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The UK earns a D for inequality

Inequality has risen faster in the UK than in any other rich country.

If you're an egalitarian-minded Brit this morning's report from the OECD Divided We Stand: Why Inequality Keeps Rising makes for grim reading. Income inequality has risen in almost every major economy and the average income of the richest 10 per cent is now nine times that of the poorest 10 per cent across the OECD. This should be a matter of concern to political leaders of all parties. We know from The Spirit Level that the most unequal countries do worse on almost every quality of life indicator. They suffer from higher levels of violence, mental illness, obesity and teenage pregnancy, and lower levels of trust, child well-being and happiness.

Unsurprisingly, it's a fairly dense report, so here, summarised for Staggers readers, are ten of the key findings.

1) Inequality has risen faster in Britain than in any other rich country. While inequality has risen in almost every OECD member state, nowhere has it risen faster than in the UK. The annual average income of the top 10 per cent in 2008 was just under £55,000, about 12 times higher than that of the bottom 10 per cent, who had an average income of £4,700. This is up from a ratio of eight to one in 1985 and significantly higher than the average income gap in OECD countries of nine to one. As the graph below shows, inequality fell in the early years of the Blair government (after soaring under Thatcher) but began to rise, albeit more slowly, after 2005.

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2) Even the Nordics are doing badly. In Sweden, Denmark and Germany (all among the world's most equal countries) the income gap between rich and poor has risen from 5 to 1 in the 1980s to 6 to 1 today. Only in France, Hungary and Belgium has there been little change in inequality, while only in Turkey and Greece has it fallen (see graph).

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3) The top 1 per cent are taking ever more of the pie. The share of income taken by the top 1 per cent of UK earners increased from 7.1 per cent in 1970 to 14.3 per cent in 2005.

4) And so are the top 0.1 per cent. In 2005 the top 0.1 per cent of earners accounted for a remarkable 5 per cent of total pre-tax income.

5) Tax cuts for the rich have increased inequality. The OECD notes that "between the late 1970s and mid 1980s, the tax-benefit system in the UK offset more than 50 per cent of the rise in market income inequality. This effect has fallen in the subsequent decades."

Indeed it has. In 1988, Thatcher's Chancellor Nigel Lawson reduced the top rate of tax from 60 per cent to 40 per cent (it was reduced from 83 per cent to 60 per cent in 1980), where it remained until Labour increased it to 50 per cent in 2009. The OECD also states that a reduction in the basic tax rate has led to increased inequality. As I've noted before, while the basic rate (a progressive tax) has fallen from 30 per cent to 20 per cent, VAT (a regressive tax) has risen from 10 per cent to 20 per cent (see graph).

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6) Marrying within their class. In Britain, unlike many other countries, the earnings gap between the wives of rich and poor husbands has grown significantly: the gap was about £3,900 in 1987 but increased to £10,200 in 2004. In other words, through marriage, wealth has become increasingly concentrated by class.

7) Benefits have become less redistributive. One of the key explanations for higher inequality is that benefits have failed to keep pace with earnings. As I've noted before, In 1970, unemployment benefit rates (£5) represented 19.2 per cent of average weekly earnings (£26.10) but now represent just 11 per cent.

Even if we take into account other benefits claimed by the jobless, Britain still has one of the lowest net replacement rates in the OECD. For a married couple with no children, the replacement rate in the first month of unemployment is 45.5 per cent, compared to 59.4 per cent in Germany, 65.8 per cent in France, 72 per cent in Ireland, 53.7 per cent in Japan and 51.2 per cent in the United States.

The OECD also notes that tighter eligibility conditions and more people working in low wage jobs (thus not qualifying for benefits) has increased the gap between rich and poor.

8) But public services have become more redistributive. The UK has increasingly relied on public services (education, health) rather than cash transfers to limit inequality. Spending on such services is 15.4 per cent of GDP while spending on cash transfers is 10 per cent. The report notes that "these services reduce inequality more than almost anywhere else, and this impact has increased over the 2000s."

9) Self-employment increases inequality. About half of the increase in individual earnings inequality was caused by the growth in self-employment. The OECD's explanation is that in general the self-employed earn less than full-time workers.

10) Most voters believe inequality is a problem. Unlike Tony Blair, whose answer to inequality was to quip that he didn't go into politics to make David Beckham earn less, most voters believe that inequality is a problem. As Michael Förster, author of the report, said: "In almost all countries apart from the US and Japan more than 50% of people say that inequality is too high. In the UK it is 65% so I think everyone agrees it is a problem."

Ed Miliband, the first truly egalitarian Labour leader since John Smith, can take comfort from this.