Wealth Inequality: Dimensions, Drivers And Responses
We are a wealthy but deeply unequal nation. The richest 10% of households own nearly 900 times the wealth of the poorest 10%, and five times more than the least wealthy half of the population, who own just 9% of the UK's wealth. Critically, these inequalities are getting worse. Between 2010-2012 and 2012-2014, over half of the increase in Great Britain's wealth went to the top 10% of households. With a deeply flawed housing market and returns to capital exceeding returns to economic growth, the trend to greater wealth inequality is set to deepen.
The first step to reversing this requires better understanding the dimensions and drivers of wealth inequality. IPPR's recent report, Wealth in the twenty-first century, seeks to do that - and sets out principles for deep-rooted reform.
Wealth is a stock of assets. It is distinct from income, a flow of economic resources, though wealth also generates income in the form of rents, dividends and interest, and when assets are sold or realised. Personal wealth in the UK totals an estimated £11.1 trillion and is measured in four categories: private pension wealth (40% of the total), property wealth (35%, net), financial wealth (14%, net) and physical wealth (10%), in that order of size.
Crucially, the elements of personal wealth are distributed differently, with physical and pension wealth most widely distributed and financial wealth least equally shared. The top 10% have on average £1.32 million worth of net financial, property and pension wealth, but the bottom 50 per cent of households in Britain have on average just £3,200. Inequalities of wealth exist between individuals and families, between areas of the country, generations and genders, and between people from different ethnicities and class backgrounds. For example, the average man at retirement age today has four to five times the pension pot of the average woman at retirement age. 41% of higher professionals, such as accountants, doctors, lawyers and managers, have at least £500,000 worth of wealth, compared to only 12% of people in routine and semi-routine occupations, such as retail workers or machine operators. Black and minority ethnic Britons are less likely to have housing wealth compared to White Britons, a gap that exists within every region of the country, every socio-economic group and income band, as well as all age groups.
Regional divides are also acute. One in four households in the South East are millionaires compared to only one in fifty in the North East. Staggeringly, the total value of housing stock in London is now greater than the housing stock of all of Wales, Scotland, Northern Ireland and the North combined, and homes in the London boroughs of Kensington and Chelsea and Westminster alone are valued at more than all of the homes in Wales. And while London's wealth grew by 14% between 2010-12 to 2012-14 (the dates for the most accurate recent data), Yorkshire and the Humber's wealth declined by 8% and much of the rest of the country saw only moderate increases.
Powerful trends are set to make these stark inequalities worse over time without a significant shift in policy direction. First, whereas expanding home ownership rates once acted as an equalising force in the distribution of wealth, home ownership has been falling since the mid-2000s and is now at its lowest rate for almost three decades. However, the fall has been uneven. Whereas home ownership among the least wealthy 50% has fallen by around 12% since the financial crisis, it has increased among the top 10%. Falling rates of home ownership also have acute intergenerational implications. For example, if similar trends to the distribution of home ownership over the period 2002-2012 were to continue, less than half of millennials are expected to buy a home before the age of 45 compared to over 70% of baby boomers who had done so at a similar age.
Trends in the housing market are also set to worsen regional inequalities.
While a quarter of London's housing stock is expected to be worth £1 million or more by 2030, and an estimated 7% of the stock in the South East at a similar level, less than 1% of homes in the North East, Yorkshire and the Humber, North West, Wales, Scotland and East Midlands in 2030 will be worth that much. Second, when the rate of return on capital after tax is higher than the rate of economic growth, wealth inequality is likely to rise. In the 21st century the rate of returns to capital, including housing and equity, has returned to its trend of exceeding the rate of growth of the economy as a whole.
Globally, the wealthiest fortunes are held almost exclusively in financial assets, which have risen at a rate of 6-7% per year (after inflation) since the 1980s. This is 3-4 times more rapidly than either growth in GDP or of world per capita wealth. In the UK economy, where wages are experiencing their longest period of sustained stagnation in 150 years, and wealth is unequally owned, higher returns to capital relative to the rate of economy growth is likely to continue to drive growing inequalities of wealth.
Reversing rising wealth inequality will require new directions in policymaking. There is a clear appetite for action too: new polling for the report shows that 57% of people want central government to do more to reduce wealth inequalities. IPPR's Commission on Economic Justice is exploring ways to create more broadly shared wealth. Forthcoming papers will set out steps to more fairly and effectively tax wealth, measures to fix our broken housing market, and new institutions so that we can own more of our wealth in common. What the report reveals is that sticking with the status quo is untenable if we want a fairer society; deep reform of our economic model is needed to ensure we all share in our common wealth.