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.
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.