Asset prices in The Monday Briefing
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In the last decade Britain and the US have experienced an unusual combination of soaring asset prices and sluggish wage growth.
Between 2006 and 2016, the total value of assets held by UK households rose by 59% while average incomes increased by just 24%.
In the UK roughly 40% of household wealth is held in pensions, 40% in property, 10% in other financial assets such as ISAs and 10% in physical assets. The median UK household, the one in the middle of the wealth distribution, is asset rich. Such a household owns net assets, after liabilities such as mortgages and credit card debt, of £259,000.
In the UK, as in other Western nations, wealth is spread unevenly. The wealthiest 10% of households own 44% of all wealth. The least wealthy 50% of households own 9% of total wealth.
The divide between holders of assets and those without assets has widened, especially in relation to housing. According to the Resolution Foundation it takes about 20 years for low and middle income households to save for a deposit for a house, up from just three years in 1997.
Perhaps it’s no surprise that all of this has stoked interest in the distribution of wealth. In the last ten years Google searches for “wealth inequality” have been running at about twice the rate they were in the decade until 2007.
Some argue that the appropriate response to rising wealth inequality is to tax wealth and capital more heavily.
Earlier this year Rachel Reeves, a senior Labour MP and Chair of the Commons business select committee, called for an additional £20bn a year in wealth taxes. Labour’s new leader in Scotland, Richard Leonard, has called for a one-off wealth tax and heavier taxation of more valuable housing and land. In February Labour’s Shadow Chancellor, John McDonnell, said his party was considering taxing land values to boost local authority spending. Earlier this month the Resolution Foundation proposed replacing inheritance tax with a tax on gifts paid by recipients which would, in time, yield more than twice as much revenue as the current system.
Yet in recent decades the tide has gone in the opposite direction. The arguments against taxes on wealth and capital – that they are unfair, deter enterprise and saving, “lock in” wealth and boost tax evasion – have tended to prevail.
The number of developed countries with an annual wealth tax has shrunk from 12 in 1994 to just four – Spain, Norway, Switzerland and France. (Last year President Macron slashed the burden of France’s wealth tax by restricting it to property). In OECD countries the proportion of total government revenues raised by such taxes has fallen by 60% since the 1960s.
In the UK, inheritance tax (IHT) is especially unpopular. The public consider it to be the most unfair of the major taxes, with only 22% of those polled seeing it as “fair”. Perhaps surprisingly, opposition to inheritance and estate taxes is even stronger among lower than high earners. Such sentiment helps explain the sharp decline in the burden of IHT over the years. Yields from estate and gift duties have fallen from 2.6% of all revenues in 1965 to less than 1% today, leading some to dub it the “voluntary tax”.
Nor, for all the recent focus on inequality and fairness, do voters necessarily respond to redistributive policies in the way that might be expected.
The oil price has had a turbocharged run in the last year, rising almost 60%. Last Friday it closed at a three year high of $77 a barrel. From the, early 2016, lows of under $30 the oil price has risen by over 160%.
Three factors explain the rebound in oil prices.
First, the global economic upswing has come faster than expected fuelling demand for oil and bolstering prices. Despite a first quarter wobble, the global economy is likely to grow at the fastest rate in seven years in 2018.
Last month Deloitte’s economists from across the world met in London to assess the outlook for the global economy. It was a fascinating and wide-ranging discussion. Rather than trying to summarise individual views, here are some of the areas where the discussions affected my own thinking.
There are numerous explanations for why technology is no longer boosting productivity in the way it did in the twentieth century. The US economist, Robert Gordon, argues that today’s technologies are less productivity-enhancing than the great inventions of the past. The opposing view is that technology is still working its magic, but in ways, such as improving the quality of goods and services, which are poorly captured by the statistics.
The latest Deloitte survey of UK Chief Financial Officers (CFOs) released this morning shows that business confidence has edged up and is running not far off its long-term average. CFOs seem to have shrugged off weakness in equity markets and concerns about trade with perceptions of uncertainty dropping to the lowest levels since the spring of 2016, before the EU referendum. This finding fits with our own “Worry Index” which tracks newspaper references to terms relating to uncertainty and risk. It dropped to a ten-year low in the first quarter.
Donald Trump’s scepticism about free trade is longstanding and was a prominent feature of his 2016 presidential campaign. Such was the appeal of Mr Trump’s protectionist stance that his opponent and former free trade advocate Hillary Clinton found herself renouncing the Trans-Pacific Partnership she had once promoted.
In the aftermath of the financial crisis poverty, inequality and social inclusion have become high profile issues. To its adherents, and there are many, the solution is for the state to provide adults with a Universal Basic Income (UBI) to cover their basic needs, allowing them to earn whatever they wanted in addition. Implementing a UBI would represent a profound change in the role of the government and its effect on peoples’ lives.
In a sign of the tough trading conditions on British high streets two well-known retail names, Toys R Us and Maplin, fell into administration last week.
Last December the US Congress passed a bill overhauling the tax code, the first major tax reform since 1986. The federal corporate tax rate was permanently slashed from 35%, the highest rate of any large, developed country, to 21%. The tax cut is partly financed by a one-off levy on profits retained overseas by US corporations, at 15.5% on cash and 8% on other investments.
Last week’s equity market gyrations felt pretty dramatic. The US market dropped 5%, the worst week in two years. Europe took its cue from the US, with the FTSE100 and German DAX also down almost 5%. The VIX Index, a measure of equity market volatility, also known as the ‘fear gauge’, shot up from what, until recently, have been very low levels.