The distribution of money matters

Tweet

Alec Haglund, IF Researcher, discusses why the distribution of money is important and why ever-increasing wealth inequality is a serious challenge that must be dealt with to ensure a fair society for future generations.

Falling bond values

Following the announcement of the disastrous mini-budget, which understandably sent markets into turmoil, the Bank of England saw it necessary to buy up low-yielding government bonds from pension funds. Were they not to have done so, a downward spiral would have been likely, as pension funds would have needed to cover their liabilities by selling their unattractive bonds, thus furthering the falling of their price.

Bank of England bailout

When investing, it is generally said that the value of your investments might go up or down. In many cases the reality is different. As for the investments made by private pension funds, the Bank of England ensured that the pension funds which had speculated on government bonds were bailed out. In a similar vein, consecutive governments have used policy to ensure that the property market continues to soar higher and higher, with the cut in stamp duty being the latest of such measures.

Although the government has now made a U-turn on some of the more egregious aspects of the mini-budget, the economic context still warrants a further examination of the actual impact of such transfers of wealth. This undertaking requires us not to overlook the nature of money.

Money, money, money

Money is the asset through which one can acquire real-world assets. It is through money that society organises both the production and the distribution of economic output and resources, such as housing, energy and food. Money itself does not contain any use value but it is used to acquire real goods and services.

Therefore, the value of money can only be determined in relation to real-world assets. Although this seems obvious, particularly in a time of high inflation when we all see the value of our money eroding as the purchasing power of our cash means we can buy fewer and fewer good and services, it is less obvious how the distribution of money impacts economic wellbeing between different groups and generations in society.

As money is used as the asset by which we ration goods, services and real-world assets in society, there is competition between different groups over scarce assets, such as housing, where those with the most money come out on top.

Mini-budget

In the mini-budget, the government had hoped that the small tax cut of a few hundred pounds per year for low- and middle-income earners would be enough to justify the five-figure tax cuts for the wealthiest in society. True enough, the rich were promised massive tax cuts, but low-income earners, largely made up of younger people, would also see a small increase in their take-home pay, so everyone should be happy, right?

Although the low-income earner might feel like they have become wealthier after being given a few hundred pounds extra per year, in reality they would become poorer from such a policy. This is because the richest in society would have received such a massive amount of wealth that their ability to use their money to compete for scarce resources in our society would have completely dwarfed the small, purely symbolic tax cut low- and middle-income earners would have experienced.

The inevitable result of such a policy would be to further entrench the concentration of wealth among the already wealthy, and in doing so make the rest of society poorer. Indeed, without any increase of output in the economy (the goods and services we produce), it would merely make it easier for one group in society to acquire such goods and services, to the detriment of all others.

For example, it would be increasingly difficult for any low- and middle-income earners ever to be able to buy a house. While they might feel like they are able to save a few hundred extra quid per year towards a deposit due to the tax cut, the wealthiest in society would have seen tens of thousands of pounds freed up which could be used to buy more real-world assets such as property, meaning that the proportion of housing that is bought by the wealthiest in society would have increased.

Mortgage rates

Naturally, this is before considering the hike in mortgage-rates, which only would exacerbate the already near-impossibility of any low- and middle-income earners to be able to buy a house. This is because the cost of borrowing would have gone up so much that it becomes increasingly unmanageable to afford the required monthly payments. The wealthiest in society, on the other hand, do not need mortgages in order to buy up assets such as property. They could therefore pick up most of the available property on the market, as the amount of money they hold would outcompete that which any low- and middle-income earner could put forth towards a house.

Renters

Adding to the issue, the more people who would have to continue to rent privately would further cement the concentration of wealth among the already wealthy. As private tenants, who are mostly young, are paying increasingly high rents to their older landlords, the monthly rent payments function as a further transfer of wealth from low- and middle-income earners to the wealthy. 

Fewer and fewer young people are able to buy a house and escape the situation of financing their landlords’ third, fourth, fifth or sixth property through extortionately high rents. It is not unsurprising that private rents are at a record-high at the same time that the proportion of young people who are owner-occupiers has been steadily falling over the past two decades.

Intergenerational transfers

Thus, while the Bank of England’s decision to buy up low-yielding government bonds to ensure financial stability in the country may have been necessary, it must also be examined through the lens of an intergenerational and intra-generational transfer of wealth in order to understand its impact. If money is handed out to one section of society, the sections of society which do not receive that money effectively become poorer.

In the case of the bond-buying by the Bank, it would be those with significant pension wealth who benefitted the most from the £65 billion injection of money. Distribution of pension wealth is highly unequal in the UK, with the wealthiest 20% of the country holding as much as 84% of all private pension wealth.

Given that the vast majority of those who hold pension wealth are wealthier, older individuals, this implies that the bond-buying by the Bank essentially amounted to a transfer of wealth from poorer and younger people to wealthier, older members of society. In addition, £65 billion pounds is by no means a small sum. If distributed evenly, £65 billion would be enough to hand every UK resident aged 15 years or older approximately £1200 pounds.

Thus, if you did not hold any pension wealth or only very marginal levels of pension wealth, you effectively became poorer as a result of the Bank’s actions as it eroded the value of your money. Those with significant amounts of pension wealth, in other words older and wealthier individuals, benefitted massively.

Protecting the wealthy old

Time and time again, we see the actions of consecutive governments favouring wealthier, older individuals at the expense of the young and low- and middle-income earners. The problem of increasing wealth inequality is not a new one, and the COVID-19 pandemic saw an unprecedented transfer of wealth to the richest in society, as the richest 10% percent of UK households saw their wealth increase by over £50,000 in the first year of the pandemic, while the wealth of the poorest 30% of households increased by only £86.

What can be done?

An alternative policy platform would aim to focus the distribution of money towards low- and middle-income earners, which would have positive effects on the economy, spurring economic activity and output. Wealthy individuals primarily use their money to buy up scarce assets like property to acquire more wealth, thus further increasing their levels of wealth and therefore their ability to acquire and extract further wealth, and so on.

Tax wealth over income

To turn the tide of the growing levels of inequality between the rich and the poor and the old and the young, we need to be serious about the taxation of wealth. The current tax system disproportionately benefits asset-owners at the expense of those who receive their income from work. This leads to a system in which those who are already wealthy can continue to amass an increasing share of the real-world assets we all require to survive, such as housing.

With approximately 30 renters competing for each available property or room in London, it is not hard to see how the competition among ourselves to acquire necessary assets like housing only furthers existing wealth inequalities by driving up rent to record-high levels.

Progressive tax system

Creating a fairer, more progressive tax system is long overdue, and the taxation of wealth must be at heart of this overhaul. Merely equalising the rates of taxation for income from work and income from asset-appreciation would raise approximately £16bn per year, while applying the National Insurance contributions consistently across different forms of income streams would raise around £30bn annually.

These measures would not only provide the government with necessary funds to address the cost-of-living crisis and undertake the necessary transition towards a carbon-free economy, but it would also be a first step in reversing the continuously growing wealth inequality in the UK. In order not to leave future generations burdened with an economy where a privileged few own all the assets required for living, we must embark on the process of taxation of wealth sooner rather than later, as the challenge only becomes more difficult the longer we wait.