8/30/2019

A Bigger Welfare State Makes the Wealth Inequality Labour Bemoans Worse

"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 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."