And whose fault was inequality?
While we’re on that subject (surely, there’s no need to ask?) I’ve been thinking about the big increase in inequality that took place in the 1980s. In 1979, people in the 90th decile of the income distribution had 3.4 times the income of people in the 10th decile; by 1990, this ratio had risen to 5.0.
It isn’t “natural” for this country to be unequal, there was a time (well within living memory) when Britain was quite an equal country. As the Institute for Fiscal Studies has pointed out:
The most widely used measure of income inequality is the Gini coefficient, which ranges from 0 to 1 with higher levels indicating higher levels of inequality. During the 1960s and 1970s, the Gini fluctuated around 0.26. During the 1980s, it increased substantially, reaching 0.34 by 1990. This was the largest increase in income inequality seen in recent British history …
And the increase in inequality in the 1980s was much more marked than in other countries. The Organisation for Economic Co-operation and Development says:
Income inequality among working-age persons has risen faster in the United Kingdom than in any other OECD country since 1975.
Despite this, you often hear arguments that suggest that what happened in Britain was because we are unusually exposed to forces like globalisation, which are the real culprits.
So I’ve been looking at last year’s annual report on The Effect of Taxes and Benefits on Household Income, trying to separate the effects of changes in redistribution from the ‘background’ increase in inequality. And it is possible to do this: the report presents figures for inequality in a number of stages, including:
- Original incomes, from employment, investment and other private sources
- Gross incomes, which also include cash benefits
- Disposable incomes, after direct taxes
- Post-tax incomes, after indirect taxes
The taxes and benefit system reduces inequality substantially:
- The Gini coefficient for original income is 0.52
- The Gini coefficient from gross income is 0.37
- The Gini coefficient for disposable income is 0.34
- The Gini coefficient for post-tax incomes is 0.38
I want to concentrate on the first and last of these – before and after the redistribution system has had its effect and I want to look at how the effect of this system has changed over time. In the chart below, I’ve done this by indexing the Gini coefficients for original and post-tax income to 1979:
There is an increase in original income inequality, but the scale of the change is much smaller than for the increase after benefits and taxes are taken into account.
Yes, the big increase in inequality happened under just one Prime Minister, but what I’d emphasise is that it’s another indication of the importance of redistribution. Cutting taxes for the rich and benefits for the poor had a huge impact in the 1980s; we need to brace ourselves: the changes that are coming in now will have the same sort of impact on inequality in the 2010s.