The distribution of wealth

At Scottish Fiscal and Economic Studies, we have, and are continuing to develop, a microsimulation model of UK and Scottish households which we can use for distributional analysis. For example we can say what a particular change in fiscal policy means for net household income for those households in the bottom decile and for those households in the top decile. Analysis of this sort underlies the paper we published last year, Constitutional change and inequality in Scotland, which investigated the distributional impacts of the various policy levers associated with different degrees of devolution and autonomy. There are many microsimulation modes which can analyse income distributions, but most, due to a lack of data availability, do not allow for the analysis of wealth distributions. The ScotFES model will be developed to include such capability in a model based on the Understanding Society dataset, complemented by a microfounded life-cycle economic model, calibrated to the Office for National Statistics Wealth in Great Britain data releases. In this post I outline the data available, and discuss why wealth is a particularly interesting topic from a Scottish point of view.

Understanding Society is the new name for what was the British Household Panel Survey and in its most recent wave, it asked questions about the financial position of households. For example: “How much in total is the current balance in your: Savings or deposit accounts (with a bank, post office or building society); National Savings Accounts (formerly National Savings Bank or Post Office Accounts); ISA – cash only; ISA – stocks and shares, or PEPs; Premium Bonds

This is a limited view of the assets held by households, in particular it misses property wealth, which is one of the most important components – but it should be correlated with the true asset position. Indeed, whilst the aggregated assets, over the whole GB population, from the Understanding Society dataset total only £425bn, compared to the £9.5tr reported by the ONS, the non-property wealth GINI coefficient from both sources is around 72-73% in both cases. It seems that the distribution of assets in the Understanding Society dataset approximately agrees with the ONS data releases. If we take household composition, income and the observed asset position for individuals from the Understanding Society data, and complement this with the results of the life-cycle model that includes property, then we can hypothesise a more complete asset picture for the period that we do have data, as well as generate a projection of this data across time. Why is this an interesting modelling exercise to undertake?

The issue of the distribution of wealth as part of the debate on inequality and the policy implications thereof, has risen in importance since the publication of Thomas Piketty’s `Capital in the Twenty-First Century’. Piketty suggests that slowing economic growth means that an increasing proportion of income in society is derived from capital, and so the distribution of capital ownership becomes increasingly important for the distribution of income in a world of slow growth. Tackling inequality may require intervention (such as wealth taxes) in the distribution of wealth. With our model we will be able to examine this distribution for Scotland.

And the distribution of capital ownership is not necessarily the same in Scotland as in the rest of the UK. In particular median household wealth is lower:

Source: ONS – Median household total wealth, by region: Great Britain, 2006/08 – 2010/12

Why is household wealth lower in Scotland than in the rest of the UK? It is unlikely to be due to demographic factors as Scotland is slightly older than the UK, and older generations hold a greater than per capita share of assets. It is not because of lower average income (Scotland’s GVA per capita is around the same as the UK’s), though it could be due to the distribution of this income: wealth is more unequally distributed than income, and Scotland has fewer very high earners who may be likely to have high asset holdings. It may be due to house prices, which are lower in Scotland compared with the UK average.

As well as its influence on inequality, the composition of household wealth in different regions has implications for the tax bases available to different regions. Enhanced devolution increases the scope for tax competition between constituent parts of the UK, and consequently may trigger a search for tax bases which are not so mobile. Incomes, especially high incomes, are usually deemed to be a mobile tax base and so enhanced devolution may encourage a shift away from income taxes – are wealth taxes a possibility? Perhaps: financial assets may be an extremely mobile tax base, whereas land rents are possibly the least mobile of any tax base.

This feeds into several current policy debates in Scotland where land reform and council tax reform are both on the agenda. The model under development at ScotFES will hopefully be a valuable tool in the analysis of such policy, as well as allowing us to conduct more comprehensive analyses of inequality in Scotland.

About David Comerford

Post-doctoral researcher in economics
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