalition has a less than one in three chance of lasting all the way until May 2015.

In response to these two claims of a near definite early demise for the coalition, Tim Bale wrote that, given what we know (and don’t know) about coalitions in the UK and elsewhere, there is just as much chance the coalition will fail before 2015 as continue. Meanwhile the Liberal Democrat political expert Mark Pack countered that the government would go its full term because, whatever the difficulties of keeping the government together, Cameron could never resign early and run the risk of Ed Miliband becoming PM of a minority government. In Twitter commentary the Nottingham academic Phil Cowley (@philipjcowley) argued strongly that no PM can (ever) bear the thought of giving up office, however difficult being in government may be, and however grim the government’s prospects may be. So he predicted that Cameron would hang on until the last possible moment, as John Major did in 1992 and 1997, and Gordon Brown in 2010. (Neither brought great successes for their party though).

Earlier this month, Alun Wyburn-Powell recalled the often overlooked 1945 Caretaker government as a precedent for what might well occur before 2015. This shortlived two month, Tory-only government “proved to be a useful firewall between an effective [wartime] coalition and a divisive election campaign”. He argued that if the Liberal Democrats were to amicably withdraw from the current coalition prior to the election campaign in early 2015, the Conservatives could then continue in a Caretaker government so that both parties could offer their own independent manifestos. This would give the Tories the opportunity to promote (albeit briefly) some new MPs to Ministerial positions, potentially calming some of the party’s dissenting voices.

No matter what, unless David Cameron desires to break with an over 40 year tradition and have an autumn election, in less than a year’s time we will know with near certainty whether or not the coalition will go to its full term.

Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting.

About the Author

Chris Gilson – LSE Public Policy Group and Managing Editor of the EUROPP blog

Chris Gilson joined the LSE PPG in December 2007 as Editor/Researcher and has worked on the long-standing hot review contract with the National Audit Office, and review work for the European Court of Auditors. He was previously Managing Editor of the LSE’s British Politics and Policy blog and is now the Managing Editor of EUROPP – the LSE’s European Politics and Policy blog. Before this, he worked for three years at the Department of Health, firstly as a Correspondence Officer and then as a Freedom of Information Officer. He has a undergraduate and a Masters degree in Geography, and a postgraduate diploma in Strategic Management, all from the University of Waikato, Hamilton, New Zealand.