Global economics in The Monday Briefing

Rising wealth, sluggish wages

The City_London
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.

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Posted on 21/05/2018

What’s up with the oil price?

Oil drill and blue sky
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.

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Posted on 14/05/2018

Nine things you (may) not know about international trade

Two lorries on the road
1. Trade liberalisation boomed and has busted

A post-World War II wave of liberalisation reduced barriers to trade and helped fuel a global boom in exports. The Uruguay Round of negotiations between 1986 and 1994 marked the high point of this process. It was the largest ever trade negotiation and significantly reduced barriers to trade in goods. Since the 1990s the momentum of trade liberalisation has slowed, and since the financial crisis, almost ground to a halt. The election of Mr Trump, an ardent critic of the international trading order, is indicative of how much things have changed.

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Posted on 08/05/2018

Thoughts on the global economy

Abstract metal sphere
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.

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Posted on 01/05/2018

As good as it gets

Building with seedling
The global recovery has moved up a gear in the last year. The year 2018 is likely to be the best year for world growth in seven years. But this is a mature recovery and, at the risk of sounding like a kill joy, this is about the time you’d expect the economic cycle to start rolling over. For the rich western economies the second half of 2018 is likely to mark the peak in growth.

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Posted on 23/04/2018

Technology and productivity - a complicated relationship

Graphic of planet and charts
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.

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Posted on 16/04/2018

Brexit transition deal boosts UK business sentiment

Compass_CFO Survey
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.

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Posted on 09/04/2018

Can labour scarcity drive productivity?

Cityscape
To the bafflement of economists Britain’s economic recovery has been accompanied by growing demand for labour and falling wages. Since 2007 the number of people in work in the UK has risen by 2.7 million, an increase of 9%. Over the same time earnings, after allowing for inflation, have fallen by about 2.5%.

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Posted on 03/04/2018

Measuring happiness

A happy man sitting on a chair
The idea of measuring national happiness has been around for decades and was pioneered by the government of Bhutan in the 1970s. Since the global financial crisis interest in measuring, and understanding, what drives happiness, has risen.

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Posted on 30/03/2018

The meaning of Mr Trump’s import tariffs

Monday Briefing_Metal pipes
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.

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Posted on 19/03/2018