In the 1970s British households held wealth worth around three times the nation’s GDP. Today it’s more than seven times, the highest such ratio in over a century. People in the top 10% of society have £2.5m, on average, in wealth. The bottom 10% have virtually nothing. The gap cannot currently be made up by saving. As in the novels of Jane Austen, social mobility appears dependent on the wealth you inherit or marry in to, rather than how much you can set aside from wages.
Just how significant this trend has become was highlighted by the Institute for Fiscal Studies, which last week said as many as one in 10 UK adults born in the 1980s will inherit more than half as much money from their parents as the average person earns in a lifetime. Those born 20 years earlier in the top decile had received less than a third of average lifetime earnings.
The gap is down to the rising value of assets, such as homes and shares, which have outpaced stagnant incomes. The wealthier have more assets and can make more gains on their capital. They do not consume these sums but bank them, widening the chasm between the haves and have-nots. The UK’s six richest people are collectively wealthier, it is calculated, than the bottom 13.2 million people.
The pandemic has exposed and sharpened inequality in the UK. A more progressive income and inheritance tax system would even things out. So would an annual wealth tax. The last government to try this was Harold Wilson’s Labour administration. In 1974 the party campaigned for a tax of up to 5% on the largest fortunes, but it abandoned the policy in the wake of the oil price spikes and inflation crisis of the mid-1970s. Britain does have transaction duties on house and share sales, but it would be more just to also impose a wealth tax based on total asset holdings.
There is a sense that society has been captured by the super-rich, who purchase an education to get their children into the top universities; they exert outsized political influence; and they can shield their cash from taxation. The result is that they can build affluence and power. If left unchecked, differences in economic status across generations become entrenched. The world has in the last two decades experienced war, a global pandemic and an economic boom and bust. A similar episode in history in the interwar years summoned great political and economic changes. The British aristocracy were replaced as the holders of power, wealth and status. Higher taxation played a role in that drama, but so did other policies.
Before Covid-19 we were seeing a steady appropriation of wealth by a rentier class, who live off the income generated by dividends and rents. The scarcer capital is, the more this group wields disproportionate influence. In any coronavirus-induced recession, they will be looking to protect extractive mechanisms that delivered a record £111bn in dividends from UK companies last year. That is money which could have been used for corporate investment, leading to better-paid jobs.
The economist Thomas Piketty estimated that half of all UK private wealth is inherited rather than earned. A wealth tax is necessary but not sufficient. The political priority is to help working people build up savings. To level up Britain, there will have to be higher wages from labour and also policies that lead, in the words of John Maynard Keynes, to the (metaphorical) “euthanasia of the rentier” so that the intelligence, skill and determination of the entrepreneur can be “harnessed to the service of the community on reasonable terms of reward”.