Sunday, July 01, 2018
Falling inequality - and other things nobody ever believes
Posted by David Smith at 09:00 AM


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

Every so often some figures come along which challenge most people’s perceptions of what has been happening to the economy. Those perceptions, indeed firm beliefs, encompass three things: inequality is rising; incomes were growing fine until the bankers wrecked the economy 10 years ago but have struggled since, and cossetted pensioners have benefited by being protected from the worst of the pain.

If I were to tell you that none of these three things were true, you might imagine that I had stumbled across a dodgy dossier from a right-wing think tank. But the findings, hailed by George Osborne, the former chancellor, and his one-time economic adviser Rupert Harrison, were in a report from the Institute for Fiscal Studies and co-funded by the Joseph Rowntree Foundation.

The report, ‘Living standards, poverty and inequality in the UK: 2018’, based on two official UK household surveys, does indeed challenge some strongly-held beliefs.

It shows that, since the post-crisis recovery in incomes began in 2011-12, median household incomes rose by an average of 1.6% a year in real terms until 2016-17. This is lower than the 2% annual average in the four decades leading up to the financial crisis but better than the 1.2% a year from 2002 to 2007, the five years leading up to that crisis.

This, on the face of it, is hard to square with the fact that consumers were spending freely in those years, in an economy driven along by consumer exuberance. But there was also a lot of borrowing; mortgages and consumer credit often growing by 15% a year. With hindsight, the fact that incomes were growing so weakly was a warning signal of the horrors that were to come.

Those horrors, the effects of the crisis and recession, explain why, though income growth in recent years has been better than generally thought, few see much cause for celebration. Mostly in the past there has been a period of catch-up after a recession.

This time, in the several moving parts that make up incomes – strong growth in employment but weak wages and cuts to benefits and tax credits – the sense has been that we have been lucky to see any income growth at all, let alone make up for lost time. After five years of recovery this time, real incomes were about 4% above their pre-recession peak. In the 1980s at the same stage they were 16% higher.

The outlook, meanwhile, is nothing to write home about. The IFS authors suggest that, because of weak earnings growth and a continued squeeze on benefits and tax credit. Living standards will, if anything, growth more slowly from now on that over the five years from 2011-12. Figures released on Friday showed that real household disposable income fell by 0.5% last year, for familiar reasons, while on a per capita basis there was a drop of 1.1%.

The second counterintuitive finding is on pensioners. The perception is that, while workers have endured a squeeze and often falls in real wages, the triple lock and other factors have protected pensioners. It is not true, at least since 2011, since which time real incomes for both pensioners and non-pensioners have risen by around 8%.

What is true, however, is that pensioners fared much better during the worst of the crisis and that advantage has stayed with them. In 2011, pensioner incomes were 5% above pre-recession levels while non-pensioner incomes were 4% down. Again, workers have not made up the lost ground; their incomes are less than 4% above pre-crisis levels while pensioners are up by 13.5%.

Perhaps most striking, however, is the finding on inequality. Rising inequality is so much part of the discourse in this country that I have almost given up trying to correct it. It seems it explains the rise of Jeremy Corbyn and the fact that Labour can happily propose higher taxes on the better-off. Indeed, Philip Hammond has hinted at something similar when he gets round to working out which taxes will have to rise to pay for the £20bn-plus funding boost for the National Health Service.

Whenever I accidentally tune into the BBC’s shouty Question Time, not usually for very long, somebody is invariably making a point, unchallenged, about rising inequality, and getting applauded for doing so. Perceptions of rising inequality helped drive the Brexit vote.

But, and the IFS report is not the first to point this out, it is not happening. The story of rising inequality in Britain is one for the history books, not the current debate. On the most commonly used measure, the Gini coefficient, inequality rose a lot in the 1980s, rose a little in the run-up to the crisis but has since fallen back to where it was in 1990. Over the course of the past three decades, income inequality in Britain is essentially flat. Those on lower incomes have been helped by government policy, including the minimum wage and national living wage, and higher taxes on the better-off.

The income share of the top 1%, which was rising in the run-up to the crisis, reaching nearly 9%, has since fallen back to under 8%.

Why does nobody, or at least not many, believe it? We are in a period in which, as I often discover, many people do not like facts and choose to ignore them , or invent their own, when they are inconvenient. But there are also other, more legitimate reasons.

One is that, for many, it is the level of inequality that matters not whether it is flat or falling. The level of income inequality established in Britain in the 1980s is internationally high. In a comparison of 37 countries by the Organisation for Economic Co-operation and Development (OECD), Britain ranked seventh highest, behind only Mexico, Chile, Turkey, America, Lithuania and Russia. Most equal was Iceland.

The sky-high incomes enjoyed by many in the public eye, which includes boardroom excesses and the money earned by some entertainers and sporting stars also foster an impression of enormous inequality. This newspaper’s Rich List draws attention to the great wealth enjoyed by those at the top; wealth of £115m in now needed to make it into the top 1,000 and thus onto the list.

This is despite the fact that Britain’s wealth inequality, by contrast with income inequality, is well down the international, league table, and far below America, as well as less than in many European countries, including Germany, France, the Netherlands, Austria and Portugal. It is less than in Canada.

People are also more likely to see income inequality as a problem, and suspect that it is rising, when their own incomes are squeezed. This, though incomes have been rising faster than immediately before the crisis, remains a fact.

Another, which may mean that we may soon have to start genuinely coming to terms with rising inequality is that the government’s welfare cuts, so far immune from the relaxation of austerity, could begin to increase it. Previous predictions of rising inequality on this basis have, it should be said, proved wide of the mark. If it were to happen, it would merely bring most people’s perceptions back into line with reality.