The latest strapline from our visionary Scottish Government was celebrated at an invitation-only conference in Glasgow yesterday. Yes, we want economic growth, it proclaims; but no, we don’t want a gulf between rich and poor.
Let’s have a reality check on this alleged connection.
The starting point is interesting. Scotland, always bemoaning poor economic growth, has fewer millionaire households – 1,600 per 10,000 adult populations – than nearly all other parts of the UK. For example, London has 2,200 per 10,000.
The comparison with London is instructive since it often has the fastest economic growth rate of the UK regions (and pays 30 per cent of all income tax), but also has some of the worst poverty. So, Scotland is more equal than London, but slower growing.
The central thesis – that inequality means poor growth – is confounded by this comparison; but also historically. In the 19th century Glasgow experienced meteoric growth evidenced by vast industrial fortunes alongside deep squalor. Likewise, in the modern age, unequal societies like Hong Kong, Singapore, India and China have seen high growth; but the egalitarian Czech Republic, low growth. The thesis that equality engenders economic growth has no consistent evidence.
The Scottish Government’s research states that, “Such inequality in wealth ownership raises fundamental questions of fairness and social justice for Scottish society.” Does this alleged inequality arise through massive pay packets, via high-income differentials? Taking the incomes approach, in which tax already deducted (from the richer mostly) and housing subsidy allocated (to the poorer mostly) is properly reflected, the results are, however, surprisingly egalitarian.
The recent Scottish Government publication, Wealth and Assets in Scotland 2006-14, shows the so-called middle 50 per cent of households earn 54 per cent of spendable income – a remarkable similarity. The high-flying top 10 per cent can dispose of 24 per cent – just over double per capita for the well qualified, often hard-working group generally at the peak of their age-related value to the rest of us in terms of skills and experience. The lowest 40 per cent survive, often heroically, on 21 per cent of the pot. As the Institute for Fiscal Studies recently demonstrated, after in-work benefits are included income inequality has actually decreased in recent years.
The reality is that millionaires, being predominantly in the 45-64 age groups represent, not surprisingly, a naturally occurring inegalitarian tendency, across all income groups, to accumulate capital later in life. When it comes to wealth in capital form, the figures offer a wholly misleading basis.
Firstly, the report alleges that just under half of the Scottish population’s wealth is in “private” pensions – including the 21 per cent of state sector employees who are almost alone in still having final-salary pension plans. These income rights are capitalised (“pot” value) and are the main force in concluding that Scotland has unacceptable inequality. It is, however, a fact that these pension pots attributed to the “better-off” do not exclusively belong to them. Apart from the 25 per cent of the “pot” that can be withdrawn tax free, three-quarters will bear income tax: the capital of middling-wealth Scots is by my calculation thus overstated by about £50bn.
At the same time as insisting on forward valuing private pensions, our social-justice-warrior statisticians fail entirely to evaluate in similar capital terms the oldest egalitarian measure in the United Kingdom, the state pension. This is worth £159 per week, £8,268 per annum and in the hands of the least well-off is not taxed.
How much is it worth? If a retiring pensioner on average can be expected to live a further 15 years, other factors being equal, then nearly £125,000 of capital value is represented, for rich and poor alike (but subject to up to 45 per cent income tax for the rich.) It’s not enough: but it isn’t worth nothing either, and if we are to create a meaningful picture of relative wealth then it cannot be photoshopped out.
More so, none of the pernicious effects of Scotland’s LBTT property tax, or capital gains or inheritance taxes overhanging the estates of the top decile of households, is counted. Thus, the picture painted of obscene relative wealth is false. The larger estates are well exposed to redistribution already: but the state does not bother to measure the impact.
What, then, of that lowest 40 per cent measured by their assets?
Here the existence of the capital value of housing subsidy benefiting the poorest is also ignored. It could be as high as £50,000 for a typical council house: for when a lease is signed the social landlord is obliged to take a two-thirds write-down against cost, due to the valuable benefit transfer to the tenant. The right to live in a property for life at a third of market rent (and to pass it on to successors) has a value in economic principle, in practice when the properties could be sold, and in accounting terms, now that fair value rules are in place.
On this simple measure of the worth of lease rights, the bottom 40 per cent (including most of the 600,000 social tenancies) who the Scottish Government attribute with only 0.95 per cent of Scottish property wealth have, in fact, an untradeable but valuable right collectively worth many billions. It should not be ignored.
The picture painted by the Scottish Government is exaggerated, and the central thesis that greater equality causes superior growth is both unsubstantiated and empirically incorrect. History teaches us that prosperity comes from an unpredictable combination of luck, application, judgement and prudence; which then brings with it the anxieties of possession, as well as the pleasures of generosity and the diversity of creative and cultural endeavour, in which Scottish fortunes have always featured.
Wealth is a positive, however arising. Egalitarian attacks on it – based on excluding inconvenient data – risk the worst sort of enterprise-inhibiting tax-grab policies driven by the pursuit of envy over excellence. Let’s encourage more, not fewer millionaires.