In the run-up to the 2024 election, future prime minister Keir Starmer labelled wealth creation Labour’s number one mission. “It’s the only way our country can go forward,” he declared. “We should nourish and encourage that – not just individuals but businesses.”
Starmer was right, in theory. But wealth creation is a slippery concept. Essential for economic and social progress, it can also work against both. It’s therefore vital to distinguish between “good” and “bad” wealth.
According to one definition, increases in “good” wealth come from innovation, investment and more productive business methods. Such activity boosts eco…
In the run-up to the 2024 election, future prime minister Keir Starmer labelled wealth creation Labour’s number one mission. “It’s the only way our country can go forward,” he declared. “We should nourish and encourage that – not just individuals but businesses.”
Starmer was right, in theory. But wealth creation is a slippery concept. Essential for economic and social progress, it can also work against both. It’s therefore vital to distinguish between “good” and “bad” wealth.
According to one definition, increases in “good” wealth come from innovation, investment and more productive business methods. Such activity boosts economic resilience, social strength and the size of the economic cake.
Examples include investment in medical and scientific technology – but also, crucially, in the activities that provide vital everyday services and goods to sustain our daily lives. Improvements in the quality of local shops, transport, services for children, adult care and decent hospitality all expand a country’s resources in ways that see the gains shared widely across society.
However, over the past half-century, a rising share of economic activity in the UK and other rich countries has been connected with “bad” wealth accumulation, which actively hampers and harms a country’s prospects.
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Bad wealth is especially associated with non-productive or low social-value activities geared to personal enrichment. In Britain and elsewhere, decades of privatisation and wider tax, benefit and monetary economic policies have fuelled rising inequality while handing much of the command over resources to corporate boardrooms, top bankers and the very rich – with damaging effects for societies and economies alike.
A central source of bad wealth has been a rise in the level of economic “extraction” or “appropriation”. This occurs when capital owners use their power to capture excessive shares of economic gains through activity which weakens economic strength and social resilience. Examples include the rigging of financial markets and manipulation of corporate balance sheets, a range of anti-competitive devices such as the rise in aggressive acquisitions and mergers, and the skimming of returns from financial transactions – a process City of London traders like to call “the croupier’s take”.
Bad wealth is also the product of passive activity unrelated to merit, skill or prescient risk-taking. Over half of the increase in household wealth in the UK since 2010 has come from rising asset prices – in particular relating to property – rather than from more productive activity. This means a huge amount of that wealth is trapped in property and other assets which are not available for reinvestment in the economy.
Britain’s economic record since the 2008 financial crisis has been dismal, with a collapse in the rate of economic growth amid much hand-wringing about its “productivity puzzle”. Yet over the same period, private wealth holdings have surged. In total, UK wealth – comprising property, physical and financial assets – is now more than six times the size of the country’s economy, up from three times in the 1970s. Other rich countries have seen similar trends.
UK wealth in comparison to size of its economy:
UK wealth as a ratio of GDP, 1880-2020. World Inequality Report 2022, CC BY-NC-SA
This surge in levels of personal wealth is not the product of more dynamic and innovative economies and record rates of investment. As an editorial in UK financial investment magazine MoneyWeek argued in 2019, too much personal wealth is the result of “mismanaged monetary policy, politically unacceptable rent-seeking, corruption, asset bubbles, a failure of anti-trust laws, or some miserable mixture of the lot”.
It is these activities which account for the burgeoning bank accounts of the already super-rich. Around the world, from the mid-1990s to 2021, the top 1% of wealth holders captured 38% of the growth in personal wealth, while the bottom 50% received just 2%. In the UK, the average wealth of the richest 200 people grew from 6,000 times the average person in 1989 to 18,000 times in 2023.
One of the most important outcomes of the rise of bad accumulation, and the associated surge in the concentration of personal wealth, has been the way opulence and plenty sit beside social scarcity and growing impoverishment. It has brought a significant shift in how national resources are used – away from meeting basic needs to serving the demands of corporate elites, a growing billionaire class, and private markets.
“The test of our progress is not whether we add more to the abundance of those who have much,” declared US president Franklin D. Roosevelt during his second inaugural address in January 1937. “It is whether we provide enough for those who have too little.”
By most metrics, Britain and many other wealthy countries are failing that test.
The second inauguration of Franklin D. Roosevelt as US president in January 1937. Smithsonian Institution/National Portrait Gallery via Wikimedia, CC BY
‘Money is like muck’
A key explanation for Britain’s low private investment, low productivity and slow growing economy is the disproportionate share of the rising profit levels of Britain’s biggest companies that has gone in payments to shareholders and executives in recent times. Dividend payments in the UK and globally have greatly outstripped wage rises over the last 40 years. In 2020, aggregate dividend payouts by the FTSE 350 companies made up some 90% of pre-tax profits.
Often, these heightened dividend payments have been financed through borrowing, thus undermining corporate strength. In the case of Thames Water – stripped of much of its value by an aggressive profit strategy by its overseas owners – this has brought near-bankruptcy.
- ** Read more: Britain’s ‘broken’ water system: a history of death, denial and diarrhoea ** *
Meanwhile, far from the promise of a property-owning society, large sections of the UK population have – outside of pension provision – no, or only a minimal, stake in the way the economy works. Those with few assets lose out from rising property prices and higher interest rates on savings.
How a nation’s productive resources – land, labour and raw materials plus physical, social and intellectual infrastructure – are owned and used is key to its productive power, social stability, and distribution of life chances. “Money is like muck – not good except it be spread,” wrote the English philosopher and statesman Francis Bacon in 1625.
In the UK, the more egalitarian politics after the second world war led to a more equal sharing of private wealth, and a much higher level of public ownership of key utilities and land. Then in 1979, newly elected prime minister Margaret Thatcher launched her drive for a “property owning democracy”. The windfall gains from council house sales and the selling of cut-price shares in her great privatisation bonanza initially benefited many ordinary people.
But today, the balance sheet looks markedly different. While the sale of council houses initially boosted levels of home ownership in the UK, the number of first-time home buyers is now less than half its mid-1990s rate. As a result, the rate of home ownership has shrunk from a peak of 71% in 2000 to 65% in 2024, with the most marked decline among those aged 25-34.
Getting on the housing ladder is now heavily dependent on having rich parents. The proportion of young people aged 18-34 living with their parents reached 28% in 2024 – a significant rise since the millennium.
At the same time, today’s much more heavily privatised economy has eroded Britain’s holdings of common wealth. Publicly owned assets as a share of GDP have fallen from around 30% in the 1970s to about a tenth. This is one of the principal causes of the deterioration in the UK’s public finances, while handing more control over the economy to private company owners.
How public ownership of UK assets has shrunk:
Proportion of UK assets held publicly and privately, 1970 vs 2018. Paying for a Decade of National Renewal (Compass), CC BY-NC-SA
Six ways to turn bad wealth into good
The French economist Thomas Piketty has argued that today’s model of corporate capitalism has a natural, inbuilt tendency to generate ever-growing levels of inequality – “a fundamental force for divergence”, as he termed it.
When the return on capital from dividends, interest, rents and capital gains exceeds the overall growth rate, asset holders accumulate wealth at a faster rate than that at which the economy expands, thereby securing an ever-greater slice of the pie – and leaving less and less for everyone else.
In his 2014 book, Capital in the Twenty-First Century, Piketty offered an essentially pessimistic conclusion that breaking this inequality cycle has only happened across history through war or serious social conflict. In response to critics, he modified this position and now seems to accept that there are democratic mechanisms for delivering more equal societies – whatever the undoubted hurdles of implementation.
Suppressing the profiteering and excessive returns that have driven higher levels of inequality is one of the biggest challenges of our time. But such an alignment of growth and rates of return on capital was broadly achieved in the post-war era, and there are several routes for achieving such convergence again – even in today’s very different conditions.
1. Shift the tax focus from income to wealth
Despite the scale of today’s wealth boom, Britain’s tax system is still heavily biased to earnings. Income from work is taxed at an average of around 33% and wealth at less than 4%. Through political inertia, the UK tax system has failed to catch up with the growing importance of wealth over income in the way the economy operates, and does little to dent the growing concentration of wealth holdings at the top.
In her first budget in October 2024, the chancellor, Rachel Reeves, took steps to raise revenue through changes to inheritance and capital gains tax (the profits made on selling shares or property other than your home). But these were too modest to alter the imbalance in the taxation of wealth and earnings.
Chancellor Rachel Reeves delivers her first budget in October 2024. Kirsty O’Connor/HM Treasury via Wikimedia
A more fundamental shift would be to reform the existing system of council tax with a larger number of tax bands at the top. Still based on 1991 property values, this is perhaps the least defensible tax in Britain. Households in poorer areas pay more than better off households in the richest.
In Burnley, the typical household pays some 1.1% of the value of their home in council tax every year. In a typical property in Kensington and Chelsea, it is 0.1%. The most effective alternative would be to replace council tax and stamp duty – the tax on the purchase of homes – with a single progressive or proportionate “property tax”. Any serious reform requires a long overdue property revaluation and an extension in the number of tax bands.
A modest and phased rise in capital taxation would also help to break up today’s wealth concentrations and reduce the passive – and often malign – role played by wealth holdings. Even small changes would release funds which could be used to improve social infrastructure from schools to hospitals.
One such change, as recommended by the Office for Tax Simplification, should be to raise the rates on capital gains tax so that they are equal to income tax rates. In 2024, 378,000 people paid UK capital gains tax worth a total of £12.1 billion – a decrease of 19% on the previous year.
Measures to limit asset inflation could include extending the Bank of England’s remit on inflation to limit rises in property prices, which have led to historically high rents and priced a rising proportion of young people out of home ownership.
2. Reduce how much wealth gets passed on
“A power to dispose of estates forever is manifestly absurd,” the Scottish economist Adam Smith declared 250 years ago. “The Earth and the fulness of it belongs to every generation, and the preceding one can have no right to bind it up from posterity. Such extension of property is quite unnatural.”
Economist Adam Smith (1723-1790). Wikimedia
Despite Smith’s exhortations, birth and inheritance remain the most powerful indicators across most countries of where you end up in the wealth stakes and the pattern of life chances.
Importantly, inheritance does little to boost productive activity. Higher ratios of inheritance in wealth holdings – and recent decades have seen an upward shift – tend to be associated with reduced economic dynamism. Assets tied up in large wealth pools are often little more than “dead money”: idle resources that could be put to use funding public services or productive investment.
Yet, helped by light taxation, social privileges continue to be handed on in perpetuity. Only 4.6% of deaths in the UK resulted in an inheritance tax charge in the 2023 financial year, contributing a tiny 0.7% of all tax receipts.
Around 36% of all wealth is stored in property, and there is a strong public attachment to people retaining their inherited housing wealth – even among those who are not beneficiaries. In part, inheritance tax is widely perceived as unfair because of the way the richest are able to avoid it.
Of people born in the UK in the 1980s, those in the poorest fifth by wealth will enjoy an average 5% boost to their lifetime income through inheritance, compared with 29% for the top fifth. Clearly, those on the wrong side of this gap will be left even further behind by the end of their lives.
And the divide is widening sharply. The scale of intergenerational wealth transfer is on a steeply upward trend, with projected levels of inheritance set to dwarf all previous wealth transfers in the coming decade. Little of this process contributes to more productive activity, with one of its primary and malign effects being to fuel higher house prices.
3. Introduce a ‘whole wealth’ tax
Another much-debated option would be to levy a new tax on whole wealth holdings, rather than just the revenue these assets generate. An annual 1% tax on wealth over £2 million – affecting some 600,000 people in the UK – could raise around £16 billion a year, according to the 2020 Wealth Tax Commission report.
Such taxes would be easier to levy on immobile assets like buildings and land taxes than on liquid assets, such as financial holdings. But this complexity is not insurmountable – and nor is public opinion. Such a measure could be sold politically as a “solidarity tax” to help pay for key under-resourced but high social-value services – such as a proper social care system and improved services for children.
While many governments have been wary of the political reaction to higher taxes on wealth, YouGov’s most recent survey suggests around three-quarters of the public now support such a tax, with more than half strongly supporting it.
The Inequality Crisis – a talk by the article’s author, Stewart Lansley, in March 2013. Video: RSA.
4. Increase public ownership of utilities and services
Tackling inequality and profiteering also require a greater level of common and social ownership. Britain is a heavily privatised and marketised economy. Few other developed countries have handed over such control of key utilities to private firms.
Privatised in 1989, Britain’s water industry has been turned into a potent example of profiteering. Under private ownership, it has delivered leaky and unrepaired pipes, the illegal dumping of sewage spills into rivers and beaches, and two decades of under-investment in large part because of the disproportionate share of profits going in dividend payments to mostly overseas owners.
Another significant trend has been the private takeover of a range of public services – from social care to children’s services. According to the Competition and Markets Authority (CMA), the UK has “sleepwalked” into a dysfunctional system with widespread profiteering in privately run children’s homes. It found operating profit margins averaging 22.6% from 2016-20, driven by escalating charges and cost-cutting.
These examples of bad accumulation have hollowed out some of the UK’s most vital industries. A mix of public and social ownership and much more effective regulation are necessary to turn these industries into effective service providers rather than cash machines for investors.
Regulatory reforms are also needed to moderate the way some markets work. The CMA suggests that anti-competitive behaviour and “oligopolistic structures” are hallmarks of a rising volume of business activity. For example, it has accused the UK’s seven largest housebuilders of collusion on issues from pricing to marketing.
Price gouging – when firms exploit emergencies such as the COVID pandemic and Russia’s invasion of Ukraine to charge excessively high prices for essential goods – is another area ripe for tougher intervention.
5. Establish citizens’ wealth funds
Alongside greater social ownership, all citizens need to be given a more direct stake in the gains from economic activity. As one heckler put it during the Brexit referendum: “That’s your bloody GDP, not ours.”
One route would be to build models of “people’s capital” through a new strategy of asset redistribution to individuals. This would extend the principle of income redistribution that has been one of the main, if now much weakened, pro-equality instruments of the post-war era. A medium to long-term plan would be to create one or more national and local “citizens’ wealth funds”, owned collectively by all on an equal basis.
Originally advanced by the British economist and Nobel laureate James Meade, such funds would be created by the state but owned by society, with returns distributed either as universal dividends or as investment in public services. Such a fund could be financed from a mix of sources including long-term government bonds; the transfer of several highly commercial state-owned enterprises, such as the Land Registry, Ordnance Survey or Crown Estate; part of the proceeds from higher wealth taxes; and new equity stakes in large corporations.
Anchorage, capital of the US state of Alaska, which operates a permanent fund for its citizens. TripWalkers/Shutterstock
Perhaps the most notable example of citizen-owned capital is the Alaska Permanent Fund. This was created in 1976 from oil revenues and effectively owned by all of the US state’s citizens. It has since paid out a highly popular annual dividend which averages about US$1,150 (£875) a year.
The UK has its own example: also in 1976, the Shetland Islands Council established a charitable trust from “disturbance payments” paid by oil companies in return for operational access to the seas around the islands. The returns from this trust have been used to fund social projects, from leisure centres to support for the elderly.
Another possibility is to establish a national pension fund that would eventually pay for the cost of state pensions. Australia’s Future Fund, for example, is an independently managed sovereign wealth fund to meet future civil service pension obligations. Established in 2006 by receipts of AUS$50 billion (£20 billion) from the sale of Telstra, the national telecoms company, it has since been supplemented by direct government grants and is projected to reach a value of AUS$380 billion by 2033.
The UK government has launched the Community Wealth Fund, a £175 million initiative aiming to “transform neighbourhoods with long-term financing”. Working with local communities the initiative will fund projects in local communities across England. Despite its modest finances, this establishes the principle of collectively owned social funds. This is funded through the government’s Dormant Assets Scheme, which unlocks old bank accounts and other financial products that have been left untouched.
6. Spread access to the nation’s assets across society
Any meaningful redistribution of wealth across society requires a suite of deep structural reforms from improving access to affordable housing to reducing levels of corporate extraction.
One of the most important issues is finding ways of extending access to assets to all citizens as a condition of democratic opportunity. The Child Trust Fund, introduced by New Labour in 2005, was an ambitious attempt to address wealth inequality by giving every child a modest financial stake – a kind of citizen’s inheritance. Yet the scheme was abolished in 2010 by the incoming coalition government.
In the event, it only achieved a modest impact. Average payouts when children reached 18 were around £2,000, with a quarter of all accounts being forgotten or lost. The desired shift in household saving habits tended to be limited to more affluent parents paying extra into the trust funds, meaning the policy reinforced some of the inequalities it had aimed to challenge.
Chancellor Alistair Darling hosts a children’s party at No.11 Downing Street to mark the first Child Trust Fund payments in September 2009. Lewis Whyld/PA Images/Alamy
Bold decisions required
While recent years have seen a growing debate about the impact of ever higher concentrations of wealth in the UK, few proposals for real change – beyond a mere tampering at the edges of inheritance and capital gains tax – are yet on the political agenda. Some of these measures would take longer to achieve, and some, such as citizens’ wealth funds, are more ambitious and potentially transformative than others. All would require bold decisions by government.
In the run-up to her much-anticipated November 26 budget, the chancellor has hinted that higher taxes on the wealthy will be “part of the story” – although a manifesto-busting rise in the base rate of income tax is also on the cards.
Against this, Reeves has ruled out a standalone wealth tax, and there appear to be no plans for more radical measures to rein in excessive profiteering. This means that the wealth gap is probably set to widen.
Yet history suggests the idea of limiting high concentrations of wealth is far from utopian. Limits operated relatively effectively among nations including the UK and US in the post-war decades, through a combination of regulation, highly progressive taxation and changes in cultural norms.
The highest personal fortunes were more modest in part because of the destructive effect of war on the size of asset holdings. There was also a new social and cultural climate that would not have tolerated today’s towering fortunes, and which allowed the post-war progressive tax systems to be maintained for decades.
Restructuring the process of wealth accumulation is never going to be straightforward politically. The protests over the adjustment to inheritance tax in 2024, in particular its impact on farmers, demonstrates how sensitive these issues are – particularly when stoked by those seeking to make political capital out of pro-equality reforms.
But Britain stands at a historic moment. Failure to tackle mounting wealth-driven inequality will have harmful consequences for the social and economic stability of generations to come. Amid rising public anxiety about the future and a widespread sense that the economy is “rigged” against ordinary people, a more ambitious political agenda that addresses inequality and economic stagnation could win public backing, if any government is brave enough to try.
The Conversation and LSE’s International Inequalities Institute have teamed up for a special online event on Tuesday, November 18 from 5pm-6.30pm. Join experts from the worlds of business, taxation and government policy as they discuss the difficult choices facing Chancellor Rachel Reeves in her budget. Sign up for free here
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