Should governments have to clean up the damage left by their central banks? In a speech given in December, Mark Carney – echoing a classic refrain heard from the Bank of England – insisted that ‘all monetary policy has distributional effects, but it is rightly the role of elected governments to take measures to offset them if they so choose.’
As outlined by my colleague Ed Smythe, a decade of extraordinary monetary policy has made the gap between the richest and the poorest much wider in absolute terms. The richest 20% of households each gained, on average, £314,413 in net wealth – over 189 times the increase of £1,659 that went to the poorest 20%.
Because this wealth transfer has happened on such a colossal scale, the notion that fiscal policy can somehow compensate the losers is simply implausible. Spreading the wealth gains equally would require redistribution starting with an average windfall tax of £230,000 per household on those in the top quintile, tantamount to a wealth tax of 17.5%. A tax on this scale would be totally without precedent. An emergency wealth tax existed for a short period in Iceland, between 2010 and 2013 – but at an annual rate of 1.5%. Seen in this light, the measures that would be required to reverse recent increases in wealth inequality are outlandish.
In the context of existing fiscal policy, it is far from apparent which tax Mr Carney imagines could do the work. By way of comparison, an equivalent burden delivered through raising capital gains tax (say, on gains between 2010 and 2015) would mean an increase of something between 20 and 35 percentage points – relying on the unlikely assumption that individuals take no steps to avoid paying it. And while this tax would penalise some of the richest, it would only raise enough to pay 4% of the compensation needed by poorer households.
Alternatively, some rough calculations imply that a higher-rate income tax of 60% would see the average top quintile household take 80 years to pay back the gain in wealth. HMRC’s own research, which accounts for behavioural changes, puts the annual revenue gained from a 1 percentage point increase in the higher rate at no more than £1.2 billion. If that figure was constant for each incremental increase, redistributing the wealth gains would take 53 years in total. However, since returns would diminish with further tax rate increases, the 80-year figure starts to look optimistic.
Perhaps Mr Carney imagines fiscal policy can prevent increasing wealth inequality from being passed down to future generations. But an inheritance tax at 100 per cent, working with the average house price in the London area , would account for less than a third of the transfer required, before accounting for any exemptions.
In short, the Bank’s attempt to shift responsibility over to fiscal policy is highly questionable. Besides being politically unfeasible, any of these options would have serious knock-on effects on economic activity. Monetary policy has had dramatic effects on inequality that the Bank ought to recognise.
To stop monetary policy driving inequality, policymakers need to fix the problem at its source. The tools used by central banks since 2008 are exhausted and discredited. Policymakers should look to new solutions – like our proposal, QE for People – to reinvigorate the parts of the economy that matter and to spread wealth fairly and sustainably.
 ONS, House Price Index, August 2017