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How to solve the UK’s wealth inequality problem

A  family on the average wage would have to bank every single penny for 43 years to reach the wealthiest 10 per cent.

This year, average wages are set to be flat. British households, meanwhile, are in the middle of a projected four-year income stagnation. And our productivity has barely risen since the 2008 financial crisis.

Pay, incomes, productivity – that all are flatlining is the defining feature of our economics and our politics today. There’s a reason calling a general election in 2017, as wages fell, was a risky choice by Theresa May.

But one economic number that we rarely discuss has been increasing for some time: wealth. The value of land, it was recently reported, has increased by 412 per cent since 1995; UK households have £12.8tn of wealth. Crucially, our wealth is growing much faster than our income. Between 1955 and the 1980s, wealth was steady at two and a half times national income. Today, it’s closer to seven.

Why does wealth growing much faster than income matter? Because it means that in 21st century Britain, it is no longer truly possible for someone to earn their way to wealth. The entry price to become one of the wealthiest 10 per cent of families is now £1.2m. A typical family, with an income of just over £28,000, obviously can’t expect to make it into that club – they’d have to bank every penny for 43 years. But even a family doing particularly well, with an income of £60,000, putting them in the top 10 per cent by annual income, would have to save everything for 20 years to reach the wealthiest 10 per cent. Or, to put it another way, they will never get there.

And that’s before the second trend – a wealth inequality tipping point. The 20th century delivered huge reductions in wealth inequality. You may have noticed there are fewer landed gentry about. By some estimates, the top 1 per cent had 70 per cent of all wealth in 1900. World Wars, progressive taxation and surging home ownership reduced that to less than 20 per cent by the 1980s. But there is no guarantee this trend will continue: property wealth is now becoming more unequally distributed with home ownership falling. That should trouble us all: inequality of wealth is almost twice as high as that of income.

If these two trends continue, only those born into money, or who marry into it, will constitute Britain’s wealthiest. That reality should alarm socialists on the left and meritocrats on the right. To paraphrase the French economist Thomas Piketty, who was born with what and who marries whom might make for a good Jane Austen novel, but it can’t be an acceptable answer to the kind of country we want to build.

What should all of this mean for politics and policy? Some of it is far from inevitable and reflects unambiguous policy failures. Building more homes and reducing incentives for people to demand second or third houses should be an immediate priority.

We also need to actively address wealth inequality by helping more people build some assets up. The success of pension auto-enrolment in enabling more women and low earners to save for retirement needs to be replicated for the self-employed. And we should revive the idea of asset-based welfare – because the state should help low-income families acquire assets, not merely subsidise their low incomes.

Inheritances, which are forecast to double over the next two decades, are crucial. Encouraging families to share that wealth around would help, so inheritance tax should be paid by recipients with an allowance, rather than by estates. Collective inheritances, such as social housing and decent infrastructure, are also a vital way to ensure that Britain has something to offer you even if your parents can’t write a cheque.

Though we can’t stop wealth playing a big role in society, we can make it pay its fair share. Wealth has more than doubled as a percentage of national income since the 1980s, but the amount of tax we collect from it has been frozen at around 4 per cent of GDP.

Poorly thought-through manifesto raids on wealth are unwise, but inaction on its taxation is not tenable given the strain on the public finances in the coming years, as Britain’s large baby boomer cohort (who hold a disproportionate amount of this wealth) move from paying taxes to receiving pensioner benefits. If wealth doesn’t take more of the strain, income or consumption taxes will have to – or our public services will deteriorate.

Wealth differences also risk bleeding into other areas of life where they do not belong. Wealth status could determine not only where you live, but the education you get, the risks you can take and the jobs you can do. Policy should aim to directly counter those pressures. And we must, at all costs, stop these wealth gaps infecting our politics by introducing further controls on election spending.

As a country, we find discussing wealth rather awkward. But that’s something our politics will have to overcome – because wealth is profoundly reshaping Britain. 

Torsten Bell is the director of the Resolution Foundation 

Torsten Bell is director at the Resolution Foundation. Prior to that, he was director of policy for the Labour Party and worked in the Treasury, both as a special adviser and a civil servant.

This article first appeared in the 08 February 2018 issue of the New Statesman, The new age of rivalry

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Can Britain’s new powers to investigate unexplained wealth prevent real-life McMafias?

The government is waking up to the fact that global criminals are fond of London. 

The BBC’s McMafia, a story of high-flying Russian mobsters and international money launderers woven into the fabric of London, ended this month. Despite the dramatic TV twists, the subject matter has its basis in reality. As a barrister dealing with cases that involve Russia and former Soviet states, my experience is that politicians and business people use the apparatus of the state to put rivals out of business by any means possible.

In McMafia, previously straight-laced fund manager Alex Godman (played by James Norton) begins transferring money under the cover of a new investment fund. With a click of a button, he can transfer a shady partner’s money around the world. As the Paradise Papers underlined, money can indeed be hidden through the use of complex company structures registered in different countries, many of which do not easily disclose the names of owners and beneficiaries. One company can be owned by another, so the owner of Company A (in Panama) might be Company B (in the Cayman Islands) which is owned by Company C (in the Seychelles) which owns property in London. To find out who owns the property, at least three separate jurisdictions must be contacted and international co-operation arranged – and that’s a simple structure. Many companies will have multiple owners, making it even more difficult to work out who the actual beneficiary is.

I represent individuals before the UK extradition and immigration courts. They are bankers, business people and politicians who have fled persecution in Russia and Ukraine or face fabricated charges in their home country and face extradition or deportation and will often be tortured or put on show trial if we lose. Their opponents will deploy spies, who may pay visits to co-defendants in Russia for “psychological work” (aka torture). Sometimes the threat of torture or ruin against a person’s family is enough to make them confess to crimes they didn’t commit. I have seen family members of my clients issued with threats of explicit violence and the implicit destruction of their life. Outside their close relatives’ homes in Russia, cars have been set on fire. Violence and intimidation are part of the creed that permeates the country’s business and political rivalries.

As in McMafia, London has long played a bit part in these rivalries, but the UK government has been slow to act. In 2006, Alexander Litvinenko, a former Russian security agent turned defector, was killed in London using Polonium 210 – a radioactive substance put into a cup of tea. Although Russian state involvement was suspected from the beginning, the UK government tried to block certain material being released into the public domain, leading his family to complain that the UK’s relations with Russia were being put before the truth. In 2016, a decade after his death, the inquiry finally delivered its verdict: there was a “strong probability” Litvinenko was murdered on the personal orders of Vladimir Putin. Yet in the same breath as condemning the act, David Cameron’s spokeswoman said the UK would have to “weigh carefully” the incident against “the broader need to work with Russia on certain issues”.

The government of Cameron’s successor has however been quick to use McMafia as a spring-board to publicise its new Unexplained Wealth Orders (UWO). These new investigatory powers are purportedly to be used to stop the likes of Alex from hiding money from the authorities. Anyone with over £50,000 of property who is politically exposed or suspected of a serious crime, will be forced to disclose the source of their wealth on request. While most British homeowners would own more than £50,000, the individuals are likely to be high profile politicians or under investigation already by the authorities. If they fail to respond punctually, they risk forfeiting their property.

The anti-corruption organisation Transparency International has long campaigned for such measures, highlighting cases such as the first family of Azerbaijan owning property in Hampstead or senior Russian politicians believed to own flats in Whitehall. Previously, confiscating hidden assets has been a lengthy and complex process: when the High Court confiscated an £11m London house belonging to a Kazakh dissident, the legal process took seven years.

The new Unexplained Wealth Orders mean that the onus is shifted to the owner of the property to prove legitimacy and the origin of the wealth. The authorities will have much greater power to investigate where finance and investment originated. But in order for them to work effectively, they will have to be backed up by expert prosecutors. The government still has a long way to go before it makes London a less attractive place to hide money.

Ben Keith is a barrister at 5 St Andrew’s Hill specialising in extradition, immigration, serious fraud, human rights and public law.