Boris's championing of inequality is a recipe for destroying social mobility

The mayor presented social mobility as compensation for inequality but it's the gap between the rich and poor that erodes opportunity.

We can at least commend Boris Johnson for his candour. Unlike those in his party who hide behind euphemisms and platitudes, the mayor presented rampant inequality as both inevitable and desirable in his Margaret Thatcher lecture last night. Differences in IQ, the efficient operation of the free market and the need for economic incentives all meant it was "futile" for politicians to even try to narrow the gulf between the rich and the rest. "Whatever you may think of the value of IQ tests it is surely relevant to a conversation about equality that as many as 16% of our species have an IQ below 85 while about 2% have an IQ above 130," he said, oblivious to the fact that this gap isn't the cause of inequality but the result of it

But while delivering this bleakly Hobbesian message, he attempted to sweeten the pill by echoing John Major's lamentation of stagnant social mobility and calling for a dramatic expansion of opportunity. In one passage he remarked:

I worry that there are too many cornflakes who aren’t being given a good enough chance to rustle and hustle their way to the top. We gave the packet a good shake in the 1960s; and Mrs Thatcher gave it another good shake in the 1980s with the sale of the council houses. Since then there has been a lot of evidence of a decline in social mobility, as Sir John Major has trenchantly pointed out.

And in another:

It seems to me that though it would be wrong to persecute the rich, and madness to try and stifle wealth creation, and futile to stamp out inequality, we should only tolerate this wealth gap on two conditions. One, that we help those who genuinely cannot compete; and two, that we provide opportunity for those who can

But his presentation of social mobility as a form of compensation for inequality was almost comically inappropriate. As anyone with the most cursory grasp of the subject knows, reduced opportunity is the inevitable result of greater inequality: it's harder to climb the ladder when the rungs are further apart. As the empirical masterpiece The Spirit Level showed (see graph), it is the most unequal countries, such as the UK and the US, that have the lowest levels of social mobility, while the most equal, such as Sweden, Canada and Japan, that have the highest. In the case of Britain, it was after Boris's heroine took office, and the gap between the rich and the poor became a chasm (the gini coefficient rose from 12.9 in 1978 to 22.2 in 1990), that social mobility began to stagnate. 

Confronted by this unavoidable truth, Boris offered nothing resembling a solution. In his recent report on the subject for the coalition, Alan Milburn wisely noted that "deep-rooted inequality and flatlining mobility have been decades in the making" and that "in most developed countries there has been a declining share of economic growth going to labour (and a higher share to capital) at the same time as there has been growing wage inequality. In the UK, the share of national income going to wages of workers in the bottom half of the earnings distribution decreased by a quarter between 1979 and 2009."

But Boris had nothing say to about repairing the broken link between growth and earnings. Instead, he called for the return of academic selection under the guise of "academic competition" (perpetuating the myth of grammar schools as engines of social mobility) and sought to reassure us that those benefiting most from inequality were already paying their fair share. He told his audience: "Today, when taxes have been cut substantially, the top one per cent contributes almost 30 per cent of income tax [one might note that he is among them]; and indeed the top 0.1 per cent - just 29,000 people - contribute fully 14 per cent of all taxation."

Yet this statistic tells us less about what has happened to the tax system than it does about what has happened to the income system. Over the period in question, the earnings of the rich have soared to hitherto unimaginable levels. As a recent OECD study showed, the share of income taken by the top 1% of UK earners increased from 7.1% in 1970 to 14.3% in 2005, while the top 0.1% took 5%. Quite simply, the rich are paying more because they're earning more. Is this really cause for us to "fete them and decorate them and inaugurate a new class of tax hero"? If 11 million low and middle earners receive the pay rise they have been denied since 2003, they'll pay more tax too. In fact, compared to the rich, they're already paying the lion's share. As the ONS recently found, owing to VAT and other regressive levies, the least well-off households pay 36.6% of their income in tax, while the wealthiest pay 35.5%. Had the coalition taken Boris's advice and cut the top rate of income tax to 40p (with a 30p rate down the line) , that gap would be even wider. 

A more progressive tax system would narrow the gap between rich and poor and tilt the odds in favour of social mobility but here, as elsewhere, the policies promoted by Boris aren't the solution to a society in which birth determines destiny, they're the cause of it. 

Boris Johnson declared in his Margaret Thatcher lecture that it was "futile to stamp out inequality". Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.