Analysis: The rich get richer in poor old Britain
'Bloated and parasitic', 'a social and moral disgrace' ... the pay gap is surging but many of Britain's top earners don't create wealth, they just redistribute it to their wallets
Sunday 19 March 2006
In the past decade and a half, Britain has been going through a gold-tinged transformation - a great surge in both the numbers of the mega-rich and in the level of their wealth. It is a trend that has, if anything, accelerated under Tony Blair.
Official figures show that the share of wealth owned by the top 1 per cent rose from a historic low of 17 per cent in 1989 to 23 per cent in 2002. According to the annual Rich Lists published by The Sunday Times, the number of billionaires in Britain - a mix of entre- preneurs, aristocrats, deal makers and tax exiles - has more than tripled since 1990, while for those worth over £100m, it has risen more than fivefold. The Datamonitor consultancy reports that, since 1997, the number with "liquid assets" of over £5m has more than doubled to 9,000, despite the carnage of the stock market crash in 2000.
This is tearaway growth on a scale not seen for close to a century, and the forward march of the super-rich has profound implications for Britain: 25 years ago, this was one of the most equal societies in the developed world; today it is one of the most unequal.
We are not yet back to the conditions that prevailed up until the 1920s, when a tiny proportion of the population - a mix of the landed aristocracy and the new industrial and commercial barons - held an even greater share of the nation's wealth. But in those times, the constraints on wealth making were much weaker, monopolies could operate largely unchecked, the Inland Revenue was in its infancy, regulations were minimal. That degree of inequality was eventually to prove unsustainable.
What is surprising is how in today's much more mature democracy, the top few thousand individuals are able to win such large shares of the nation's economic wealth.
This boom has been welcomed across most of the political divide, with Mr Blair applauding the rise of a new wealthy super-class. As Peter Mandelson once put it, New Labour is relaxed about people getting "filthy rich".
Supporters of the wealth explosion make three main arguments: that it reflects an increasingly meritocratic Britain; that it is being powered by the rise of a new generation of exceptionally driven and skilful entre- preneurs and business leaders; that higher levels of personal wealth harm nobody else. So do these arguments stand up?
There are, of course, lots of examples of self-made multi-millionaires who have not inherited a business or a fortune, just as there always have been. Sir Tom Hunter and Sir Alan Sugar both left school at 16 and were small traders before founding successful businesses. But, as my book Rich Britain shows, most of today's super-wealthy in fact still come from a relatively privileged background. "New money" is not, in general, a sign of a more opportunistic culture.
According to one detailed study by the historian Tom Nicholas: "Becoming a business leader in Britain is still largely determined by the interconnected characteristics of a wealthy family and a prestige education ... there has been no democratisation of British business over the last century and a half."
There is also little evidence that today's financial elite is presiding over an entrepreneurial and business renaissance, sufficient to justify the much higher rewards. A study published by the Institute for Fiscal Studies shows that Britain has low innovation rates compared with its main competitors. It also ranks 15th among the 30 richest countries for productivity growth.
Few could quibble with personal enrichment if it reflected higher levels of wealth creation bringing wider social and economic benefits. But is this really what has been driving runaway executive pay and dividends, soaring City fees and record bonuses? Of course there are many examples of entrepreneurs, from James Dyson to Stelios Haji-Ioannou, who have created wealth, jobs and opportunities.
However, many modern entrepreneurs play a very different role to the moguls of the past. Today they are more likely to have made their money not by building firms and products from scratch but through financial raiding, deal making and speculative share dealing. These involve less risk and generally create less new wealth, in some cases none at all.
Indeed, the evidence is that many of the tycoons, investment bankers and business executives who top the rich lists have simply taken advantage of today's pro-rich culture to grab a larger slice of the cake for themselves. Far from being a "positive sum-game" with no losers, what is happening is a complex transfer from ordinary shareholders, taxpayers and customers.
Twenty years ago, the typical chief executive of a FTSE 100 company earnt 25 times the pay of the average worker. As Rich Britain demonstrates, it is now close to 120 times. And for what? A recent study by academics at Manchester University revealed that top company heads have enjoyed pay increases that vastly outstrip a range of performance measures, from pre-tax profits to return on capital. Such extensive "value skimming" led them to conclude that "top managers in giant firms appear to be an averagely ineffectual officer class who do, however, know how to look after themselves". The business magazine Management Today has condemned the growing gulf in pay as defying "any sense of fairness".
Despite constant rows over "rewards for failure", big payoffs have become the norm. Sir Peter Davis presided over a falling share price and plunging profits before he picked up £2.4m on being ousted at J Sainsbury. A few months later, bonuses of £807,000 were paid to the executives of Jarvis, despite the group's share price crashing from 566p to 9.5p. The management expert Charles Handy notes that such payouts have made ineptitude by executives the shortest route to millionaire status. In America they are known as "golden condoms" as they "protect the executive and screw the shareholder".
"Value skimming" is also at the heart of the escalating rewards enjoyed by City lawyers, accountants and investment bankers since the late 1980s. I would contend that the City in effect operates as an informal cartel charging excessive fees ("the croupier's take") for activity that generally involves the transfer (sometimes the destruction) of wealth rather than its creation. Major business decisions are often driven by the prospect of fat bonuses and fees for directors and their City advisers, irrespective of the long-term interest of the company. Despite playing their part in the collapse of Marconi, the City bankers who devised its failed strategy walked away with colossal fees.
Some former insiders are damning of the way the City operates. Financial journalist and ex-banker Edward Chancellor has described the finance industry as "bloated and parasitic". Philip Augar, once a top executive at Schroders, calls the sums paid to brokers "a social and moral disgrace".
Many of those sitting at the top of the rich lists have also inflated their fortunes through the manipulation of Britain's lax tax rules - and thus at the expense of taxpayers. In the past three years, Philip Green has paid his family some £2bn in dividends from Bhs and Arcadia. And because his retail companies have been set up so that they are in effect owned by his wife, Tina, a Monaco resident, the Green family have saved close to £500m in tax.
When Mr Green paid his family £1.2bn in October last year, he financed it by taking out a loan. Although this is a common form of financial engineering in privately owned companies, it had the benefit of cutting Arcadia's corporation tax bill, as the interest charges on the loan could be offset against profits. In this way, wealth was simply being redistributed from taxpayers to Mr Green's family.
He isn't alone: five thousand Britons, mostly businessmen, live in Monaco, which the French now call le rocher anglais. Entre- preneurs from Sir Richard Branson to Hans Rausing, along with City dealers, are known to use a variety of legitimate offshore tax- avoidance schemes.
An entrepreneurial and innovative culture is vital to economic progress. Exceptional dynamism deserves generous rewards. In the past decade and a half, though, rewards and merit have become decoupled. While some of the UK's super-rich are inspirational, others - often engaged in essentially unproductive activity - are much less deserving. Their riches have been accumulated through clever, and perfectly legal, manipulation of the financial system, which diverts wealth created by others in their direction.
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