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It's the Assets, Stupid

The recent decision by the Office of National Statistics to undertake large-scale data collection on the distribution of household wealth and assets in Britain has significant implications for public policy...

The recent decision by the Office of National Statistics to undertake large-scale data collection on the distribution of household wealth and assets in Britain has significant implications for public policy. The case for having a greater policy emphasis on wealth - as opposed to simply focussing on income - is that a household's wealth at a given point in time is often a better indicator of its economic wellbeing. The ONS has now made this point explicitly, stating in July 2014, that "it is important to consider both wealth and income when assessing the economic well-being of households" .

For example, a person on a low income with significant savings living in a house that is owned mortgage-free faces very different economic constraints to someone on the same income with no assets to their name. Around 7% of people in the bottom 20% of income have property wealth worth over a quarter of a million pounds yet this is not taken into account when considering their eligibility for means-tested benefits . Conversely a person with an above-average salary with significant consumer debt (negative wealth) is in a very different position to someone on the same salary who is largely debt-free. The same data shows that while in the lowest income quintile, 24% of households have negative financial wealth, in the three middle income quintiles, the numbers are higher at 27%, 28% and 26% respectively . It appears that the poorest are not necessarily the most debt vulnerable.

Of course the two measures are intrinsically linked: income is the measure of flow whereas wealth is a measure of stock, such that households who are able to sustain high incomes will have the opportunity to build up wealth. And having sufficient income to pay the bills on a day-to-day basis - whether it comes from work, or rent from assets owned - is a necessary condition for wellbeing. However it is the existence of assets which provides security, opens up opportunity and gives people freedom to take risks, to invest for the future, to buy time, and to give. And so without an explicit consideration of their distribution, governments are unable to achieve their stated goals, regardless of whether those goals are fundamentally egalitarian, paternalistic or libertarian.

In a recent Smith Institute research paper written jointly with Ashwin Kumar and Paul Hunter we undertook some original analysis of the latest release of Wealth and Assets survey data . This yielded some insights that policy makers should take into account.

First, changes in longevity mean that households in Britain who receive inheritances tend to do so precisely when their wealth is already at its highest. This may be an opportunity to explore ways to incentivise the distribution of wealth more widely to younger family members whose need is greater, for example through taxing inheritance at receipt rather than bequest.

Second, there exists a significant cohort of people - around 1.7 million households - who own property but have a low income. These people are in a markedly different situation, having a degree of security and the possibility of realising their asset if needed, to those on a low income with no property assets. Yet this is not recognised either in discussions around income inequality or in the benefit system - it is still possible to get low-income benefits if you live in a high-value home.

Conversely, there exists a further significant cohort who have a relatively high income but a significant amount of household consumer (non-mortgage) debt. They have a greater financial vulnerability than would be presumed by looking at income alone; there may be a role for public policy to crystallise and support people in this situation to a greater extent.

But the overriding conclusion is that it is not possible to have a meaningful discussion of equality without discussing the housing market. At the moment, financial security is strongly linked to housing ownership, and the gap between those who have housing and those who do not is expected to widen: because housing is in limited supply and the returns on ownership are so great, particularly in London and the South East.

This opens up a real policy choice. On the one hand a case could be made to discourage property ownership compared to other forms of investment to reduce speculative purchasing and encourage greater saving in support of the real economy. Tools to do so could include targeted taxation to incentivise a behavioural shift, new institutions and policies to guarantee security of tenure in other ways and proactive intervention to reduce the attractiveness of high-value areas and encourage investment in low value areas.

On the other hand a case could simultaneously be made for measures to extend property ownership as far as possible, widening opportunity from the middle classes out and shrinking the group of people whose overall wealth position is constrained by the continuing need to pay for housing costs. That this choice exists is the proverbial elephant in the policy room when discussing issues relating to inequality in Britain.

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