For the past 70 years or so, each generation in Britain could reasonably expect to be wealthier, at each stage in their lives than their parents. They became less and less reliant on inherited cash; they became more educated, were more likely to own their own home and could expect to retire in a relatively comfortable state.
However it’s gradually becoming clear that this is no longer the case. We’ve known for some time that those born since 1980 have faced worse outcomes (in terms of wealth, pensions and home ownership) than their parents. However, the IFS has now added to the sense of doom by reporting that the same also goes for those born in the 1960s and 70s.
The full IFS report can be found here. The main point is one illustrated by the chart below.
As you can see, those hitting the age of 40 are less wealthy at the same point in their lives as those born a decade earlier. The same goes for those hitting 50 and those hitting 60.
The upshot of this, according to the IFS, is that for many of these generations, inherited cash will become more important than it was for their parents’ generations. And that’s already borne out by survey evidence: under a third of those born in the 1940s have or expect to receive an inheritance. The equivalent figure for those born in the 1970s is a whopping 70%.
This is a significant economic and social shift. For the explanation of why, one has to look towards the research of the world’s great expert in research on wealth, Thomas Piketty of the Paris School of Economics. He’s found that the flow of cash from one generation to another dropped sharply for much of the 20th century – as you can see looking at this chart of inheritance flows (the amount of cash passed down from one generation to another) as a percentage of GDP. Here’s the relevant chart for France:
And here’s the equivalent for the UK:
At the turn of the 20th century about a fifth of national income was passed down from one generation to another. That dropped very sharply to around 6% by the 1980s. It now looks almost certain that the share will rise back up in the coming decades. Indeed, Piketty’s simulations bear out that prospect.
Tempting as it is to assume that this might be an aberration, and that we might return to a world of greater intergenerational equality in the future, that seems unlikely. For, based on a few of Piketty’s other charts (he has a major book on wealth arriving next year which will, in economics circles at least, be a must-read) the aberration seems to have been the mid-20th century. Indeed, just consider the chart below of national wealth in the UK.
The 20th century, its depressions and wars, contributed to a very sharp fall in wealth across the UK. Put simply, there was less wealth left to inherit. However, this level of wealth has been built back up again over the decades that followed. Britain is currently getting back to the level of national wealth it had in the late Victorian period (though bear in mind that in absolute terms levels will be far higher – after all, national income was substantially lower all those years ago). But this may well imply that inheritance levels will also rise back to those previous levels. As a result, society is quite likely to become less equal. Here’s a chart of how Britain’s equality compares over time:
There is a proviso to all of this – which is to say that none of these trends are inevitable. At least part of the explanation behind the fall in inequality, the fall in inheritance levels and the improvement in cross-generational equality during the 20th century was government intervention: the introduction of welfare states across the Western world, the establishment of redistributive taxation systems: these are likely at least partly to have contributed to the phenomenon.
However, some would argue that, given the continued rise in the value of high-end assets, thanks at least partly to quantitative easing on both sides of the Atlantic, this inequality has only worsened in the wake of the financial crisis.
The world is becoming wealthier, which is good news. However, the assets are being concentrated amongst a smaller group of people.read more
It is perhaps fitting that the Chancellor’s Autumn Statement took place on a day which was dominated by news of storms and gusts. Rarely has a Parliamentary Statement been quite so full of hot air.
From listening to the Chancellor reeling off the various different measures he was announcing, you might have got the impression that today’s Statement was chock-full of an extraordinarily important set of measures – everything from school meals to National Insurance changes to a swathe of property market changes.
However, look into the documentation itself, and a different story emerges. The net effect of the measures contained in the Autumn Statement was, over the course of the next five years, microscopic in fiscal terms – a net £25m giveaway to taxpayers.
Now, on the one hand, this is precisely what George Osborne said in the Commons – that this would be a “fiscally-neutral” Autumn Statement – every giveaway more or less matched by a like-sized takeaway. But even the plusses and minuses were hardly very big. Not one of the measures (save for the pre-leaked extra spending cuts, mainly a result of underspending) will raise or cost more than a billion pounds.
The biggest cumulative expense over the next five years is the cancellation of the 2014 fuel duty increase (that’ll cost £3.4bn in total), closely followed by the marriage allowance (£2.5bn). That might sound like a lot, but then consider the fact that these will be more than paid for by the collection of anti-avoidance measures announced by the Chancellor (they will apparently raise a combined £6.9bn, though few would put much faith in the Treasury’s capacity to predict those kinds of revenues).
Anyway, the bottom line is that the new measures we heard about today will make little difference to the economy. Indeed, the main message from the Office for Budget Responsibility is that the biggest contributor to the upgraded growth and improved borrowing forecasts is the simple fact that the economy is recovering faster than expected.
More specifically, it expects a mini-housing boom in the run-up to the 2015 election, with property prices rising by more than 7% that year, partly on the back of the Help to Buy scheme. It’s a prospect that will cheer few economists – who had hoped that by now Britain would have grown out of its perennial reliance on housing to boost the economy.
Anyway, it is this economic recovery which means the UK will grow by 2.4% this year, rather than the 1.8% forecast in March. It is this which means the deficit will be whittled away over the coming years and will, by 2018/19, become a surplus, with the Government earning more revenues than it’s spending. In fact, if anything, the OBR is now being a little over-pessimistic, where before it might have been accused of over-optimism.
Though it thinks growth will be stronger than expected in the next couple of years, it’s below where the Bank of England thinks growth will be. It also actually trimmed the forecast for growth in 2016 and 2017. It also warned that most of the fall in borrowing was a product not of extra Government ambition on cutting spending but of the fact that a stronger economy means stronger tax revenues. In other words, the public finances still need work.
Having said that, they, and the broader fiscal picture, are starting to look substantially different – and now that the OBR has provided us with another year’s-worth of economic data we are in a position to take a step back and look at the kind of state we will be left with after the austerity is over. And the most striking finding from the OBR is the following: that come 2018, Britain’s state spending will be down to the lowest level since 1948 – the year the National Health Service was launched.
This is a major, some would say epochal, shift in the nature of Britain’s state. The public sector is shrinking down to the size it was before the advent of the welfare state. This is a staggering story – and yet has received precious little attention in the press. But expect it to return with a vengeance in the run-up to the 2015 General Election.
A few of you have made the valid point that the chart above doesn’t include spending on welfare or indeed the NHS. I’ve spent a bit of time in front of a spreadsheet and here’s a graph which shows you how George Osborne has arrived at that surplus in 2018/19. Here is public spending vs receipts going all the way back to 1948.read more
Which region of the UK is growing the fastest? Where are house prices least affordable? Where is unemployment highest and lowest? And whose earnings are rising the fastest?
As economic questions go, they are more important than ever before, for a simple reason: Britain’s recovery is proving more divergent than in many decades. While the country’s overall economic numbers look more and more encouraging, there are nonetheless areas that are being left behind.
That was why we at Sky News have created a new application which allows you to compare all the different local regions of Britain in terms of their economic performance (whether that means house prices, earnings, unemployment and so on). I’d strongly recommend you go check it out as soon as possible – whether online, on your mobile or on your iPad.
To give you a bit of a head-start, here are a few of the insights you can find in there.
UK’s highest unemployment rate
It’s to be found in Birmingham, which had an unemployment rate of 17.3%, as of the most recent data.
The lowest can be found in Devon – a mere 3.3%.
UK’s highest and lowest salary increases
Which region of the UK had the highest wage increases according to the latest data? Big prize if you can guess this one without using the console.
The answer is Anglesey, where the average wage was up by an astonishing 12.9% in 2012. Though admittedly that’s from a low base – as you can see below, the average wage is still, at just over £20k, below the national average. However, the news isn’t all good in Wales, as the average salary in Powys dropped by 7.1% in the same year.
Overall economic growth (or contraction)
My final striking stat is the area of the UK that had the strongest growth in 2011 (the latest year for which we had comparable regional figures). According to our console (which uses data from the ONS), it was none other than Aberdeen, which expanded by 6.5% – largely thanks to the North Sea and oil output. These, by the way are “Gross Value Added” figures, a pretty good measure of output, though note they are nominal figures, so don’t adjust for inflation. The area with the worst change in overall economic output, on the other hand, was Southampton, whose economy shrank by 0.2% that year.
There are hundreds of other interesting facts buried away there, so go check the app out now. I’d recommend you start by comparing your local area with the rest of the UK – and go from there…read more
In this post-crisis era it’s not often one comes across economic statistics that genuinely surprise you. But tonight we at Sky News have reported one which most certainly did that for me.
According to our analysis of figures from the Bank of England, carried out with the help of Simon Ward of Henderson, one of Britain’s most expert economists, we’ve uncovered the fact that over the past year Britons have pulled cash out of their long-term savings accounts at a rate of approximately £900 a household.
The £23bn outflow of cash from savings accounts and cash ISAs is the fastest on record, a sign that Britons are resorting to mining their bank accounts in an effort to afford their spending during the economic recovery. This is a phenomenon which has been largely ignored by conventional economists, in part because they tend to focus far more on debt.
You can see the phenomenon in the chart above. The black line is the broadest measure of money in the UK economy, but look at the blue line: that’s a measure of the amount of cash in Britons’ long-term savings accounts. As you can see it’s been growing for most of recent history, but in the past year it’s slid sharply into negative territory. Meanwhile, the amount of cash held in current accounts and cash (the red line, which economists like to call M1) has risen very sharply, suggesting people are now shifting that cash into their pockets and into their instant-access accounts.
Above is a chart showing the annual changes in long-term savings figures looking back a bit further. As you can see, not until the most recent quarter has the annual change in deposits dropped by more than 10%. In the third quarter of this year it was -10.8%. Apologies for the gap in the line, which is due to a break in the data.
The flow of cash has two consequences – one broadly positive, the other about which people may be more equivocal. The good news is that it is likely to make the domestic economic recovery even stronger than had been previously reckoned – after all, that money needs to go somewhere. On the flip-side, the dig into savings may well be a consequence of the fact that households, facing the biggest real-terms earnings squeeze on record, are resorting to mining the money they set aside for the future in order to finance short-term spending.
Moreover, these figures underline the fact that people are being driven away from long-term savings by the paltry interest rates they get there. Figures also published by the Bank of England show that the average interest rate on long-term savings accounts has now dropped to 2.4% – the lowest level since comparable records began in 1999.
According to Simon Ward: “I think there could be a number of reasons why this is happening. One is that some households are obviously under financial pressure and are having to draw on their savings. Other households have seen that interest rates are very unattractive and so have decided to spend some of their hoarded cash.”
The news will need to be examined in more detail, however. This is the first substantive evidence we’ve had that Britons are pulling cash out of their savings at the fastest rate in modern history. Whether you’re reassured that people aren’t borrowing more and more, or you’re dismayed at the collapse of Britain’s long-term savings industry, the phenomenon is now too big to ignore.