To tackle personal debt we need to tackle inequality first

An inequality test should be applied to all government policies to assess whether they will increase the gap between the richest and the rest.

Today’s report on personal debt from the Centre for Social Justice makes for sobering reading. With average household debt at £54,000, nearly twice the level of a decade ago, it is clear just how many are struggling in austerity Britain.

We’re told that the causes of this astonishing personal debt are people being forced to use credit to pay bills as the cost of living rises, as well as the legacy of cheap credit before the financial crash. These are clearly significant issues, but the reality is that they are part of a far wider, systemic problem. One that many seem unwilling to recognise. The gap between the rich and the rest has widened alarmingly over the past 30 years, with the UK now experiencing one of the highest levels of income inequality in the developed world. Study after study, in both the UK and internationally, has shown that as inequality rises, so does household debt.

According to research by the Joseph Rowntree Foundation, single people need to earn at least £16,850 a year before tax in 2013 for a minimum acceptable living standard. Couples with two children need to earn at least £19,400 each. But according to the ONS, just under half of people don’t get £19,400. About a third don’t get £16,850. For years, people have been told that if they work hard, they’ll get the rewards, but that simply isn’t true anymore. This is partly a result of a greater proportion of UK jobs being low paid. The proportion of jobs classed as low paid by the OECD is now among the highest of developed nations, and around 20 per cent of employees earn below the Living Wage.

Another issue is the increasing amount of insecure work such as temporary work and zero-hours contracts. Being trapped in a low-pay-no-pay cycle understandably plays havoc with budgeting. A further problem is a result of inequality driving up prices. This is most obvious in housing costs, where the average person trying to find a home finds themselves in a market where they are competing with people who are buying second homes, and with investors who are fuelling speculation-driven property inflation. In fact around 85% of new-build properties in central London and 38% of re-sales are estimated to have been purchased by overseas buyers.

Perhaps the biggest problem is also the simplest. Pay for FTSE Director’s may have increased by 14 per cent in the last year, but for the average employee pay continues to fall behind prices. We’ve now had four years of pay falling in real terms for most people. To tackle the debt crisis, the government needs to focus on reducing the UK’s high levels of income inequality. An inequality test should be applied to all government policies to assess whether they will increase the gap between the richest and the rest. Raising the level of National Minimum Wage and incentivising employers to offer jobs that pay a reliable income is a key way of tackling debt, driving demand in the economy, and reducing social security costs.

We also need a more progressive tax system, including proposals like a property speculation tax to stop the rich pricing the rest of us out of a home, but also a fiscal rebalancing away from consumption taxes like VAT, because they hit average and poor people hardest and hold back spending. Inequality is more than a driver of debt, it supresses our economic recovery and fractures our society. If the government wants to tackle debt, it needs to tackle inequality first.

Duncan Exley is director of The Equality Trust

Children play a game of football in front of a residential development in the London borough of Tower Hamlets on February 21, 2013 in London. Photograph: Getty Images.

Duncan Exley is the director of the Equality Trust

Photo: Getty Images
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Autumn Statement 2015: George Osborne abandons his target

How will George Osborne close the deficit after his U-Turns? Answer: he won't, of course. 

“Good governments U-Turn, and U-Turn frequently.” That’s Andrew Adonis’ maxim, and George Osborne borrowed heavily from him today, delivering two big U-Turns, on tax credits and on police funding. There will be no cuts to tax credits or to the police.

The Office for Budget Responsibility estimates that, in total, the government gave away £6.2 billion next year, more than half of which is the reverse to tax credits.

Osborne claims that he will still deliver his planned £12bn reduction in welfare. But, as I’ve written before, without cutting tax credits, it’s difficult to see how you can get £12bn out of the welfare bill. Here’s the OBR’s chart of welfare spending:

The government has already promised to protect child benefit and pension spending – in fact, it actually increased pensioner spending today. So all that’s left is tax credits. If the government is not going to cut them, where’s the £12bn come from?

A bit of clever accounting today got Osborne out of his hole. The Universal Credit, once it comes in in full, will replace tax credits anyway, allowing him to describe his U-Turn as a delay, not a full retreat. But the reality – as the Treasury has admitted privately for some time – is that the Universal Credit will never be wholly implemented. The pilot schemes – one of which, in Hammersmith, I have visited myself – are little more than Potemkin set-ups. Iain Duncan Smith’s Universal Credit will never be rolled out in full. The savings from switching from tax credits to Universal Credit will never materialise.

The £12bn is smaller, too, than it was this time last week. Instead of cutting £12bn from the welfare budget by 2017-8, the government will instead cut £12bn by the end of the parliament – a much smaller task.

That’s not to say that the cuts to departmental spending and welfare will be painless – far from it. Employment Support Allowance – what used to be called incapacity benefit and severe disablement benefit – will be cut down to the level of Jobseekers’ Allowance, while the government will erect further hurdles to claimants. Cuts to departmental spending will mean a further reduction in the numbers of public sector workers.  But it will be some way short of the reductions in welfare spending required to hit Osborne’s deficit reduction timetable.

So, where’s the money coming from? The answer is nowhere. What we'll instead get is five more years of the same: increasing household debt, austerity largely concentrated on the poorest, and yet more borrowing. As the last five years proved, the Conservatives don’t need to close the deficit to be re-elected. In fact, it may be that having the need to “finish the job” as a stick to beat Labour with actually helped the Tories in May. They have neither an economic imperative nor a political one to close the deficit. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.