It’s only natural that a Labour government would want to concern itself with inequality, not least because that’s what many voters want. According to the Resolution Foundation, the share of the public citing poverty and inequality as one of the most important issues facing the UK rose from 7 per cent in 2010 to 19 per cent on the eve of the pandemic.
It seems obvious that inequality in the UK has been rising since the financial crisis, and in particular since the Conservatives took power in 2010. No catechism of the UK’s woes is complete without the rote intonement that “inequality is rising”.
And yet, it isn’t. Don’t take my word for this. Take a look instead at the World Inequality Database, painstakingly assembled by a team including the economic superstars Emmanuel Saez, Gabriel Zucman and Thomas Piketty. All three are closely associated with the view that inequality is a serious problem.
And yet the WID is clear: in the UK, the share of income flowing to the richest 1 per cent is lower than it was during the financial crisis. It is much the same in the most recent numbers as it was in 1997, when Tony Blair was elected, and this is true both for pre-tax income (of which the richest 1 per cent get 13 per cent) and for post-tax income (8.5 per cent). Income inequality hasn’t risen, it’s fallen. Redistributive taxes have given it a little extra nudge.
If the point about redistributive taxes seems surprising, it shouldn’t be. We have all been told — rightly — that the total tax take relative to the size of the economy is near the highest level for more than 70 years. Yet for people on average incomes, direct taxes (income tax and national insurance) are at their lowest level for decades.
That is partly because more taxes are levied through indirect taxes such as VAT, but also because the rich pay more tax than they used to. According to Paul Johnson of the Institute for Fiscal Studies, someone earning £200,000 a year pays about £10,000 a year more in tax under today’s tax arrangements than they would have in 2009.
Meanwhile, for someone on average earnings, the total income tax and national insurance paid has fallen fairly steadily from about 30 per cent in the late 1970s to less than 20 per cent today. Record taxes? Not for Jane and John Average.
If income inequality has fallen, and taxes have become more redistributive, then what is the problem? The answer: slow growth. Broadly-based economic growth supplies the funding for public services and benefits, while easing people’s concerns about affording the essentials of life. The UK’s problem is not that economic growth has been too narrow, but that it has barely happened at all. What we have had is broadly-based stagnation.
That said, there are at least three aspects of inequality that deserve priority. The first is that niches of deprivation have been allowed to develop. Some are poorly studied — for example, the Department for Work and Pensions did not publish data about food bank use until last year.
Other pockets of poverty are the result of deliberate policy choices. Contrary to popular belief, child poverty is not rising in the UK. However, relative poverty in households with three or more children is rising — no surprise, given that in 2017 the government limited child support to the first two children in each family.
A second source of inequality that weighs heavily on the UK is that between London and the rest. This problem gets plenty of attention but too little action. Output per hour is actually falling in London — it’s lower than it was in 2007. This is a shocking state of affairs.
But the struggles of London are little help to the UK’s smaller cities. Look at gross value added per worker in Europe’s great cities, and you’ll see London remains one of Europe’s most productive and populous conurbations, albeit some way behind Paris. But it’s the UK’s smaller cities that are failing to live up to their potential. Lyon, Toulouse, Barcelona and Milan are all doing substantially better than Birmingham or Manchester. Germany has a dozen cities doing better than the UK’s second most productive major city, Edinburgh.
A third pernicious source of inequality is the UK’s sclerotic housing market. When Blair was elected, house prices were three times earnings. Now they are more than six times earnings or twice as difficult to afford. For those on these typical salaries, affording a home requires access to dynastic wealth. This is a source of inequality that mere income statistics do not convey.
The new government’s early plans look promising: in particular, effective planning reform would make housing more affordable. But fixing the planning problem, and the lost potential of smaller cities, is a much more challenging task than what recent governments have done, which is to redistribute some income using the tax system.
There is a paradox here: the weaker growth becomes, the more people focus on inequality, fighting over the pie rather than finding ways to make the pie grow. This new government is right to emphasise the need for growth rather than redistribution. It’s unclear that the voters — or its own backbenchers — will feel the same way.
Written for and first published in the Financial Times on 19 July 2024.
Loyal readers might enjoy the book that started it all, The Undercover Economist.
I’ve set up a storefront on Bookshop in the United States and the United Kingdom. Links to Bookshop and Amazon may generate referral fees.
