Home is where your wealth is

9 Nov 07
DAVID LIPSEY | Modern British politics has been about incomes. If real incomes are rising, so the conventional wisdom goes, then the government will be sitting pretty whatever else it is messing up.

Modern British politics has been about incomes. If real incomes are rising, so the conventional wisdom goes, then the government will be sitting pretty whatever else it is messing up.

If they are falling, Pericles himself would struggle to maintain popular support.

This autumn, however, we have seen a switch to a new kind of politics: the politics of assets.

On the back of rising house prices, many people suddenly find themselves well-off. The average housing wealth of someone aged

55-64 has risen by £98,000 to £240,000 over the past ten years, according to an excellent new paper on asset accumulation by James Lloyd of the International Longevity Centre.

You might think that being rich would be an opportunity for the newly wealthy to share their good fortune with their fellow citizens. After all, making loadsamoney by sitting on your sofa at home hardly requires the incentive of economic reward.

Taxes on such unearned gains used, therefore, to be favoured by economists over taxes on income.

That’s what economics may say but the politics is completely the reverse. Basking in their affluence, the newly wealthy are in fact more determined than ever to keep their money, if not for themselves, then for their children.

Hence the great inheritance tax drama: Conservative opportunism and Labour funk, leading to a handout from Alistair Darling which has the wealthy dancing in the streets. Hence the row over capital gains tax, where the government’s proposals had immediately to be revised to make them less onerous on the already very wealthy.

The new wealth has one undesirable characteristic: it is very unevenly distributed. The top one per cent of the population has a quarter of it, while most at the bottom of the income distribution have no or little wealth at all.

So it follows that the tax reliefs are adding to inequality. The inheritance tax concession may have been politically inevitable but it is also economically damaging and socially and morally demeaning.

If we go on like this, the divide between the haves and the have-nots will widen — and, worse, inequality will be perpetuated down through the generations. There can be no genuine equality of opportunity, such as all political parties now affect to want, when some people start with so much more in prospective wealth than others.

However, the asset revolution also presents some opportunities. While much worry has gone into the provision of pensions for Britain’s ageing population, asset appreciation has been quietly solving much of the problem.

The rise represents a straight transfer away from the young, who have to pay the high house prices and the onerous mortgages which result from them.

It represents a transfer of wealth on an unparalleled scale to older people, most of whom will now own houses and most of whom will no longer face substantial mortgages.

And do not say that the old cannot access their housing wealth. They can, either by moving somewhere smaller or cheaper, or by taking out an equity mortgage sustained on their home.

Another problem transformed by the asset boom is the problem of paying for care in old age. This was the subject of Public Finance’s recent round table on long-term care and pensions, extensively reported in this issue.

An argument has long raged between those who believe that everyone’s long-term care should be paid for by the state — as it largely is in Scotland — and those who believe that the state should concentrate its support on those unable to pay for themselves.

That argument has shifted increasingly in favour of the latter. This is partly because in Scotland, where the cost of free care has exploded, the policy has failed. It is currently being reviewed by Lord Sutherland, chair of the royal commission that first proposed it.

But more important, the case for better-off people to fund their own care has been immeasurably strengthened. More people can comfortably afford to pay for their long-term care out of their housing assets.

If they want to be sure, they can invest part of their wealth in an insurance policy to cover long-term care costs. Following the inheritance tax change, many will be able to do this and still leave their children mouthwatering legacies.

The new inequalities created by the asset revolution will not easily be reversed. The new wealthy are also those with the strongest political muscle, sure to fight tooth and nail to hang onto their gains.

Politics rules out a full frontal assault on the new rich. If, however, the results include a solution to the pension and long-term care problems, that will be some consolation.

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