Why Britons are much wealthier than we think
Britons are much better off and the UK is a wealthier country than the GDP data suggests, says Max King. That’s likely to continue whatever the short term disruptions. Here's why.
Nearly all of the £21bn market value of Scottish Mortgage Trust (LSE: SMT) represents investment returns rather than capital invested; nearly all its returns have come from overseas; and nearly all its investors are from the UK.
This means that via SMT alone, UK investors have accumulated £21bn of wealth from overseas businesses.
If this analysis were extended to all funds with UK shareholders investing overseas and all overseas companies with UK shareholders, either direct or through pension funds, it is clear that the British have built a massive store of wealth from, it has to be said, the hard work of others.
Britain is better off than the statistics might suggest
In addition, Britons have accumulated other assets overseas including bonds, property and bank deposits. This, of course, is in addition to their domestic assets including equities, bonds, cash and property – always remembering that the UK still has a relatively high level of home ownership.
With GDP per capita, according to the World Bank, of $45,700, 10% higher than the UK, it is generally assumed that Germans are better off than the British. But just over 50% of German households own their homes, compared with 67% in the UK. The UK figure is below the peak of 71% in 2003, but it is rising and a clear majority of UK owners now own outright.
When it comes to pensions, Germans invest in government or blue-chip bonds. In the past, this produced a reasonable rate of return in real (that is, after-inflation) terms, though less than equities, but with bond yields now negative yet inflation over 4%, the real value of German pensions is falling. Other savings are usually put into bank deposits, on which historic returns have been lower than on bonds.
This hasn’t helped Germany’s economy much as these savings are funnelled via the Bundesbank to the European Central Bank, who then pass them to the central banks of southern Europe via the Target 2 mechanism to cover the savings shortfalls there.
Other European countries have higher levels of home and equity ownership than Germany but only the Netherlands is broadly comparable with the UK in terms of equity ownership. What this means is that the UK has a huge wealth advantage over Europe. Germany may have a more efficient economy with higher average pay than the UK but Germans squander their advantage by investing their savings poorly. Per capita, Britain is almost certainly wealthier.
Inevitably, wealth in the UK is unevenly spread but a high level of home ownership, broad enrolment in personal pensions and, now, auto-enrolment in employer pensions, ensures that many benefit from the growth in asset values and this gives them additional spending power. In Europe, wealth seems to be more concentrated with ultra-wealthy oligarchs playing a much bigger role in public life than in the UK.
Wealth well beyond that generated by earnings helps explain why the UK is able to run a persistent current account deficit. Britain is “not living beyond its means” as the Jeremiahs like to claim, but using investment returns to augment its living standards. For example, in exotic holiday destinations, there always seem to be far more British and far fewer Germans than the GDP per capita data would suggest.
Britain is likely to continue growing richer
With equity and property returns holding up but returns on cash and government bonds having plummeted, Britain’s wealth advantage is likely to increase. There is a risk that the government will attack pensions and savings through taxation, or direct them into white elephant “infrastructure” projects with low (or negative) returns but, hopefully, it won’t want to kill the goose that lays the golden egg.
The golden egg is the rapidly growing stream of capital gains tax, stamp duty, inheritance tax and other wealth taxes which will continue to relieve the pressure on public finances and finance redistributive policies. Unless, that is, taxes are increased beyond the point at which diminishing returns set in.
The trends are all in the right direction. Money is pouring into Sipps; employer-led defined-contribution pension schemes, via auto-enrolment, are making their members much more aware of investment returns; and internet dealing is encouraging direct share dealing. Some of this is reflected in the new hobby of short-term trading but there have been strong inflows, especially from the young, into investment trusts.
Data on wealth is extremely hard to collect so statistics are likely to be inaccurate and comparisons between countries highly unreliable. For what it’s worth, estimates of US net wealth per household show a little over $1m compared with half that in the UK. German data suggests $250,000 and French $280,000. The margin for error in these numbers is large but the broad picture looks about right.
The UK has become a far wealthier country than the GDP data suggests and that out-performance is likely to continue whatever the short term disruptions.