To cries of disbelief from the Labour benches, George Osborne boasted in his last Budget that “under this government income inequality is at its lowest level for 28 years”. Osborne’s statement wasn’t wrong. The Gini coefficient for disposable income in 2011-12 (the most recent figure then available) was 32.3 per cent, the lowest level since 1986. As I noted at the time, it’s normal in periods of economic stagnation for inequality to fall as middle class earnings decline and the automatic stabilisers protect the incomes of the poorest.
But as I also noted, the Chancellor’s boast was unlikely to last for long. Owing to the coalition’s welfare cuts, many of which only took effect last year, inequality is forecast to significantly increase between now and 2015-16. In particular, Osborne’s decision to cap benefit increases at 1 per cent for at least three years (an unprecedented real-terms cut) means the poorest will see a sharp fall in their incomes. The IFS expects inequality “to rise again from 2011–12, almost (but not quite) reaching its pre-recession level by 2015–16.”
Today, the Office for National Statistics has provided us with an update and, exactly as predicted, inequality is on the up again. The Gini coefficient increased to 33.2 in 2012-13, the same level as in 2009-10 and is only likely to get worse (these figures are from the year before the top rate of tax was cut from 50p to 45p).
While the Tories could take little credit for the earlier fall in inequality (which was largely due the decline in middle class earnings), they will deserve the blame for the rise. And with Ed Miliband making the need to reduce the gap his defining mission, Osborne may live to regret fighting on this turf.