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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.
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.
Economists don’t agree about much, but there is a strong consensus that education is a powerful enabler of growth and living standards. In the last century, the number of years people spend in education has risen inexorably. Today better education and training are offering the answer to challenges as diverse as mass automation, low productivity and lack of social mobility.
UK growth has softened since the EU referendum, and at a time when the rest of the global economy is picking up. The pace of UK activity has not closely followed the news flow on Brexit, illustrating how politics is one of many factors influencing growth.
Errors in predicting the future of technology tend to be extreme. At one end are the naysayers, like the Hollywood mogul Darryly Zanuck, who in 1946 predicted that TV would flop, “People will soon get tired of staring at a plywood box every night."
The global economy enters 2018 with good momentum. Expectations for growth this year are rising in many countries, equities are hitting new highs and business confidence is buoyant.
The latest Deloitte survey of UK Chief Financial Officers, released this morning, shows the CFOs enter 2018 more focussed on controlling costs than at any time in the last eight years. CFOs seem to be reacting to slower UK growth and Brexit uncertainties with a renewed focus on costs.
We are launching our Christmas reading list today. Our ‘top six’ is the product of a lot of reading and some debate in the Economics Team. The list aims to offer a thought-provoking and enjoyable break from the rigours of Christmas. All are available free and online. You can save these articles on your smartphone's or tablet's reading list. To print any use the print icons, where available, on the webpages to ensure the whole article comes out.
It’s official, the UK growth outlook has taken a turn for the worse. By far the biggest news in last week’s budget was the downgrade in the Office of Budget Responsibility’s (OBR) forecast for UK productivity growth over the next four years, from an average of 1.6% to 0.9% a year.
There is no consensus about why UK productivity growth has been so weak in recent years. But with the under-performance running into its sixth year, and other countries struggling with similar problems, the OBR has thrown in the towel and accepted that the days of rapid productivity growth are over.
Spending money just keeps getting easier. Internet shopping, electronic bank transfers, contactless and mobile payments are increasingly popular ways of spending. Last year the number of contactless payments tripled in the UK and on-line shopping rose nearly 20%. Digital versions of traditional central bank currencies are in the ascendant in the West.