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Weighing scales to represent social disparity

Do higher public and private debt levels benefit the wealthy?

Funder

The Leverhulme Trust

Value

£59,156.00

Project dates

01/12/2023 - 30/11/2024

Project team

  • Principal Applicant: Professor Glauco De Vita, CBiS, Coventry University
  • Dr Yun Luo, University of Southampton
  • Dr Khine S. Kyaw, Cardiff Metropolitan University
  • Dr Kexing Li, Research Assistant, CBiS, Coventry University

 

 

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Project overview

High debt levels and growing inequality are arguably the two most concerning political, economic and social issues in Western Europe. In the UK these trends have been particularly pronounced, attracting much public interest. Despite the concomitant rise in recent decades in both debt levels (public as well as private) and wealth inequality, empirical evidence on the relationship is absent in existing literature.

This is striking especially since recent theoretical contributions point to a link between debt and wealth inequality. This project contributes to the debate by investigating empirically whether higher levels of UK public and household debt increase the UK wealth concentration at the top 1% and 10% of the wealth distribution. This study is the first to investigate empirically whether rising levels of UK public and household debt benefit the wealthy and thus widen the gap between the ‘haves’ and ‘have-nots’.

Project objectives

  1. To conduct a stylised facts analysis of the evolution of UK public debt, UK private (household) debt and UK wealth inequality from the post-war period to date.
  2. To undertake a comprehensive review of the theoretical literature postulating a link between wealth concentration/inequality and debt (public as well as private), under both distortionary and non-distortionary taxation.
  3. To test empirically the significance of public debt as well as household debt on wealth inequality (top 1% and 10% wealth shares) while controlling for additional factors theoretically expected to have an impact on wealth concentration at the top of the wealth distribution (taxation, income inequality, stock value, interest rates, housing and rental prices, welfare spending, etc.).
  4. To extend the analysis to a cross-country setting by estimating an equivalent fixed effects panel data model for the UK, USA and France.
  5. To draw relevant implications, formulate policy recommendations and disseminate the research outcomes.

Key findings

Using the Autoregressive Distributed Lag (ARDL) cointegration approach on UK data from 1970 to 2019, the results show that higher debt levels, both public and private, increase concentration in the top 1% and 10% wealth shares. For both top wealth shares, the effect is most pronounced in the case of private, household debt. Higher stock value is also found to increase wealth inequality while welfare spending and general taxation have a negative effect.

Fixed effects panel estimation on a small cross-country dataset that also includes France and the USA provides broad support to the time series results for the UK. These robustness estimations confirm that the wealthiest 1% and 10% benefit from increases in both public and household debt levels as well as rises in the value of stock. The panel estimates also suggest that while rising house prices have a mitigating effect on wealth inequality, thereby reducing disparity across the wealth distribution, rising rental housing values substantially increase the wealth captured by the richest 1%. Under these cross-country specifications, the top 1% and 10% wealth shares are not significantly moved by social spending, taxation, and interest rates.

Impact statement

A widening gap between the rich and the poor can be a serious threat not only to economic growth but to social and political stability too. ‘Reducing inequalities within and between countries’ also features as one of the 17 United Nations Sustainable Development Goals (SDG 10) that were adopted in 2015 as a universal call to action to achieve a better and more sustainable future for all.

Although the project has just been completed and impact is inevitably still in its very early stages, especially by virtue of its originality, the contribution the study makes is expected to be of significance also beyond academia, with important implications for policymakers in the UK and internationally. Wealth inequality is not a phenomenon that can be left to fate or as a casual by-product of existing economic conditions, it can be reversed through policies and reforms. The same can be said of growing public debt, which is also a political choice, not an inevitability. Our findings suggest a potential virtuous cycle in taxing wealth more effectively (rather than relying solely on general taxation and welfare spending in the fight against inequality) as government revenue raised in this way would reduce the need for higher government borrowing which, in turn, would avoid further debt-induced rises in the wealth concentrated at the top.

By shedding light on the role of high debt levels on top wealth shares our findings can help policymakers better understand the trade-offs involved in attempting to reduce wealth inequality via increased government borrowing and the further accumulation of public debt. Further important implications for policymakers flow from our findings with respect to the potential influence of household debt on wealth inequality, and the effects of other control variables included in our models such as house prices, rental prices, and welfare spending.

Outputs

 Queen’s Award for Enterprise Logo
University of the year shortlisted
QS Five Star Rating 2023
TEF Gold 2023