Category: Essentials of Economics: Ch 08

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Assessing policies to tackle coronavirus: the use of cost–benefit analysis

It is commonplace to use cost–benefit analysis (CBA) in assessing public policies, such as whether to build a new hospital, road or rail line. Various attempts in the past few months have been made to use CBA in assessing policies to reduce the spread of the coronavirus. These have involved weighing up the costs and benefits of national or local lockdowns or other containment measures. But, as with other areas where CBA is used, there are serious problems of measuring costs and benefits and assessing risks. This is particularly problematic where human life is involved and where a value has to be attached to a life saved or lost.

Take the case of whether the government should have imposed a lockdown: an important question if there were to be a second wave and the government was considering introducing a second lockdown. The first step in a CBA is to identify the benefits and costs of the policy.

Identifying the benefits and costs of the lockdown

The benefits of the lockdown include lives saved and a reduction in suffering, not only for those who otherwise would have caught the virus but also for their family and friends. It also includes lives saved from other diseases whose treatment would have been put (even more) on hold if the pandemic had been allowed to rage and more people were hospitalised with the virus. In material terms, there is the benefit of saving in healthcare and medicines and the saving of labour resources. Then there are the environmental gains from less traffic and polluting activities.

On the cost side, there is the decline in output from businesses being shut and people being furloughed or not being able to find work. There is also a cost from schools being closed and children’s education being compromised. Then there is the personal cost to people of being confined to home, a cost that could be great for those in cramped living conditions or in abusive relationships. Over the longer term, there is a cost from people becoming deskilled and firms not investing – so-called scarring effects. Here there are the direct effects and the multiplier effects on the rest of the economy.

Estimating uncertain outcomes

It is difficult enough identifying all the costs and benefits, but many occur in the future and here there is the problem of estimating the probability of their occurrence and their likely magnitude. Just how many lives will be saved from the policy and just how much will the economy be affected? Epidemiological and economic models can help, but there is a huge degree of uncertainty over predictions made about the spread of the disease and the economic effects, especially over the longer term.

One estimate of the number of lives saved was made by Miles et al. in the NIESR paper linked below. A figure of 440 000 was calculated by subtracting the 60 000 actual excess deaths over the period of the lockdown from a figure of 500 000 lives lost which, according to predictions, would have been the consequence of no lockdown. However, the authors acknowledge that this is likely to be a considerable overestimate because:

It does not account for changes in behaviour that would have occurred without the government lockdown; it does not count future higher deaths from side effects of the lockdown (extra cancer deaths for example); and it does not allow for the fact that some of those ‘saved’ deaths may just have been postponed because when restrictions are eased, and in the absence of a vaccine or of widespread immunity, deaths may pick up again.

Some help in estimating likely outcomes from locking down or not locking down the economy can be gained by comparing countries which have taken different approaches. The final article below compares the approaches in the UK and Sweden. Sweden had much lighter control measures than the UK and did not impose a lockdown. Using comparisons of the two approaches, the authors estimate that some 20 000 lives were saved by the lockdown – considerably less than the 440 000 estimate.

Estimating the value of a human life

To assess whether the saving of 20 000 lives was ‘worth it’, a value would have to be put on a life saved. Although putting a monetary value on a human life may be repugnant to many people, such calculations are made whenever a project is assessed which either saves or costs lives. As we say in the 10th edition of Economics (page 381):

Some people argue ‘You can’t put a price on a human life: life is priceless.’ But just what are they saying here? Are they saying that life has an infinite value? If so, the project must be carried out whatever the costs, and even if other benefits are zero! Clearly, when evaluating lives saved from the project, a value less than infinity must be given.
 
Other people might argue that human life cannot be treated like other costs and benefits and put into mathematical calculations. But what are these people saying? That the question of lives saved should be excluded from the cost–benefit study? If so, the implication is that life has a zero value! Again this is clearly not the case.

In practice there are two approaches used to measuring the value of a human life.

The first uses the value of a statistical life (VSL). This is based on the amount extra the average person would need to be paid to work in a job where there is a known probability of losing their life. So if people on average needed to be paid an extra £10 000 to work in a job with a 1% chance of losing their life, they would be valuing a life at £1 000 000 (£10 000/0.01). To avoid the obvious problem of young people’s lives being valued the same as old people’s ones, even though a 20 year-old on average will live much longer than a 70 year-old, a more common measure is the value of a statistical life year (VSLY).

A problem with VSL or VSLY measures is that they only take into account the quantity of years of life lost or saved, not the quality.

A second measure rectifies this problem. This is the ‘quality of life adjusted year (QALY)’. This involves giving a value to a year of full health and then reducing it according to how much people’s quality of life is reduced by illness, injury or poverty. The problem with this measure is the moral one that a sick or disabled person’s life is being valued less than the life of a healthy person. But it is usual to make such adjustments when considering medical intervention with limited resources.

One adjustment often made to QALYs or VSLYs is to discount years, so that one year gained would be given the full value and each subsequent year would be discounted by a certain percentage from the previous year – say, 3%. This would give a lower weighting to years in the distant future than years in the near future and hence would reduce the gap in predicted gains from a policy between young and old people.

Conclusion

Given the uncertainties surrounding the measurement of the number of lives saved and the difficulties of assigning a value to them, it is not surprising that the conclusions of a cost–benefit analysis of a lockdown will be contentious. And we have yet to see what the long-term effects on the economy will be. But, at least a cost–benefit analysis of the lockdown can help to inform discussion and help to drive future policy decisions about tackling a second wave, whether internationally, nationally or locally.

Articles

Questions

  1. What are the arguments for and against putting a monetary value on a life saved?
  2. Are QALYs the best way of measuring lives saved from a policy such as a lockdown?
  3. If the outcomes of a lockdown are highly uncertain, does this strengthen or weaken the case for a lockdown? Explain.
  4. What specific problems are there in estimating the number of lives saved by a lockdown?
  5. How might the age distribution of people dying from Covid-19 affect the calculation of the cost of these deaths (or the benefits or avoiding them)?
  6. How might you estimate the costs to people who suffer long-term health effects from having had Covid-19?
  7. What are the arguments for and against using discounting in estimating future QALYs?
  8. The Department of Transport currently uses a figure of £1 958 303 (in 2018 prices) for the value of a life saved from a road safety project. Find out how this is figure derived and comment on it. See Box 12.5 in Economics 10th edition and Accident and casualty costs, Tables RAS60001 and RA60003, (Department of Transport, 2019).
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The global economic outlook: getting bleaker

Three international agencies, the IMF, the European Commission and the OECD, all publish six-monthly forecasts for a range of countries. As each agency’s forecasts have been published this year, so the forecasts for economic growth and other macroeconomic indicators, such as unemployment, have got more dire.

The IMF was the first to report. Its World Economic Outlook, published on 14 April, forecast that in the UK real GDP would fall by 6.5% in 2020 and rise by 4% in 2021 (not enough to restore GDP to 2019 levels); in the USA it would fall by 5.9% this year and rise by 4.7% next year; in the eurozone it would fall by 7.5% this year and rise by 4.7% next.

The European Commission was next to report. Its AMECO database was published on 6 May. This forecast that UK real GDP would fall by 8.3% this year and rise by 6% next; in the USA it would fall by 6.5% this year and rise by 4.9% next; in the eurozone it would fall by 7.7% this year and rise by 6.3% next.

The latest to report was the OECD on 10 June. The OECD Economic Outlook was the most gloomy. In fact, it produced two sets of forecasts.

The first, more optimistic one (but still more gloomy than the forecasts of the other two agencies) was based on the assumption that lockdowns would continue to be lifted and that there would be no second outbreak later in the year. This ‘single-hit scenario’ forecast that UK real GDP would fall by 11.5% this year and rise by 9% next (a similar picture to France and Italy); in the USA it would fall by 7.3% this year and rise by 4.1% next; in the eurozone it would fall by 9.1% this year and rise by 6.5% next.

The second set of OECD forecasts was based on the assumption that there would be a second wave of the virus and that lockdowns would have to be reinstated. Under this ‘double-hit scenario’, the UK’s GDP is forecast to fall by 14.0% this year and rise by 5.0 per cent next; in the USA it would fall by 8.5% this year and rise by 1.9% next; in the eurozone it would fall by 11.5% this year and rise by 3.5% next.


The first chart shows the four sets of forecasts (including two from the OECD) for a range of countries. The first four bars for each country are the forecasts for 2020; the other four bars for each country are for 2021. (Click here for a PowerPoint of the chart.)


The second chart shows unemployment rates from 2006. The figures for 2020 and 2021 are OECD forecasts based on the double-hit assumption. You can clearly see the dramatic rise in unemployment in all the countries in 2020. In some cases it is forecast that there will be a further rise in 2021. (Click here for a PowerPoint of the chart.)

As the OECD states:

In both scenarios, the recovery, after an initial, rapid resumption of activity, will take a long time to bring output back to pre-pandemic levels, and the crisis will leave long-lasting scars – a fall in living standards, high unemployment and weak investment. Job losses in the most affected sectors, such as tourism, hospitality and entertainment, will particularly hit low-skilled, young, and informal workers.

But why have the forecasts got gloomier? There are both demand- and supply-side reasons.

Aggregate demand has fallen more dramatically than originally anticipated. Lockdowns have lasted longer in many countries than governments had initially thought, with partial lockdowns, which replace them, taking a long time to lift. With less opportunity for people to go out and spend, consumption has fallen and saving has risen. Businesses that have shut, some permanently, have laid off workers or they have been furloughed on reduced incomes. This too has reduced spending. Even when travel restrictions are lifted, many people are reluctant to take holidays at home and abroad and to use public transport for fear of catching the virus. This reluctance has been higher than originally anticipated. Again, spending is lower than before. Even when restaurants, bars and other public venues are reopened, most operate at less than full capacity to allow for social distancing. Uncertainty about the future has discouraged firms from investing, adding to the fall in demand.


On the supply side, there has been considerable damage to capacity, with firms closing and both new and replacement investment being put on hold. Confidence in many sectors has plummeted as shown in the third chart which looks at business and consumer confidence in the EU. (Click here for a PowerPoint of the above chart.) Lack of confidence directly affects investment with both supply- and demand-side consequences.

Achieving a sustained recovery will require deft political and economic judgements by policymakers. What is more, people are increasingly calling for a different type of economy – one where growth is sustainable with less pollution and degradation of the environment and one where growth is more inclusive, where the benefits are shared more equally. As Angel Gurría, OECD Secretary-General, states in his speech launching the latest OECD Economic Outlook:

The aim should not be to go back to normal – normal was what got us where we are now.

Articles

OECD publications

Questions

  1. Why has the UK economy been particularly badly it by the Covid-19 pandemic?
  2. What will determine the size and timing of the ‘bounce back’?
  3. Why will the pandemic have “dire and long-lasting consequences for people, firms and governments”?
  4. Why have many people on low incomes faced harsher consequences than those on higher incomes?
  5. What are the likely environmental impacts of the pandemic and government measures to mitigate the effects?
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Should the post-Covid-19 recovery be a Green recovery?

Pre-Covid 19, the climate change movement had gathered momentum with climate activist Greta Thunberg regularly in the news and people around the world striking in protest of inadequate government action on the climate crisis. However, now in a world overtaken by the pandemic, climate change is no longer at the centre and appears a more distant threat. The majority of the large climate change events due to take place this year have been delayed and policy announcements are aimed at supporting the current economic hardships. This is not surprising nor debatable, but there is a risk that, as Covid-19 dominates the news, policy and debates for a long time to come, this will overshadow any environmental initiatives that were due to be implemented.

Governments around the globe are navigating their economies through the pandemic and starting to think about the future road to recovery. However, there is an argument that it doesn’t have to be a case of ‘either or’, as there is the potential for policies to address the Covid-19 crisis and climate change at the same time. How policy makers respond now could shape the fight against climate change for the future. One of the lessons from the pandemic is that quick responses to high impact risks are vital to reduce costs. With that in mind, and given the costs of climate change, it is arguable that now is the best time to address its challenges.

Climate change and Covid

It is estimated that there was a total global loss of $3tn caused by natural disasters over the past decade. By 2050, cumulative damages from climate change are predicted to reach $8 trillion, impoverishing the world as a whole by 3% of GDP and the poorest regions by more. Climate activists argue that despite the economic consequences of climate change, the action taken by governments has been insufficient. In 2015, the then Bank of England governor, Mark Carney warned: ‘Once climate change becomes a defining issue for financial stability, it may already be too late.’

However, since the pandemic struck all over the world, there have been positive consequences for the environment. Pollution levels started dropping fast as airlines grounded fleets, car travel came to a stop and industries shut down. With 2.6bn people living under restrictions under their country’s lockdown, there has also been an impact on the environment, not just the spread of the virus. Given that the lockdowns across the world have come at huge social and human costs, is now not the time to ensure that these improvements for the environment are not just temporary but ignite long-term changes?

Given the clear impacts and risks of Covid on peoples’ health, our ability to change our behaviour quickly has been striking. The importance of behaviour change has been brought to the centre and, arguably, it shows that we are capable of change when lives are at risk and are deemed more important than business-as-usual GDP growth. The application to climate change, however, is not as straightforward, as the costs to human lives are often viewed as a future problem.

Global cooperation

Dr Laure de Preux, Assistant Professor of Economics at Imperial College Business School, highlights the important role that cooperation across borders plays in the face of a global crisis like Coronavirus, and how that can be applied to the fight against climate change.

The big challenges the world is facing, including the climate change crisis, can only be dealt with efficiently through international cooperation. We cannot only act individually; the benefits of our actions are multiplied if integrated into a global strategy. In the case of COVID-19, social distancing measures can only be truly effective if they are adopted at a large scale.

World leaders are aware that their economies now face one of the most severe recessions in history as a consequence of the coronavirus restrictions. Governments are going to have to dedicate huge budgets to enable the economic activity to resume again. This presents a unique challenge, but also a massive opportunity for global cooperation. The question to be asked, therefore, is that if these stimulus packages are a one-off chance to transform the economy, how should the government spend it and what should be their focus? Should the recovery policies focus on creating a greener economy?

The European Union unveiled what it is calling the biggest ‘green’ stimulus package in history. Ursula von der Leyen, the European Commission president, told European Parliament members that this issue is about all nations and it is bigger than any one of them. The deputy Prime Minister of Spain, Teresa Ribera, states that there is a greater risk by not acting in this way. She argues that if the recovery is not green, then it will be nothing but a short-cut to solve the current problems rather than a true economic recovery.

It is not just in Europe where the recovery has an environment focus. Joe Biden is believed to be planning a similarly huge green stimulus package for the US. The model echoes the vast investment projects of the New Deal that helped lift America out of the Great Depression in the 1930s.

There are sound economic reasons why politicians see green technology as a prudent investment. Renewable energy is now often cheaper than fossil fuels in large parts of the world and the technologies are proven and can be built at scale today. The argument for renewables providing a pathway for clean future growth is based on the logic of much of manufacturing – the more you produce, the cheaper it gets. However, China does not appear to have similar plans for their recovery. China produces almost a third of the world’s emissions, as much as the USA and the EU combined. At the annual National People’s Congress, there was no indication that the big expansion of coal-fired electricity generation would be reversed, even though it is also expanding the production of renewable energy. China expanded its coal-fired power stations as a key part of its stimulus package after the 2008 financial crisis.

Policy decisions

The UK government receives ongoing pressure from energy companies. The boss of energy giant SSE, Alistair Phillips-Davies has warned that a failure to deal with climate change could eventually have a greater economic impact than coronavirus. SSE wants the UK government to encourage private investment in renewables by giving the green light to big new projects, such as hydrogen and carbon capture plants and boosting electric vehicles. Despite the impacts of climate change not being immediately felt in comparison to Covid-19, Phillips-Davies argues that a failure to deal with climate change could lead to great long-term impacts:

While it is still too early to predict with confidence the full human, social and economic impact of coronavirus, we can say with certainty that significant investment will be needed to rebuild the UK economy in its wake.

It is clear that any pandemic-induced financial decisions made over the next 12 months will shape the global economy for the next decade. The full impact of the virus on climate change will be determined by the world’s stimulus measures adopted post-pandemic. Following the 2008 financial crisis, the energy-intensive stimulus measures that followed, particularly in China, boosted emissions. Therefore, if we are to meet the reduction in emissions target our response needs to be green, helping to shape a sustainable future. Dr Alex Koberle, of the Grantham Institute at Imperial College London, argues that Governments should take time to reflect, learn from past mistakes and redirect development towards a sustainable future.

Shouldn’t growth be given priority?

With 1.6 billion people working in the informal economy worldwide reckoned to be in immediate danger of losing their livelihoods (according to the International Labour Organization), is now the right time to be focusing on the climate? Industries such as airlines and car manufacturing are strategic industries, employing millions of people. Headlines of longer-term environmental targets will be given less importance than headlines of job losses. Recovery relies on the government finding ways to employ lots and lots of people. There is a close relationship between real GDP, employment and energy consumption. Therefore, any policies aimed at reducing greenhouse gas emissions, unless carefully directed, could reduce economic growth and employment for both less and more developed economies. Such policies would increase the cost of conventional energy sharply.

Critics of a green energy policy for recovery argue that investing in renewable energy ignores the adverse effects of reduced investment and higher energy costs in other sectors. By governments prioritising policy to focus on the environment, they could harm the ability of most people to improve their own circumstances, especially given the terrible economic shock caused by the lockdowns.

Conclusion

With the majority of news in recent months providing little joy, there has been at least the positive impact on the environment. However, advocates say it not a cause for celebration and warn that any benefits are likely to be short lived. There have been some positive behavioural impacts but the true test will be what happens in the recovery phase. If the focus is returned to business as usual what happens to the targets actioned prior to Covid-19?

The immediate priority of all governments right now is to control the pandemic and to save lives. As their policy interventions have an impact and economies start to emerge from this crisis, then there is an important debate to be had about how new investments can help create a cleaner, greener recovery. We have learnt from the current pandemic that changes can be made when consequences are imminent, however, climate change is a threat that doesn’t go away, and is arguably just as urgent. Solutions to both crises can be integrated into a coherent response to propel the global economy towards sustainable growth and increased resilience.

Articles

Letter

Questions

  1. Are government attempts to reduce the impact of climate change beneficial or harmful to UK firms?
  2. What policy instruments can the government use to increase economic activity?
  3. How does an increase in investment affect aggregate demand?
  4. What are the costs and benefits of economic growth?
  5. Why can climate change be described as a market failure?
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Private schools warned regarding price fixing

Like most other sectors of the economy, private schools have been significantly affected by the coronavirus pandemic. As with all schools, they have been restricted to providing their pupils with online instruction. In addition, some parents are likely to have seen their ability to pay the high fees private schools charge restricted. As a result of both of these factors, private schools have been forced to look into providing discounts or refunds on their fees. However, the UK competition authority have received evidence that these schools may have been communicating with each other over how they will set these fee reductions. The authority is concerned that this will allow the schools to restrict the discounts and keep their fees higher.

In other markets (see here and here) the competition authorities have been prepared to relax certain elements of competition law in light of the coronavirus situation. However, price fixing is the severest breach of competition law and the Competition and Markets Authority (CMA) has been clear that this continues to be the case in the current climate. A CMA spokesperson said:

Where cooperation amongst businesses or other organisations is necessary to protect consumers in the coronavirus outbreak, the CMA will not take enforcement action. But we will not tolerate organisations agreeing prices or exchanging commercially sensitive information on future pricing or business strategies with their competitors, where this is not necessary to meet the needs of the current situation.

Therefore, the CMA has written to the Independent Schools Council and other bodies representing the private school sector. This letter made clear that communicating over the fee reductions would be very likely to breach competition law and could result in fines being imposed.

This warning is important since the sector has a history of illegal communication between schools. In 2006 the Office of Fair Trading (OFT) (one of the predecessors to the CMA) imposed fines when it discovered that 50 of them, including Eton and Harrow, had for a number of years shared information on the fees they intended to charge. The OFT discovered that this had taken place following evidence obtained by a student who hacked into their school’s computer system. Here the student found information on the intended fees of competitor schools and leaked this information to the press. It is clear that the CMA will keep a close eye on private schools as they react to the ongoing pandemic.

Articles

Questions

  1. What are the key features of the private school sector? Is this a market where you would expect competition to be intense?
  2. Why is price fixing the severest breach of competition law?
  3. Assuming communication between the private schools is eradicated, how would you expect the sector to be affected by the coronavirus pandemic?
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Wealth and Income Inequality in Britain

The issue of inequality has come into increasing focus over recent years. The impact of the COVID-19 pandemic raises further concerns that these inequalities may be exacerbated further. Here we provide an overview of some of the key patterns in current levels of wealth and income inequality in Britain. They show, for example, the markedly higher degree of inequality in wealth relative to income, the importance of property wealth and private pension wealth in determining levels of wealth, and the considerable variation in average wealth levels of households by age and location.

According to the 6th round of the Wealth and Assets Survey the aggregate wealth of British households was £14.63 trillion in April 2016 to March 2018. This compares with £12.57 trillion in the previous survey which ran from April 2014 to March 2016. This amounts to a 16.3 per cent nominal increase. In real terms, after adjusting for consumer price inflation, the increase was 13.1 per cent. Furthermore, when compared with the first round of the survey in July 2006 to June 2008, there has been a nominal increase in the aggregate wealth of British households of 74 per cent and a real increase of 41 per cent.

What is wealth?

An important question to ask when reflecting on the growth and distribution of wealth across households is what wealth comprises. In fact, it comprises one of four components:

  • Net Financial wealth – the value of financial assets (savings and financial investments) less any financial liabilities (loans and arrears)
  • Physical wealth – the value of household contents, possessions, valuables and vehicles
  • Private pension wealth – the value of private pensions, such as occupational pensions and personal pensions
  • Net property wealth – the value of any property owned (including other land/properties owned abroad) less the value of any loans or mortgages secured on these properties.

Figure 1 shows the evolution of aggregate wealth over the last two surveys (at constant 2016-18 prices) by the four component parts. Two components dominate the aggregate wealth of British households: property wealth (35 per cent) and private pension wealth (41-42 per cent). Financial wealth is the third largest component (14 per cent), while property wealth is the smallest component (9 to 10 per cent). (Click here for a PowerPoint of the chart.)

Trends in the average wealth of households

To help contextualise the size of wealth and begin to think about its distribution, rather than look at aggregate household wealth we can instead look at the average wealth of British households.

Figure 2 shows the average wealth (at constant 2016-18 prices) as measured by the mean (aggregate divided by the number of households) and the median (the middle household). The mean wealth of households is seen to be greater than their median wealth. In April 2016 to March 2018, average wealth as measured by the mean was £564,300 (an increase of 40.3 per cent over July 2006 to June 2008), whilst the average wealth of each household as measured by the median was £286,600 (an increase of 28.5 per cent over July 2006 to June 2008). (Click here for a PowerPoint of the chart.)

The higher mean value of wealth relative to the median value shows that the distribution of wealth is unequal. Therefore, the mean-to-median ratio is an indicator of inequality. In April 2016 to March 2018 the mean-to-median ratio was 1.97, up from 1.94 in April 2014 to March 2016 and 1.77 in July 2008 to June 2010, and 1.8 in the first survey in July 2006 to June 2008. This metric is therefore consistent with a more unequal distribution of wealth having arisen since the second survey in July 2008 to June 2010, a period during which the UK and global economy was been buffeted by the effects of the financial crisis and the associated economic downturn.

Trends in the average income of households

Figure 3 shows the mean and median values of disposable income (adjusted for the number and age of individuals comprising each household). Mean disposable income of UK households in financial year ending (FYE) 2018 was £35,928, a 0.5 per cent real decrease over FYE 2017, whilst median wealth (middle household) was £29,598 in FYE 2018, a 1.5 per cent real increase over FYE 2017. (Click here for a PowerPoint of the chart.)

The higher mean value of disposable income relative to the median value is indicative of inequality in disposable income. In FYE 2018 the mean-to-median ratio for disposable income was 1.21, down from 1.24 in FYE 2017 and a peak of 1.27 in FYE 2014, but higher than the 1.10 in 1978. The longer-term growth in the inequality of income helps to exacerbate existing wealth inequalities.

Comparing the inequality of income and wealth

Figure 4 shows starkly the current inequality in wealth as compared to that in income. It does so by plotting their respective Lorenz curves. The curves show the proportion of overall wealth or income attributable to a given proportion of households. For example, 50 per cent of households have close to 28 per cent of total disposable income and a mere 8.5 per cent of aggregate wealth. (Click here for a PowerPoint of the chart.)

The inequality shown by the Lorenz curves is especially startling when we look at the top and bottom deciles. The bottom decile has just 2.9 per cent of income and only 0.07 per cent of wealth. Meanwhile the top 10 per cent of households have 28.5 per cent of income, almost the same as the first 50 percent of households, and some 44.6 per cent of wealth, with the previous 90 per cent of households having 55.4 per cent of wealth.

The Lorenz curves allow for the calculation of the Gini coefficient. It measures the area between the Lorenz curve and the 45 degree line consistent with zero inequality relative to the total area below the 45 degree line. Therefore, the Gini coefficient can take a value of between 0% (no inequality) and 100% (total inequality – where one person has all the wealth). Unsurprisingly whilst the Gini coefficient for disposable income in the UK in FYE 2018 was 34.7 per cent, that for aggregate wealth in Great Britain in April 2016 to March 2018 was significantly higher at 63.3 per cent.

The Gini coefficient for disposable income has risen from 25.5 per cent in 1977 to a peak in FYE 2008 of 38.6 per cent. It has therefore eased during the 2010s, but is nonetheless 13 percentage points higher today than it was four decades ago. Meanwhile, the Gini coefficient for wealth at the time of the first survey from July 2006 to June 2008 was 61 per cent. It has been unchanged at 63 percent over the last three surveys.

Inequality in wealth by component, location and age

It is important to recognise the inequalities in the components of wealth. This has particular importance when we are trying to understand how wealth varies by household characteristics, such as age and location.

Figure 5 shows that the highest Gini coefficient is for net financial wealth. This stood at 91 per cent in April 2016 to March 2018. This extremely high figure shows the very high levels of inequatity in net financial wealth. This reflects the fact that some households find themselves with negative net financial wealth, such that their debts exceed their assets, whilst, on the other hand, some households can have large sums in financial investments. (Click here for a PowerPoint of the chart.)

We saw at the outset that the largest two components of wealth are property wealth and private pension wealth. The Gini coefficients of these two have in recent times moved in opposite directions by roughly similar magnitudes. This means that their effects on the overall Gini coefficient have offset one another. Perhaps for many people the rise in Gini coeffcient for property from 62 per cent in July 2006 to June 2008 to 66 per cent in April 2016 to March 2018 is the inequality measure that resonates most. This is reflected in regional disparities in wealth.

Figure 6 shows the geographical disparity of median household wealth across Britain. The regions with the highest median wealth are the South East, South West, London and the East of England. They have the highest contributions from net property wealth (40.4 per cent, 35.6 per cent, 41.7 per cent and 37.2 per cent respectively). The region with the lowest median total wealth, the North East, has the least total wealth in net property wealth (24.8 per cent). (Click here for a PowerPoint of the chart.)

Property wealth and private pension wealth also contribute to disparities in wealth by the age of the head of the household, also known as the household reference person or HRP. In April 2016 to March 2018 the mean wealth where the HRP is 25-34 was £125,700, rising to £859,200 where the HRP is 55-64 and then falling to £692,300 when the HRP is 65 or over. This is consistent with households accruing wealth over time and the using wealth to help fund retirement.

Where the age of the HRP is 55-64, mean property wealth in April 2016 to March 2018 was £255,800 compared to £53,700 where the HRP is 25-34. Meanwhile, where the age of the HRP is 55-64, mean private pension wealth was £449,100 compared to just £32,300 where the HRP is 25-34. In respect of property wealth, the deterioration in the affordability of owner-occupied housing over many years will impact especially hard on younger households. This will therefore tend to exacerbate inter-generational wealth inequality.

Whilst this briefing provides an overview of recent patterns in income and wealth inequality in Britain, the articles and press releases below consider the impact that the COVID-19 pandemic may have on inequalities.

Articles and Press Releases

ONS Bulletins

Questions

  1. In what ways can we use statistics to help measure and inform our analysis of inequality?
  2. In what ways can income inequality impact on wealth inequality?
  3. How can wealth inequality impact on income inequality?
  4. What might explain why wealth inequality is greater than income inequality?
  5. Explain how Lorenz curves help to generate Gini coefficients.
  6. Why would we expect the wealth of households with a younger household reference person (HRP) to be lower than that of a household with an older HRP? Would we expect this average to rise over all age ranges?
  7. If you were advising a government on policies to reduce income and wealth inequalities what sort of measures might you suggest?
  8. What is the difference between original income and disposable income?
  9. What is the difference between disposable income and equivalised disposable income?
  10. What role does the housing market play in affecting wealth inequality?
  11. Why is net financial wealth so unequally distributed?
  12. What is meant by health inequality? Of what significance is this for income and wealth inequality?
  13. What is meant by social mobility? Of what significance is this for income and wealth inequality?