Despite an increasingly loud conversation about inequality, its root causes remain intact. Stewart Lansley argues that the government has the power to tackle the issue if only it would consider new models of debt financing

Rising inequality is not just a matter of social justice. It also makes economies much more prone to economic crisis. And the most recent evidence shows that the gap between rich and poor is still on the rise.

Despite the growing verbal war against ever-rising inequality, its root cause – the over dominance of private capital in the UK economy and the growing concentration of capital ownership – remains intact.

There are several ways of tackling such concentration. For example, through higher taxation on capital (as proposed by Thomas Piketty). Or by the encouragement of alternative business models – from co-operatives to partnerships – that share the fruits of ownership more widely. But another powerful weapon that has been largely ignored in the UK is the collectively owned social wealth fund.

This type of fund aims to capture some of the financial gains from the private ownership of capital and use the proceeds for wider community benefit, such as investment in social infrastructure. By cutting back the growth of private wealth and extending wider opportunities, such funds would also help tackle inequality from both ends.

“It makes little sense to use long term capital assets to finance a temporary revenue gap – the family silver can only be sold once.”

The creation of one or more social funds would help secure a more even economic balance between collective and private ownership, while the returns to the funds would be shared across the population. By adding over time to the value of public assets, a side of the economy too often ignored, they would also help to improve the overall balance sheet of public finances, providing a counter-weight to the national debt.

Learning from sovereign wealth funds

In recent decades more than 50 countries – from Norway to Singapore – have introduced state-owned sovereign wealth funds. These have mostly been resourced through the exploitation of oil. Many are run in a very closed and non-transparent way as investment arms of the state, sometimes without obvious public benefit. But several examples offer a blueprint for a model social wealth fund.

Since the early 1980s for example, Alaska has operated a highly popular fund which pays an annual dividend to all citizens. Perhaps the most successful and transparent example of these funds is the US$700 billion Norwegian Fund. Highly popular with the public, and overseen by an independent ethics committee, it holds 1% of global equities.

While Britain has spurned the opportunity to finance such a fund from part of the proceeds of North Sea Oil, it is not too late to launch one or more funds using alternative revenue. For example, the proceeds of the privatisation juggernaut – itself a key driver of inequality – is set to deliver £32bn in revenue this year alone. Instead of going lock, stock and barrel into the Treasury black hole, it could be paid directly into a public investment fund.

Like what you’re reading? Get your Positive News subscription here

Imagine the shape of the British economy today if such a fund had been established with the sale of British Gas and British Telecom in the mid-1980s. With close to £200bn of sales since then, and part of the fund reinvested, it would have grown to represent a very sizeable chunk of the economy’s overall wealth. This would have provided a powerful balance to private capital. It could have funded a range of socially useful projects aimed at improving opportunity and social mobility, through, for example, tackling youth unemployment.

The government now argues that the money raised from future sales – from RBS to the student loan book – will help pay down the deficit. Yet it makes little sense to use long term capital assets to finance a temporary revenue gap. The family silver can only be sold once. And although these sales can reduce the cash debt at a given moment, they aggravate the problem of public indebtedness by reducing the value of public assets.

Public debt is much less of an issue if it is balanced in part by a decent and growing asset base. But soon Britain will be all debt and no assets. This is indefensible short-termism that will be paid for heavily by subsequent generations.

Wider role

Social wealth funds could also play a much wider role in the economy. For example, the proceeds of right-to-buy, now to be extended to housing association tenants, could be paid into a social housing fund to fund new housing, instead of being colonised by the Treasury.

“Social wealth funds have the potential to be a powerful weapon in the anti-inequality armoury.”

Another possibility, first advocated by the Nobel laureate James Meade in the 1960s, would be to finance such a fund through the dilution of existing capital ownership. This could be achieved through, for example, an additional modest levy on share ownership (and additional to the existing stamp duty on share transactions). Such an approach would generate a sizeable fund over time, enough to fund a range of social programmes and possibly an annual citizen’s dividend, through a modest contribution from a very privileged social group.

Depending on how they are financed, these funds have the potential to be a powerful weapon in the anti-inequality armoury, they would boost social investment and greatly improve the overall balance sheet of the public finances in the process.

First published by The Conversation

Photo credit: © Jon Nicholls

  • Anna Zimmerman

    Whilst these are all good initiatives, the salient point is that the UK government has absolutely no desire to close the gap between the wealthy and the poor. The problem has never been the lack of options, but the political will to enforce them when those currently in power are so steeped in neoliberal ideology that they are impervious to good sense. The only option the public have, in the absence of a better government, is to build alternative economic and social support systems and as much as possible bypass those that keep the elites in power…and to work for long term political transformation.

  • Archbishop Jonathan Blake

    It is clear that the present economic system is failing the world. New, more equitable, yet incentive inclined, and work rewarding economic models must be explored.

  • Pingback: Find Alternative Business Funding | SEO Zen Bonus()

  • Malin

    In Okehampton in Devon there is a group looking to set up local power generation. Okehampton has two rivers plus leats, and has in the past produced hydro-electricity. And to that, despite the reputation for rain it does manage a good amount of sunshine hours for solar power. The group wishes to provide power so that money spend on electricity can remain locally rather than going to big companies often based in other countries. This money will be reinvested locally. Local people will finance, it will provide local work, and then the money will help the local community in turn. It’s early stages but I have high hopes.
    Sometimes you just have to ignore those at the top and just do things anyway. Thankfully our local government organisations are supportive.