Gap between rich and poor narrows

Observations on equality

It looks as though, after drifting the wrong way for some years, Britain is gradually becoming a more equal society.

New figures from the Office for National Statistics show that household income inequality fell in 2004/5 for the third year running, and post-tax inequality is now back at a level last seen in 1987. Even wealth inequality, which grew substantially over the past decade on the back of house-price increases, has pegged back.

But if the gap between rich and poor is generally narrowing, there are still plenty of people feeling little benefit. Hilary Armstrong, the new cabinet minister for social exclusion, says that at least a million people are firmly excluded from the mainstream. On a long list of indicators - the education of children in care, teenage pregnancy rates, mental health problems and weak basic skills in adults - the casualties keep coming.

Greater equality is not in itself a government objective. During the 2001 election campaign Tony Blair famously declared himself indifferent to David Beckham's earnings and said that tackling poverty, not reducing inequality, was his goal. In fact, he did both.

Old-fashioned tax and spend achieved a lot. Before tax and benefits do their redistributive work, the income of the top fifth of households is 16 times greater than that of the bottom fifth. After income transfers, the ratio is four to one. Progressive changes, such as generous tax credits and the rise in National Insurance to pay for the NHS, played an important part in reducing inequality. The minimum wage has also helped those at the bottom.

Child and pensioner poverty fell significantly, if not by as much as the government had planned. But a great deal of this success was with low-hanging fruit - families just below the poverty line. Entrenched exclusion is proving a harder nut to crack.

And despite the progress, the gap between rich and poor is still a lot wider than it was before Margaret Thatcher came to power, and wider than in most of Europe. In fact, a lot of the recent reduction simply made up for lost time in Labour's first term, when inequality worsened.

More worryingly, things are about to get harder. Spending growth will soon slow, the political space for tax or National Insurance increases has shrunk and the jobless count is going up. To reduce poverty and inequality will require some tough choices about spending priorities.

Nick Pearce is director of the Institute for Public Policy Research, which will publish a "state of the nation" assessment of Labour's record in December

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