10 August 2017

Inequality hasn’t risen since the crash but it’s now set to soar

The Conservatives’ £9bn of welfare cuts will reduce family incomes by as much as £3,000 a year.

Inequality, politicians and commentators often lament, has surged since the financial crisis. The widening gap between the rich and the poor is used to explain Jeremy Corbyn’s ascent, the Brexit vote and the Conservatives’ electoral humbling. Yet compared with these political convulsions, the data is surprisingly static. Rather than rising since the 2008 crash, income inequality has slightly narrowed (as a recent Institute for Fiscal Studies report showed). But this is not a sign, as some on the right suggest, that all is well in the UK.

Britain’s problem is not that inequality has risen but that it hasn’t fallen enough. The country is still living with the consequences of the 1980s when inequality surged as the earnings of the rich rose and their taxes fell. The Gini coefficient, a scale on which zero is absolute equality and one is pure inequality, rose from 0.25 in 1979 to 0.34 in 1991.

This is not merely an abstract concern. As works such as 2009’s The Spirit Level have shown, inequality is associated with a range of economic and social maladies, including financial instability, crime, obesity, drug abuse, social immobility and educational failure.

When the crash came, the poor, it is often said, “paid the price for a crisis they did not cause”. Though this is a fine political line, the data again tells a different story. “The 2008-09 recession stands out as principally an earnings recession, not an employment recession,” Torsten Bell, the director of the Resolution Foundation and Ed Miliband’s former policy head, tells me. It was high earners who experienced the steepest fall in their incomes, if only because they had more to lose.

Unlike in the 1980s, when unemployment exceeded three million, the jobless total peaked at 2.7 million in 2011 and has since fallen to 1.5 million. The employment rate has risen to 74.9 per cent, the highest since comparable records began in 1971. Significantly, it is the poorest who have benefited. “All the employment growth since the financial crisis has been among the poorest 40 per cent of families,” Bell says. “That wasn’t true in the 1990s.”

Low earners have also gained from the higher minimum wage, or “National Living Wage”, which has risen from £6.70 an hour in 2015 to £7.50. While part-time and temporary employment has increased ubiquitously since the crash, it has still paid to work.

But the non-rise in inequality also reflects more negative trends. As the Bank of England governor, Mark Carney, recently observed: “Real income growth has not been as weak in the UK since the middle of the 19th century.” The stagnation of average earnings, which are not forecast to return to their pre-crisis peak of 2007 until 2022, has served to reduce overall inequality by narrowing the gap between the middle and the bottom.

The political preoccupation with inequality reflects the rising fortunes of the top 1 per cent. As average earnings have been squeezed, voters have grown less tolerant of reckless plutocrats such as Philip Green and Mike Ashley. Top earners were initially penalised by the crash, but their share of disposable income has since recovered to a near-record high of 9.5 per cent.

Wealth inequality has also widened as property ownership has fallen to 63.5 per cent, the lowest level since 1987 and the fourth-lowest in the EU. The Conservatives are struggling to sell capitalism to voters with no capital.

For the poorest, the pain has been deferred rather than avoided. In the early post-crash years, their incomes were partially protected as welfare benefits, such as tax credits, rose in line with inflation. But as a result of George Osborne’s four-year benefits freeze that began in April 2016, inequality is rising once more. Theresa May broke with austerity in rhetoric but she did not in reality. The forthcoming £9bn of welfare cuts will significantly widen inequality and child poverty, reducing family incomes by as much as £3,000 a year.

Bell likens the period ahead to “the Eighties without the yuppies”. Benefits will be reduced at the bottom, while wages will be squeezed for almost everyone else. A grim era is becoming grimmer.