The Daily Telegraph - 23.08.2019

I

n a speech in Corby this week,

Jeremy Corbyn made reducing

inequality central to his pitch to

be the next prime minister.

Certain polling emboldens the

Labour leader. When asked in

the abstract, the UK public expresses

strong concern about the gap between

rich and poor.

Brexit, the NHS and now crime,

remain more important concerns. But

US evidence during the last crash

suggests inequality rises in the public

consciousness in a weakening

economy. It spiked here last year too

when the economy slowed. A messy

Brexit or the threat of Corbyn’s agenda

slowing growth further could produce

fertile ground for egalitarian

sentiment in a coming election.

A reawakening of this age-old

debate though provides opportunity to

highlight inconvenient truths for the

Left about the trends and causes of

inequality. Contra claims it’s spiralling

out of control, UK income inequality

has been pretty much unchanged for a

quarter of a century. Wealth inequality

• an aggregated measure comprising
  physical, financial, housing and private
  pension wealth– has risen somewhat
  over longer periods, but likewise has
  been near-flat for at least a decade.
  Labour retorts that both are still too
  high. Wealth inequality is the bugbear
  de jour, being (as it always is given the
  life cycle) more unequally distributed
  than income. Scary-sounding data
  from the Office for National Statistics
  (ONS) suggest the richest 10pc of
  Britons hold 44pc of aggregate private
  wealth, while the bottom 10pc own
  nothing. In Corbyn’s world, this
  justifies more “Robin Hood policies”
  that take from the rich and spend on
  the poor.
  Yet there’s another unhelpful
  observation you won’t find Corbyn
  and Co admitting. Heaps of evidence
  around the world shows the sort of big
  welfare state he favours actually
  widens the same wealth inequality
  measures he deems obscene.
  How can “progressive” programmes
  make countries more unequal? Quite
  simply, taxpayer-funded state pensions,
  health and social care spending,
  housing subsidies, unemployment
  benefits and subsidised student loans,
  all reduce our need to save or build up
  personal financial assets. Broad-based
  higher taxes to finance them also

Poor end up paying the price of

Corbyn war on wealth inequality

Labour leader

Jeremy Corbyn

has made reducing

the gap between

rich and poor in the

UK a central plank

of his bid to be

prime minister

ryan bournene

T

his week’s bid for pubs
group Greene King has
lifted the veil on the
undervaluation of UK
assets. Whatever happens
with Brexit, it’s obvious
that British equities are relatively
cheap and under-owned. However,
this could change in the coming
months as the Brexit outcome becomes
clearer and uncertainty lifts. So, when
should investors get more positive on
UK equities? Is now the time to buy?
Global investors have turned their
back on the UK stock market for almost
three years because Britain’s economic
fundamentals and corporate earnings
have played second fiddle to the
uncertainty surrounding Brexit.
According to Bank of America’s fund
manager survey, just under a quarter
of global investors are underweight on
the UK. This means that the UK has
been the most disliked region for
41 consecutive months.
As a result, since the UK voted to
leave the EU in 2016, the FTSE 100 is
up just 17pc and
the FTSE 250
19pc. This
compares with
sterling-
equivalent gains
of more than 30pc
in the MSCI
Europe index,
62pc in the S&P
500 and 50pc for
Japan’s Nikkei

225. It’s not just
     professional
     money managers that are shunning UK
     investments. Data published this week
     by platform Interactive Investor
     showed that 24pc of its clients
     surveyed were holding fewer UK assets
     than normal because of the uncertain
     political backdrop.
     However, as we know from the
     market action following the
     referendum in 2016, any fall in sterling
     is likely to boost the share price of
     multinationals listed in London as they
     generate most of their sales abroad.
     Owning UK blue-chips is arguably a
     hedge against a sterling fall should a
     no-deal Brexit occur, as is a portfolio of
     foreign shares. This week’s bid for

UK stocks

look cheap

so prepare

to dive in

Garry

White

y

e

pubs group Greene King at a 50pc

premium to its market value by

Hong Kong billionaire Li Ka-shing

shows that some investors are now

looking through any Brexit disruption

and envisage the economy bouncing

back strongly.

This purchase is significant because

Greene King is an entirely UK-facing

business relying on British consumers

• and not a global company such as
  Arm Holdings, Cobham and Inmarsat,
  which have also been subject to
  foreign bids.
  Greene King is not the first
  UK-dependent business that has been
  sold to an overseas buyer – Dairy Crest,
  Fuller’s brewing operation and fellow
  pub group Ei have also been sold
  abroad – but coming this close to Brexit
  it is a real vote of confidence in UK plc.
  The Greene King deal is likely to be
  attractive due to its substantial
  property portfolio, with other
  beaten-down businesses potential
  targets for this reason too.
  Shore Capital, house broker of
  Wm Morrison, recently concluded that
  the supermarket was a potential target
  for a foreign buyer. The broker argued
  that a share price fall of more than
  30pc in a year, combined with
  Morrison’s strong freehold property
  portfolio and relatively low debt pile,
  made it an attractive acquisition.
  The fall in the pound is not being
  driven by the UK’s fundamentals. Sure,
  the economy shrunk by 0.2pc in the
  second quarter, but this was mostly
  due to a destocking effect, as the
  first-quarter figures were boosted by
  companies stockpiling ahead of the
  original March 31 EU departure date. In
  fact, the UK economy is holding up
  pretty well, with both government and
  household spending remaining robust
  and a likely rebound in third-quarter
  GDP that will ensure the UK does not
  fall into a technical recession. Boris
  Johnson’s administration also plans
  a fiscal blitz that should be positive
  for growth.
  The recent fall in sterling relates
  entirely to the perception that the UK
  is heading for a no-deal Brexit, which is
  now looking like the most likely
  outcome following Boris Johnson’s
  promise to the country that Britain will
  leave the bloc on Oct 31. Analysts at
  BNP Paribas, for example, now put its
  probability at 50pc, up from 40pc.
  Sterling has already priced in a lot of
  bad news and a sharp fall even in the
  case of a no-deal Brexit is unlikely to be
  as severe as in 2016 as the market is
  expecting the outcome.
  It really won’t be a surprise.
  Investors can expect further bids for
  UK-listed companies because of the
  undervalued level of sterling.
  However, volatility is likely to increase
  as we approach the Oct 31 deadline so it
  may be best to sit on the sidelines and
  take advantage of any wobbles should
  they present themselves.
  UK equities are cheap – but they may
  get cheaper before the recovery finally
  comes. Get ready to pounce.

Garry White is chief investment

commentator at wealth management

company Charles Stanley

reduce the means for ordinary

households to save and invest for

themselves. Across time and countries,

these government programmes and

transfers have therefore crowded out

private savings disproportionately for

those of modest means.

Unlike private wealth, the resources

for government programmes are not

heritable either. Contrary to popular

belief, inheritance tends to be wealth-

equalizing. While the wealthy can save

and invest in business and financial

assets to pass on to their heirs, a big

welfare state means poorer

households have less need or means

for saving, and less often see

unexpected windfalls. The welfare

state thus widens wealth inequality,

and Corbyn’s plans to expand it further

would exacerbate this effect.

That’s why Scandinavian

economies, despite low income

inequality, have wide wealth

distributions. Denmark is held up by

Corbynistas as a country to emulate on

social spending. Yet consider some

striking OECD statistics: the bottom

60pc of Danish households have

negative net wealth (ie combined, are

in debt), while the top 10pc hold 64pc

of all wealth. The figures for the UK

under these calculations (different

from the ONS) are 12.1pc and 52.5pc

wealth shares for the bottom 60pc and

top 10pc, respectively. In other words,

UK wealth is more equally distributed.

Denmark is not just some outlier

either. A 2015 European Central Bank

study across the eurozone found that

“an increase in welfare state spending

goes along with an increase – rather

than a decrease – of observed wealth

inequality”. France has high social

spending and low wealth among less

well-off households, for example,

while Luxembourg and Spain have

relatively low social spending and high

wealth holdings for the poor.

Now, this alone doesn’t mean the

welfare state is inherently “bad”. Most

programmes or transfers are

introduced to achieve ends other than

affecting inequality. Facilitating the

poor to worry less about

precautionary savings and granting

them confidence to spend through

their lifetimes may still improve

well-being. There are, naturally, other

important economic phenomena that

shape wealth distributions.

The point here is that Corbyn and

others use measures of wealth

inequality “worsened” by the welfare

state as justification for further

expanding it. They risk us getting

stuck in a loop whereby more social

spending leads to more private wealth

inequality, which is then used to

justify additional social spending.

There are two potentially honest,

rational responses to this evidence.

One would be to give up on or

augment wealth inequality statistics.

Many economists believe a better

proxy for well-being would be lifetime

consumption, inclusive of private and

government-provided services.

Alternatively, we could adjust wealth

statistics to account for the present

value of promised government

benefits as if they were “real” wealth.

Accounting for government and state

pensions for the UK alone has been

found to reduce measured wealth

inequality by almost a third. Adding

more services might reduce it further.

Acknowledging that “lived”

inequality is far less dramatic than

quoted wealth figures suggest would

probably be an ask too far for Corbyn,

undercutting as it does his whole

economic narrative. Yet the alternative

response is equally awkward. For if he

insists private wealth inequality is

society’s premier problem, he might be

forced to reconsider some of the

welfare state drivers of it.

Could one imagine Corbyn

campaigning for privatisation of the

state pension or for replacing the NHS

with individual health savings

accounts to quell this wealth

inequality scourge? Probably not. That

itself reveals a great deal. Deep down,

even the Labour leader would spurn

reducing the measured private wealth

gap in favour of other priorities.

Ryan Bourne occupies the R Evan

Scharf chair for the Public

Understanding of Economics at the Cato

Institute

‘Heaps of

evidence

around the

world shows

the sort of big

welfare state

he favours,

widens the

inequality

measures he

deems

obscene’

Business comment

Scotland relied on the black stuff,

now its fiscal black hole beats Italy’s

W

hich country in the developed

world has the biggest budget

shortfall? A black hole in the

public finances larger than the likes of

Italy and the rest of southern Europe,

bigger than the US under spendthrift

Donald Trump and double that of

debt-ridden Japan.

That dubious honour would go to

Scotland if it were an independent

country. Its £13bn shortfall is

equivalent to more than half the UK’s

total notional fiscal deficit despite

having less than a tenth of the

population, it was revealed this week.

While the UK’s deficit almost halved

to 1.1pc of GDP in 2018-19, the figure

for Scotland fell 1.1 percentage points

to a still eye-watering 7pc.

Momentum is gathering behind

Nicola Sturgeon and the SNP’s

renewed push for independence, but

the huge budget black hole raises

serious questions over whether

Scotland’s spending could be

sustainable if it broke away.

Scotland is not unusual in having a

large deficit among Britain’s regions.

The UK is increasingly reliant on large

surpluses built up in London and the

south of England. Scotland has a

similar deficit per person to the north

of England, while Northern Ireland

and Wales have an even higher

shortfall per person.

The large surpluses in the capital

and south of England are “used to

transfer funding to the Midlands, the

North, Scotland, Wales and Northern

Ireland”, says David Phillips at the

Institute for Fiscal Studies.

However, Scotland is unusual in that

its deficit has been created by higher

spending rather than significantly

lower tax revenue.

“The reason that the North, Wales

and Northern Ireland have big deficits

is largely because they have lower tax

revenues because they are poorer than

the average part of the UK,” says

Phillips. “In Scotland, it’s not really

that. Tax revenue per person is a little

bit below the UK average but spending

is substantially above the UK average.

That’s largely funded by the block

grant from Westminster. Scotland has

historically received more per person

going back decades.”

Each nation of the UK receives a

block grant, which is tweaked using

the Barnett formula. Running such a

high deficit when independent “would

not be sustainable”, Phillips says.

Scotland proportionally spends

more on a number of areas, such as

transport, higher education, social

care and economic development, he

explains. Flagship SNP policies, such

as free personal care for the elderly

and no university tuition fees, have

been pricey.

Thomas Pugh at Capital Economics

warns that Scotland would have to

make “some very tough budget

decisions” if it had similar levels of

funding to the rest of the UK. He says

that Scotland’s public finances have

also been damaged by the drop in oil

revenue and its lower population

density, meaning it “costs more per

head to provide the same services”

such as healthcare and education.

Oil revenues used to “make the

figures add up” but they are “nowhere

near where they used to be”, Pugh

says. Revenue from crude has plunged

from up to £9bn in the years just

before the first independence

referendum to less than £2bn.

While the bumper oil revenue has

dwindled, Brexit and the threat of a

disorderly departure from the EU have

boosted the pro-independence

campaign in Remain-backing

Scotland. Supporters argue that an

independent Scotland would benefit

economically from rejoining the EU.

A recent poll found that “Yes” to

independence has edged ahead in the

debate and Sturgeon is pressing for

another vote next year, potentially

after a no-deal Brexit.

Economists believe that an

independent Scotland would be likely

to face huge deficits unless it altered

its fiscal policy or somehow unlocked

higher growth.

The gap would need to be closed by

“higher taxation, lower spending, or

the holy grail of faster economic

growth”, says Prof Graeme Roy,

director of the Fraser of Allander

Institute at the University of

Strathclyde.

He says that last year’s deficit will

not “tell you what the long-term

independence finances could be”, but

is the starting position that Scotland

will face.

Roy adds: “Those people advocating

greater autonomy and independence

have to provide a really robust,

clear-cut case in how to address the

scale of the deficit that Scotland would

inherit on Day One. That has to be a bit

about getting faster economic growth

but you cannot guarantee that.”

While Scotland’s deficit is not

unusual compared to other regions of

the UK, the separatist sentiment

threatening to boil over is unique. The

large deficits provide ample

ammunition to unionists arguing that

the numbers simply do not add up.

Its deficit would be unsustainable

and an independent Scotland would

have tough decisions to make.

Scotland’s annual

revenue from crude

oil has plunged

from £9bn before

the independence

referendum to less

than £2bn now

ABERMEDIA/MICHAL WACHUCIK/PA

A vote for independence

would raise big questions

over the country’s deficits,

economists tell Tom Rees

‘Spending [in Scotland] is

substantially above the UK

average, largely funded by

Westminster’s block grant’

‘Sterling has

already

priced in a

lot of bad

news. The

market is

expecting it’

PETER SUMMERS/GETTY

32 ***^ Friday 23 August 2019 The Daily Telegraph

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