Sunday, January 15, 2017
Inequality is falling - somebody should tell Theresa May
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

Inequality has become the fallback position for politicians in need of a theme, or organisations which want to show they care. Inequality, it seems, is driving political change – pushing voters to extremes - and uncomfortable electoral outcomes.

Inequality threatens the very survival of capitalism, which is why the World Economic Forum, as it gathers in Davos this week, has named it as one of the three key risks facing the world economy over the next 10 years and has as its theme “responsive and responsible leadership”.

Inequality provided the backdrop to Jeremy Corbyn’s populist relaunch and his proposal for a pay cap. Or was it a pay ratio? The maximum wage, last seen in British football in the early 1960s (it was £20 a week, now some earn that a minute), seems to appeal to the Labour leader.

I don’t worry too much about the World Economic Forum, which has to find something to talk about and has a habit of picking the wrong themes. I don’t worry very much about Corbyn either. The idea of a populist relaunch is to make yourself popular, and he is a very long way from that, and from power.

I do, however, worry about somebody who is in power, our prime minster. In her first big speech for a while, Theresa May warmed to a theme which I fear will become a motif for her premiership. Though her speech on the “shared society” focused on mental health, a worthy topic, it was interspersed with other references.

“We need to address the economic inequalities that have emerged in recent years,” she said, so that everybody shares in the country’s prosperity. She criticised “politicians who supported and promoted an economic system that works well for a privileged few, but failed to ensure that the prosperity generated by free markets and free trade is shared by everyone, in every corner and community of their land.”

You might think, if the prime minister is saying this, Britain must be suffering from a crisis of rising inequality. In fact, as official figures released shortly after her speech showed, inequality has been falling. The Office for National Statistics (ONS) reported that in the 2015-16 tax year inequality in Britain measured by the Gini coefficient fell to its lowest since 1986. As the ONS put it: “There has been a gradual decline in income inequality in the last 10 years, with levels similar to those seen in the mid to late 1980s.”

If we take the period since the start of the financial crisis, the poorest fifth of households have seen a 13.2% rise in real incomes (adjusted for the increase in the consumer prices index) since 2007-8, compared with 6.6% for the next quintile, 3.9% for the middle fifth and 4% for the next-to-richest quintile. The best-paid fifth of the population have, in contrast, seen a cumulative drop in incomes of 3.4%, the only group to be worse off than before the crisis.

The experience of the top fifth of the population demonstrates that, apart from the fact that some high-paying occupations have suffered in recent years, redistribution through taxes and tax credits works, as the Institute for Fiscal Studies pointed out on Friday, (and is of course much more sensible than silly ideas such as pay caps).

George Osborne deliberately targeted the lower-paid with his tax changes, excluding those on higher incomes from most or all of the gains from, for example, raising the personal income tax allowance. That and the government’s generosity towards pensioners, of which more in a moment, explain why inequality has been falling.

You may say at this point that it is one thing for those on higher incomes to have suffered a bit since the crisis. In some cases perhaps they deserved to, but that is a small price to pay for having lived high on the hog in the period leading up to it. Surely these global citizens cleaned up then?

Again, no, or at least not disproportionately. The rising pre-crisis tide lifted all boats. Figures from Matthew Whittaker, chief economist at the Resolution Foundation, show that all income groups enjoyed healthy and sustained real income rises in the period 1990 to 2007-8. For those in the bottom fifth, real incomes rose by an average of 2.3% a year, rising to 2.7% for the next band of income. The middle quintile saw an average rise of 2% a year, while for those in the top two groups, the increases were 1.7% and 1.8% respectively. Income inequality has fallen to a 30-year low because lower income groups have done relatively well over a long period.

There are, of course, caveats. Some would say the gains made by the top 1%, or 0.1%, are of greater concern than what has happened to these larger groupings such as the top 20%. Nobody should excuse the excesses, often apparently unrelated to performance, in some boardrooms.

The prime minister’s “privileged few” language, however, risks not only undermining the generally successful growth story of recent decades but deliberately setting different groups against one another. May, who is an unlikely champion of working class people, is in danger of stoking up class war.

There are bigger issues here. One, highlighted by the Resolution Foundation’s Whittaker, is that more important than the distribution of income is the fact that, in the post-crisis period, everybody’s incomes have grown very slowly, and that what in the past was regarded as a normal, unremarkable rise in living standards, has not been achieved. So the middle fifth of the population, having seen their real incomes rise by 2% a year in the two decades leading up to the crisis, have had an annual rise of just 0.5% since then. That should mean a focus on raising productivity, and hence real wages.

The other big issue is how prosperity, particularly in recent years, has been distributed between the generations. As the ONS pointed out, retired households have on average seen a 13% rise in their real incomes since 2007-8, while non-retired households have yet to put their heads above water; their incomes are on average 1.2% lower than they were in 2007-8. Retired households have benefited from government policy on uprating state pensions and have benefited from wealth gains, thanks to policies such as quantitative easing. Though the incomes of younger households have been rising in recent years, this has been a lost decade for them and is not sustainable for the longer-term.

So, while income inequality is a natural target for politicians and businesses wanting to show that they care, generational inequality has been the problem of recent years. And the need for policies, and economic performance, which raise incomes in general is more pressing than ever. Blaming the privileged few is bad economics and questionable politics.