By Professor Glauco De Vita (CBiS, Coventry University), Dr Yun Luo (University of Southampton), Dr Khine S. Kyaw (Cardiff Metropolitan University) and Dr Kexing Li (CBiS, Coventry University)

Rising public debt is one of the most pressing political and economic issues in the UK, with the ever-mounting burden of public indebtedness leading media commentators to go as far as claiming that ‘Debt annihilation is approaching’ (The Telegraph, 3 February 2024).

Although many ways in which excessive public debt can hurt an economy have already been documented in the literature, we are interested in uncovering whether rising public debt levels may have contributed to another significant negative trend in the UK, namely, the plague of growing wealth inequality; not just stemming from increasing poverty but from the expanding excess wealth accumulated at the top.

Indeed, since the mid-1980s, the UK wealth shares of the top 1% and 10% have risen dramatically, with the richest 1% now holding around a fifth of total wealth, while the top decile about 60%. Over the same period the total UK government debt pile more than trebled, reaching over 100% of annual national income in 2023, levels unseen since the post-war period (The Guardian, 21 June 2023).

Although much has been written on the causes of wealth inequality, little is known on whether public debt affects wealth concentration at the top of the wealth distribution. In our recently funded Leverhulme research project (RPG-2023-099) we investigated whether rising public debt levels benefit the wealthy.

What we knew, and didn’t know, before the project

The debate about the widening gap between the ‘haves’ and ‘have-nots’ gained momentum with the publication of Piketty’s Capital in the Twenty-First Century, where he argued that the tendency of returns on capital – rather than income from labour – to exceed the rate of economic growth, is the main driver of wealth concentration at the top.

Since then, research on the causes of a growing wealth gap has identified many potential drivers such as monetary policy, tax evasion, house prices, and mortality rates (see, e.g., Magwedere & Marovza, 2022; Zucman, 2015; Fuller et al., 2020; Berman & Morelli, 2021) Although recent theoretical contributions point to a link between debt and wealth inequality, the empirical question of whether rising levels of public debt make the wealthy richer, remains largely unanswered.

The argument that rising public debt may cause the further accumulation of wealth by the rich seems intuitively plausible. When governments borrow, they must then pay interests on this debt, with money usually raised from taxation. This process effectively entails a transfer of wealth from taxpayers to bondholders. Since government bonds are held in large part by the wealthy rather than the poor, this tax–and–interest–payment cycle inevitably redistributes wealth in favour of the rich. Recent theoretical studies provide more complex hypotheses on the debt-inequality transmission channel (see, e.g., Maebayashi and Konishi, 2019). These studies’ predictions are mixed, depending on a range of assumptions related to levels of initial wealth, whether multi-period overlapping generations are included in the models, and the redistributive nature of taxes on bequests by the rich. Yet, to date, no attention has been paid to letting the data speak.

Part of the reason for the absence of such evidence is the lack of availability of good quality wealth data, which are sparse at best. Using a relatively new wealth inequality database that combines different data sources, we investigated whether higher levels of UK public debt increase wealth concentration at the top 1% and 10% of the wealth distribution.

What our data tell us

We found that over the past five decades, higher debt levels significantly increased the concentration of wealth of the richest 1% and 10% of the UK population. Our data show that a 1% rise in public debt leads, on average, to a further increase in the wealth share held by the top 1% and 10% of between 0.08 and 0.11 percent. Although these percentages may seem small, it important to stress that they represent a multiplier of the further accumulation of wealth by the rich on the share of the total UK wealth they already possess, roughly 20% and 60%, respectively. Massive amounts in absolute terms!

So what?

By uncovering the role that high debt plays in fuelling the increase in top wealth shares, our findings alert to a further danger from the accumulation of large public deficits, and their unsustainability. Government policy aimed at reducing initial inequality through borrowing may, in fact, increase wealth inequality in the long run.

The question of what could be done in response to the concomitant rise in public debt and wealth inequality is, therefore, best addressed by reopening the policy debate about introducing a broad-based tax on the individual ownership of net wealth, i.e. on most (or all) type of asset, not just capital gains and inheritance.  

Taxing wealth

Taxing the wealth of the rich and/or the super-rich (including assets held offshore) in this way would bring about a virtuous cycle since Government revenues raised in this way would reduce the need for higher government borrowing. This, in turn, would avoid further debt–induced rises in the wealth concentrated at the top. After all, wealth remains relatively under-taxed in the UK (The Guardian, 23 January 2024) vis-à-vis income from labour or even consumption. That said, the new Labour Government appears to have the rich in its sight, with the UK’s richest facing the prospect of sharp Labour tax hikes on wealth in the next October Budget (The Business Times, 29 August 2024).

Why does it matter?

Wealth inequality matters. A widening gap between the rich and the poor can be a serious threat not only to economic growth but social and political stability too. ‘Reducing inequalities’ also features as one of the United Nations Sustainable Development Goals (SDG 10) that were adopted as a universal call to action to achieve a better future for all.

Through understanding the impact of organisations’ activities, behaviours and policies, the Centre for Business in Society at Coventry University seeks to promote responsibility, to change behaviours, and to achieve better outcomes for economies, societies and the individual.

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