Children play football in front of a residential development in the London borough of Tower Hamlets. Photograph: Getty Images.
Show Hide image

How inequality is costing the economy billions

The social consequences of inequality, such as reduced life expectancy and worse mental health, cost the equivalent of over £39bn every single year.

Since the late 1970s, the UK has become one of the most unequal countries in the developed world. As the rich have got richer, the rest of us have been left behind. Research released today by Oxfam shows that just five families now have as much wealth as the poorest 20 per cent of the population. It’s a frightening statistic, and for most people, one that offends their basic sense of decency. Can anyone really be "worth" this much? Can so many people be worth so little?

Worryingly, for some the answer appears to be "yes". For these people, an elite but small group of "wealth creators" are delivering jobs and driving economic growth. If five of these people happen to have the same wealth as a fifth of the population, well that’s just reward for their hard work and, no doubt, superior intellect. Perhaps even more concerning is the argument that inequality is not just acceptable, but desirable - driving the competitiveness vital to entrepreneurialism. But does seeing someone paid hundreds or even thousands of times more than you act as encouragement, or as a painful reminder of how little society values you?

The reality is that the consequences of the UK’s extraordinarily high levels of inequality are far-reaching and catastrophic. Of the developed OECD countries, the UK is ranked 17th out of 23 for life expectancy, 19th out of 22 on obesity, 17th out of 21 on teenage births, and 17th out of 23 for imprisonment. More equal societies, meanwhile, top the table on almost every measure.

Inequality shapes how we see others, our levels of trust in strangers, our sense of community. It erodes the bonds between individuals. But might it go even further? The IMF and others have pointed towards the damaging effects that inequality may have on economic growth. It makes perfect sense; if wages stagnate or fall for the majority of people, a consumer-led recovery becomes tricky to engineer without encouraging a huge growth in personal debt.

In addition, the impact of inequality on our health, wellbeing and crime rates may also have a financial cost. Research recently conducted by the Equality Trust has found that the impact on the UK of some of the social consequences of inequality, including reduced healthy life expectancy, worse mental health, higher levels of imprisonment and murder, could cost the equivalent of over £39bn every single year. If this was broken down to an individual level, it would show that the impact of inequality on every man, woman and child in the UK can be valued at £622.

Yet these figures may be just the tip of the iceberg. Many of the costs associated with inequality remain incalculable. For example, how does one value the higher level of community cohesion, trust, and social mobility associated with less unequal countries? Our estimate is based on a comparison between the level of inequality in the UK and the average level seen in developed countries. In other words, small changes to our level of income inequality would have a huge effect.

In recent weeks, the issue of inequality has gained significant coverage, it is now unquestionably part of the public and political narrative. But we need action to match the rhetoric. A living wage, a fairer tax system, and the creation of jobs with genuine opportunities for advancement should all be part of political party manifestos. But all parties serious about reducing costly social problems must also include an Inequality Test - an explicit goal that the net impact of their policies will be to reduce the gap between the richest and the rest. The benefits of reducing economic inequality are clear - a richer, healthier and quite possibly happier society. But we need politicians to have the courage and conviction to deliver real change.

Duncan Exley is the director of the Equality Trust

Duncan Exley is the director of the Equality Trust

Getty
Show Hide image

I was wrong about Help to Buy - but I'm still glad it's gone

As a mortgage journalist in 2013, I was deeply sceptical of the guarantee scheme. 

If you just read the headlines about Help to Buy, you could be under the impression that Theresa May has just axed an important scheme for first-time buyers. If you're on the left, you might conclude that she is on a mission to make life worse for ordinary working people. If you just enjoy blue-on-blue action, it's a swipe at the Chancellor she sacked, George Osborne.

Except it's none of those things. Help to Buy mortgage guarantee scheme is a policy that actually worked pretty well - despite the concerns of financial journalists including me - and has served its purpose.

When Osborne first announced Help to Buy in 2013, it was controversial. Mortgage journalists, such as I was at the time, were still mopping up news from the financial crisis. We were still writing up reports about the toxic loan books that had brought the banks crashing down. The idea of the Government promising to bail out mortgage borrowers seemed the height of recklessness.

But the Government always intended Help to Buy mortgage guarantee to act as a stimulus, not a long-term solution. From the beginning, it had an end date - 31 December 2016. The idea was to encourage big banks to start lending again.

So far, the record of Help to Buy has been pretty good. A first-time buyer in 2013 with a 5 per cent deposit had 56 mortgage products to choose from - not much when you consider some of those products would have been ridiculously expensive or would come with many strings attached. By 2016, according to Moneyfacts, first-time buyers had 271 products to choose from, nearly a five-fold increase

Over the same period, financial regulators have introduced much tougher mortgage affordability rules. First-time buyers can be expected to be interrogated about their income, their little luxuries and how they would cope if interest rates rose (contrary to our expectations in 2013, the Bank of England base rate has actually fallen). 

A criticism that still rings true, however, is that the mortgage guarantee scheme only helps boost demand for properties, while doing nothing about the lack of housing supply. Unlike its sister scheme, the Help to Buy equity loan scheme, there is no incentive for property companies to build more homes. According to FullFact, there were just 112,000 homes being built in England and Wales in 2010. By 2015, that had increased, but only to a mere 149,000.

This lack of supply helps to prop up house prices - one of the factors making it so difficult to get on the housing ladder in the first place. In July, the average house price in England was £233,000. This means a first-time buyer with a 5 per cent deposit of £11,650 would still need to be earning nearly £50,000 to meet most mortgage affordability criteria. In other words, the Help to Buy mortgage guarantee is targeted squarely at the middle class.

The Government plans to maintain the Help to Buy equity loan scheme, which is restricted to new builds, and the Help to Buy ISA, which rewards savers at a time of low interest rates. As for Help to Buy mortgage guarantee, the scheme may be dead, but so long as high street banks are offering 95 per cent mortgages, its effects are still with us.