LONDON — British households are richer than ever, but that won’t translate to a much-needed boost to the economy in the form of increased consumer spending, according to a new report from Oxford Economics.
Partly that is because a vast chunk of that wealth is being stored up in pension funds, and partly that is because it is being concentrated in the hands of increasingly few people.
The report found that UK households are wealthier than ever, thanks to continually rising house prices and a buoyant stock market.
At the end of 2016, British households’ total holdings of properties and assets amounted to £9.2 trillion — up almost 8% on a year earlier.
That wealth isn’t translating to a boost in consumer spending, at a time when it is much-needed: it grew at the slowest annual pace in more than three years in the first quarter of 2017, according to a Visa survey released on Monday.
In fact, Oxford Economics’ model suggests that a 10% rise in wealth boosts consumer spending by a paltry 0.2%.
One reason is that the biggest source of recent growth in wealth has been in pension funds, which represent about half of Britain’s financial wealth. Those funds are highly illiquid — difficult to convert into cash — and therefore have a negligible impact on consumer spending.
The second reason identified in the report is Britain’s bloated housing market, which Oxford Economics’ chief UK economist Martin Beck says has “created an ever-greater concentration of wealth.”
In other words, the property-owning class is shrinking while the renter class is expanding, and the renter class bolsters the income of the property-owning class.
Take a look at the chart below:
“Action by policy-makers could make a difference”
Beck argues that additional taxes on wealth would be a viable solution if the political climate were not hostile towards the idea.
He says: “A move by the state to levy additional taxes on wealth and redistribute the proceeds to lower income households would deliver an indirect route from rising wealth levels to increased consumer spending.
“But the political climate towards taxing wealth (particularly property wealth) is as cold as ever. The resources which could potentially support consumer spending in a difficult period are there. But accessing those resources is an altogether different matter,” he adds.
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