Lottery Lovehearts, Bigger Babies and A Living Standards Maelstrom For Mortgagors

Top of the Charts

Afternoon all,

It’s been a week of shocks. Boris Johnson can’t handle the truth (or at least gets irritated talking about it) and those making their money via capital gains can very much handle paying lower tax rates than the rest of us. To be fair to the Prime Minister making those very large capital gains, as Chancellor his Office for Tax Simplification published a report setting out exactly this problem. Then again that report got shelved and the OTS has since been… abolished. So they won’t be doing that again.

No-one has yet abolished TOTCs, so this week we’ve got reads on the impact of cash on families and a Chart of the Week to traumatise the mortgagors among you.

Have a great weekend.

Chief Executive
Resolution Foundation

Insuring incomes. Who knows what Labour’s position is on capital gains after hearing several shadow cabinet interviews this week. But the Party’s in-house think-tank – the Fabian Society – has a clear position on something else: income insurance. What should happen to people that exit work – be it through unemployment or temporarily through sickness – is the exam question for their latest report. The big argument is that we provide very little insurance at present (basic unemployment benefits replace just 12 per cent of average earnings) and should instead offer more generous, earnings related support – for example the state paying you half of what you were previously earning. This is basically about making the system exist for middle and higher earners, although to contain costs (they estimate of £9 billion) the insurance is time limited (e.g. six months for the unemployed). Have a read, and if you’re worried what this mean might for work incentives then fear not – an upcoming Economy 2030 essay will explain how the Danes have squared that circle.

Benefitting babies. The state provides financial support for those of us lucky/silly enough to have children. The likes of Child Benefit start from birth, but you’ll probably know this phase called pregnancy exists, so what would happen if support started before birth? Good things infant health-wise concludes a great new paper using hospital data to investigate the effects of the Health in Pregnancy Grant. This was a universal £190 cash transfer to pregnant mothers from 2009 to 2011, which the author finds boosted birth weight (by 8-12 grams) and reduced premature births (by 9-11 per cent). The impact was biggest for young mothers in deprived areas, with reduced stress the most likely driver. Money matters.

Lottery love. Never mind about the impact on babies of such small grants, what about the impact on families of massive wealth increases, like winning the lottery? Well a study of Swedish lottery players offers some very clear results with a big distinction between men and women. If men have a big win they are much more likely to get or stay married (a $140,000 win increases the chance of unmarried men getting hitched in the next five years by 30 per cent, and reduces the chance of a married one getting divorced by 40 per cent). And married or not they have more kids. The impact on women is very different – in fact the only discernible impact is that a lottery win on that scale almost DOUBLES their short-run probability of divorce (there’s no long run impact so wealth is accelerating divorces not making them happen). Basically, wealth makes men more appealing to current/prospective partners, but gives women an early out from unsatisfactory ones. Who says romance is dead?

Equal economics. I know this isn’t news, but the Royal Economic Society’s new diversity report (‘Who Studies Economics?’) is an important reminder of a big problem: economics does not have a remotely diverse pipeline coming through. Economics students at Russell Group universities are three times more likely to have been to private schools than the wider student population. And they’re three times less likely to have come from areas that don’t see many kids going to university. Women and some ethnic minorities (Black, Bangladeshi, and Pakistani students) are also under-represented. Even if not new, the report is worth a read because it does an impressive job of going beyond the headlines to dig into how under-represented groups progress through the pipeline – noting for example that women are less likely to study economics but do well if they do.

Raising rates, as the ECB, Fed and Bank of England all did this week, has lots of economic effects. Among those we can be more confident about is that rates up means house prices down (relative to where they would otherwise have been). New UK house price data this week showed us the first two months of those falls came through in December and January. For the global picture you can have a quick read of an IMF blog that basically notes everyone is in the same house price falls boat. It has a helpful rule of thumb estimate: every 1 percentage point increase in rates translates into 2 percentage points lower house prices. There’s a reason transactions are down, and people are holding off from buying right now.

Chart of the Week

We’ve all had a week to ponder the Budget’s fine print now. If there’s one thing likely to stay with people it’s the OBR’s forecast that living standards will fall this year and next, and won’t return to pre-pandemic levels until the back end of the decade. Obviously the immediate drivers of that catastrophe are soaring energy bills and double-digit inflation – affecting everyone, and lower-income families most of all.

But there’s another phase ahead of us, in which rising interest rates are doing a lot of the work of crushing living standards. As COTW shows, that will mean quite different outlooks for those in different housing tenures. The big news is that mortgagors – the highest income group – are set for the biggest income falls: 8 per cent, or £2,900, on average over this year and next. That’s a big turnaround from the living standards windfalls of falling interest rates in the 2010s.

Perhaps surprisingly, renters’ incomes are set to be flat or even grow slightly over this period. That’s because while growth in private and social rents is high by recent standards (at 4.7 per cent and – in England from April – 7 per cent respectively), that’s still well below levels of inflation – i.e. rents are falling in real-terms. As we look ahead, the cost-of-living crisis is getting more complicated in its distribution, even if the big picture remains blindingly obvious: it’s a disaster for Britain.