The pandemic made us £900 billion better off - but it's not all good news
Total household wealth across the UK has risen by a staggering £900 billion, with total savings up by £125 billion and debt reduced by £10 billion. Economically at least, the average citizen has had a very good 18 months or so.
But its not all good news according to the Wealth (gap) Year report from the Resolution Foundation. It has also led to a significant widening of wealth gaps between rich and poor with those in the lowest income groups worse off then when Covid-19 struck. There are several implications for policy-makers in this, but first let’s examine exactly what is happening to household finances and why.
Pandemic precipitated the sharpest fall in economic output for at least 300 years. For a bigger fall you have to go back to the Great Frost of 1709 - when the temperature in Western Europe fell to -15C, the lowest in the past 500 years.
Yet unlike normal recessions when wealth levels drop, the opposite happened during the pandemic.
There were several reasons for this. Unprecedented levels of government intervention cushioned the blow. But there were other factors at play as well, stemming from the unique nature of the crisis.
Restrictions on movement meant that opportunities to spend were diminished in a wide range of areas: bars, concerts, restaurants, non-essential shops, travel for those working from home etc.
That led to huge numbers of us both increasing our savings and paying off debt. The rise in savings over this period is the fastest on record. At the same time household debt has fallen by 25%.
These are themselves extraordinary figures but even they are dwarfed by the rise in asset prices over the period which has led to a collective increase of £750 billion in household wealth.
These gains are different in that they do not depend on what people earn, but what on what they already own. Two assets account for the vast majority of this – equity and property.
When Covid-19 first emerged stock markets plunged, but since then, they have more than risen to levels significantly higher than at the start of the pandemic. This in itself is unusual during a recession. But even more striking has been the rise in property prices. Northern Ireland and London have the lowest levels of increase (just over 5%) with the North West of England the highest at 15%. The overall increase is 10% - the highest in a single year for 15 years.
It is interesting to note that for wealth inequality to increase it is not necessary for anyone to own more – all that is required is for the value of wealth to go up. And if you don’t have any property you don’t benefit at all.
So therefore, adding together savings, debt reduction and asset increases the wealthiest 10% of households are now £50,000 better off, the average household £7,500 and the bottom 30% just £86. The gaps between them are growing and concerning. Before pandemic the wealthiest 10% of households had £1.3 million more than the average. That gap is wider now.
And that’s before you consider the many people who suffered severe economic hardship during the recession. In order to save and pay off debt you need to be earning more money than you need to live on.
A recent TUC survey suggests that the £20 per week uplift in Universal Credit was insufficient to provide enough of a buffer for the financially vulnerable, leaving one million children of key workers living in poverty.
And wealth inequality is likely to grow more. A survey which was conducted to inform the Resolution Foundation report suggests that many of those who saved because they had less to spend on during the pandemic will continue to do so, many say they have concluded they have learned they do not need to spend as much as before, others that they want a strong financial buffer for any future hard times. Continuing to save makes sense for them – but it will make economic recovery that much harder to achieve. And those in lower income brackets need economic recovery in order to help them claw back the increased indebtedness that many of them have suffered during the period.
It is possible that house prices may stutter in the future but there’s been little sign of that to date. In any event any fall in prices is unlikely to be steep enough to help those who are priced out of buying them and are currently paying high rents to private landlords whose own wealth has soared thanks to booming property prices. The prospects for the financial resilience and well being of the most vulnerable looks bleak.
All this has important implications for policy-makers. Many people have been enriched during pandemic, but the most vulnerable have been further impoverished. Wealth inequalities have widened to levels most of us consider unacceptable. Yet whilst average household wealth has at least doubled in real terms since the 1980s, tax take has remained stagnant.
Retaining the £20 a week uplift to Universal Credit would be a start – and pressing ahead with the reduction in the face of this evidence seems cruel and perverse.
The Resolution Foundation promises to examine what can be done to assuage wealth inequality in a future paper it plans to publish later this year. It is likely that it will focus on taxing wealth to supplement income taxes. That may well be a just solution, but given the sorry history of attempts to tax assets (think Death and Dementia taxes) it is hard to see any such measures commanding popular support.
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