20 March 2014

What Osborne didn’t mention in his Budget: inequality is forecast to soar

The Chancellor's cuts are likely to reverse the fall in inequality that he boasted of.

(Photo By Borrowing is much higher than it should be. Photo: Getty)

One of the boasts that many found surprising in George Osborne’s Budget was his declaration that “under this government income inequality is at its lowest level for 28 years” (indeed, it prompted cries of disbelief from the Labour benches). Surprising because it’s rare for Conservatives to be preoccupied with the gap between the rich and the poor and because austerity is generally held to have widened it.

But the trend isn’t as unusual as some suggest; it’s normal in times of economic stagnation for inequality to fall as middle class earnings decline and the automatic stabilisers protect the incomes of the poorest. As the ONS’s annual report on “the effects of of taxes and benefits on household income” (the source of Osborne’s boast) noted:

The Gini coefficient for disposable income in 2011/12 was 32.3%, a fall from its 2010/11 value of 33.7%, and the lowest level since 1986. This fall in income inequality is partly due to earnings (including income from self-employment) falling towards the top of the income distribution but increasing for the poorest fifth of households.

In this case, the decision of the rich to delay earnings until 2012-13 in order to benefit from the cut in the 50p tax rate is also likely to have been a factor. But it’s still a finding the Tories are hailing as they seek to prove that “we’re all in this together” (a line Osborne was audacious enough to use again yesterday).

They would be wise, however, to resist the temptation to do so. Owing to the coalition’s welfare cuts, many of which only took effect last year, inequality is forecast to significantly increase between now and 2015-16. In particular, Osborne’s decision to cap benefit increases at 1 per cent for at least three years (an unprecedented real-terms cut) means the poorest will see a sharp fall in their incomes. The IFS expects inequality “to rise again from 2011–12, almost (but not quite) reaching its pre-recession level by 2015–16.”

While the Tories can take little credit for the fall in inequality (which is largely due the decline in real earnings), they will deserve the blame for the rise. And with Ed Miliband making the need to reduce the gap his defining mission, the Chancellor may live to regret his opportunistic boast.