Trends in poverty and inequality since Labour came to power in 1997 fall neatly into three stages. In Labour’s first term, there was growth in income of over 3 per cent each year after inflation for the median household. But, unlike a similar boom period of the mid- to late 1980s, income growth among the poor was also robust, because more people were working, and because of overtly redistributive increases in benefits and tax credits for pensioners and families with children. This meant that those on low incomes more than kept up with the average, and relative poverty fell. But at the other end of the income distribution scale, the top incomes raced away. Half a million of the wealthiest people enjoyed annual increases of over 5 per cent per year after inflation, and inequality rose.
In Labour’s second term, income growth was weaker across the board. Yet relative poverty for children and pensioners continued to fall because of increases in the pension credit and tax credits for families. The bursting of the dotcom bubble led to a fall in top incomes, and so the poor began to catch up with not just the middle, but also the rich; and both poverty and income inequality fell.
Since 2004, however, the picture has been bleaker. Even before the recession – the latest data goes up to March 2008 – household incomes had barely grown at all. Any growth there has been during Labour’s third term has been concentrated among the rich, and public finance constraints have resulted in smaller benefit and tax credit rises than before. The story has been one of rising inequality and rising poverty. By 2007-2008, income inequality on the most widely used measure, the Gini coefficient, had reached its highest level since the 1950s.
It was not for want of trying. If Labour chancellors had not increased benefits or tax credits faster than inflation, both poverty and inequality would be much higher. The recession could force another change. Higher levels of unemployment are likely to increase the numbers of low-income households, but falls in average incomes lower the poverty threshold, thereby reducing relative poverty. As the origins of the recession were in the financial sector, it may well be that the consequential fall in top incomes means that Britain is currently growing more equal, if poorer..
Additional research: Luke Sibieta