The rich are getting richer – and the economy will suffer

monopoly mayfair

Do you have $3650 (£2285) in savings or equity? If so, you’re richer than 50% of people on the planet. Nearly half of the world’s wealth is now owned by just 1% of people, with serious repercussions for global economic stability.

According to the latest global wealth report published by Credit Suisse, even though overall wealth has increased dramatically from $117 trillion in 2000 to $263 trillion today, this has mostly been accumulated by a tiny minority that owns 48.5% of the globe’s resources. The issue is particularly stark in the UK, which is the only country in the G7 to have seen inequality rise during this century.

Figures released by the UK Department of Work and Pensions shows that those living in poverty in the UK are just as likely to be in work as they are to be jobless. 12% of those living in households below the poverty line are self-employed, whilst a further 38% are in either full-time or (in fewer cases) part-time employment. This widening wealth gap does not bode well for economic growth.

There’s a strong association between low economic growth and inequality,” says Tim Stacey, Senior Policy and Research Advisor at the Equality Trust. Part of this, he says, is down to the fact that inequality can lead to heavy public and private debt, fostering unrealistic expectations while at the same time pushing down productivity among workers, who become frustrated that their income does not allow for lifestyles that they have come to see as normal.

Ultimately, says Stacey, this kind of inequality creates economies that are “inherently unstable,” leading to financial crises.

One side effect of this is squeezing out competition. While cycles of boom and bust have taken some high profile casualties thought “too big to fail,” they are generally most disastrous for smaller companies. Businesses that are fighting for a slice of diminishing disposable income often compete so aggressively on price that only the largest can survive on the margins, paving the way for monopolies to form. In turn, a shrinking marketplace with fewer players means that the health of the economy rides more and more on the success of these remaining few, making it highly sensitive to volatilities.

Shifting from an economy powered by SMEs to one powered by fewer, larger companies can also create headaches for government tax collectors.

Whereas SMEs are generally based, and pay tax, in their directors’ country of residence, “Large corporations can quite legitimately base some of their operations offshore, employ local people and have these operations managed and controlled locally. They can afford international professional advice in deciding on the most effective jurisdictions in order to reduce their tax rates, and of course their VAT rates,” explains Lesley Stalker, Tax Partner at the UK accountancy and tax advisory firm RJP. Unlike their smaller counterparts, this gives them “flexibility… over how much profit they actually pay tax on.”

When a tax system has to rely on the top 10%, it is not a very stable tax system. When it has to rely on the top 1%, it is very unstable,” adds Stacey, who feels that tax payments should be tracked internationally and, potentially, pay ratios introduced within companies to cap inequality at the source.

As well as the direct hazards that inequality wreaks on the economy, there is a far more insidious issue at play: the erosion of democracy. A tax system that relies on the top 1% is not only, as Stacey says, unstable; it also shifts political clout into the hands of this 1%, whom governments are obliged to keep onside. By shifting money out of a country’s economy and tax system and into the hands of rich individuals that can spirit it away to wherever is most expedient, polarising incomes slowly chip away at sovereign wealth and power – and with it, democratic principles.

It is, for example, telling that the UK’s Conservative Party was swift to scrap the 50p top tax rate, which affected just 300,000 people (0.5%) out of a population of 60m, but has made no effort to make the tax system more progressive, which 96% of the UK population has called for. Similarly, issues that disproportionately affect struggling smaller businesses, such as high business rates, reduced access to finance and the complexity of the tax system have met with a sluggish response.

By ignoring these issues to appease the immediate interests of the wealthy, inequality is likely to intensify. Ultimately, by creating an unstable economy, this will hurt everyone, rich and poor, from the smallest start-up to the largest bank. If the world is ever to see the back of boom and bust, the growing wealth gap will have to be reversed – and it will have to happen fast.