From the TUC

Inequality, social security and the recession

25 May 2013, by in Society & Welfare

(Warning: long post). New figures from the Organisation for Economic Co-operation and Development show that, around the world, the 2007 – 10 recession tended to increase inequality. In most countries, tax-benefit systems reduced this impact – but the organisation warns that continuing high unemployment and austerity mean that there is a real risk that inequality and poverty will take off. The last UK government’s efforts to shelter the poorest from the impact of the recession seem pretty good from this perspective.

In 2011, the OECD published Divided We Stand, a ground-breaking report on rising inequality – the first time the organisation had really taken the issue seriously. The report showed that, across the developed world, inequality had risen in the three decades to 2008, by which point they stood at a record high. The new figures update these results to 2010 and the OECD has taken the opportunity to look at what happened to inequality during the 2007 – 10 global recession.

The first point to note is that, around the world, the recession cut “market incomes” – incomes from capital, employment and self-employment. The OECD average was for market income to fall 1.9 per cent a year in real terms; the fall was rather steeper in the UK – 2.16 per cent a year.

And, as market incomes fell, they became more unequal; as the OECD puts it, “the pain of the crisis was not equally shared.” On average, between 2007 and 2010 the Gini coefficient (a common measure of inequality) rose by 1.24 points in OECD countries; the UK had one of the worst increases – 1.92 points.

But there is a positive story here. Firstly, “disposable income” (after taxes and benefits) did not fall as much as market income and in the UK and for the OECD as a whole this was the result of both taxes and benefits:

Annual percentage changes in disposable income between 2007 and 20101, by income component

Change in market income

Impact of benefits

Impact of taxes

Change in disposable income

United Kingdom

-2.16%

0.56%

0.68%

-0.88%

OECD average

-1.90%

0.78%

0.61%

-0.44%

And the OECD attributes to taxes and benefits the fact that disposable income inequality increased by much less than market income inequality. For the OECD as a whole, while the Gini coefficient for market incomes rose by 1.24 percentage points between 2007 and 2010, the coefficient for disposable incomes only rose by 0.03 points. And whilst the increase in inequality of market incomes was substantially worse in the UK (1.92 points) disposable income inequality actually fell slightly (by 0.03 points). The positive effect of taxes and benefits is partly because they were operating as intended and partly because some countries increased benefits and cut taxes in response to the recession.

The UK’s equality performance is quite good on several measures. The OECD has data on relative income inequality for 20 countries in 1995 and 2010 – roughly matching the period in office of the last government. The UK is one of just four in which the proportion in poverty fell:

Relative poverty in 1995 and 2010 and change

1995

2010

Change

Italy

14.67%

12.99%

-1.68%

Mexico

21.70%

20.41%

-1.29%

Hungary

7.40%

6.80%

-0.60%

United Kingdom

10.52%

9.97%

-0.54%

France

7.60%

7.87%

0.27%

Norway

7.10%

7.53%

0.43%

Netherlands

6.90%

7.50%

0.60%

United States

16.69%

17.38%

0.68%

Greece

13.54%

14.32%

0.78%

Canada

10.73%

11.85%

1.12%

Denmark

4.73%

6.00%

1.27%

Czech Republic

4.27%

5.83%

1.56%

Germany

7.16%

8.82%

1.66%

OECD-20

9.41%

11.07%

1.66%

Luxembourg

5.50%

7.24%

1.74%

New Zealand

8.40%

10.30%

1.90%

Japan

13.75%

16.03%

2.28%

Australia

11.41%

14.44%

3.04%

Finland

4.11%

7.26%

3.15%

Turkey

16.15%

19.30%

3.15%

Sweden

3.69%

9.14%

5.45%

Israel

13.83%

20.86%

7.03%

(The measure here is different from that we are used to in British discussions about relative poverty – it is the share of people living in equivalised households with below 50 per cent of median equivalised disposable household income.)

The current government often responds to similar claims by pointing out that, during recessions, the fall in average incomes will reduce the number in poverty. The OECD has looked at that issue by asking what happened during the recession to relative poverty and to “anchored” poverty – where poverty is defined as half of median incomes in 2005. Where a country’s strong poverty performance is only due to the effect of the recession it will not do well on this extra measure. In fact, the UK is one of only five countries in which poverty fell on both measures between 2007 and 2010:

Percentage point change in relative and anchored poverty, 2007 – 2010

Country

Anchored poverty

Relative poverty

Portugal

-1.72%

-2.22%

Germany

-1.10%

0.30%

Israel

-1.01%

1.00%

Belgium

-0.63%

0.54%

United Kingdom

-0.63%

-1.32%

Poland

-0.49%

0.89%

Denmark

-0.45%

-0.08%

Korea

-0.40%

0.10%

Canada

-0.15%

0.53%

Austria

-0.15%

0.90%

Finland

-0.13%

-0.75%

Sweden

-0.11%

0.79%

Slovak Republic

-0.08%

1.15%

Turkey

0.00%

2.30%

Luxembourg

0.04%

0.04%

Australia

0.24%

-0.20%

Norway

0.29%

-0.26%

United States

0.30%

0.05%

France

0.45%

0.67%

OECD

0.50%

0.08%

Netherlands

0.60%

0.80%

Slovenia

0.76%

0.99%

New Zealand

0.80%

-0.70%

Hungary

0.85%

0.42%

Japan

0.85%

0.33%

Czech Republic

0.87%

0.41%

Iceland

1.93%

-0.09%

Mexico

2.14%

-0.44%

Italy

2.15%

1.04%

Estonia

2.74%

-2.22%

Ireland

3.66%

-0.94%

Greece

5.09%

0.41%

Spain

5.12%

1.68%

To what extent is this performance the result of policy? The OECD data don’t allow us to answer this definitively, but there’s a strong indication from the results for how relative poverty changed for different groups. Between 2007 and 2010, the relative poverty rate in the UK fell by 1.3 percentage points, the third best performance in the OECD and substantially better than the OECD average of a 0.1 point increase. But the performance for different groups was very different:

  • For children, the UK had, by a clear margin, the best performance in the OECD – a 3.4 point fall;
  • For pensioners, the fall was 3.9 points, 9th best but still better than the OECD average of a 2.7 point fall.

But, for young people (18 – 24) there was a 3.9 point increase – only three countries did worse than the UK.

Now, I find this reassuring in a way. Not that we should be pleased about our atrocious performance on youth poverty (which reinforces the TUC’s case for prioritising young people’s education, benefits and employment). But it does suggest that policies make a difference: the last government made significant effort to address pensioner poverty and child poverty was famously a priority that fed through to specific interventions right up to 2010, but most commentators would now agree that they “took their eye off the ball” when it came to young people and their problems. If making an aspect of poverty and devoting resources to it had no effect anti-poverty campaigners might as well go home, so this hint that it does matter is significant.

Finally (and I apologise for the long post) I want to turn to one of the OECD’s main comments on these figures. The point out that these figures “only tell the beginning of the story”. The impact of the recession on market incomes was to increase inequality; it was state programmes and government stimulus policies that reduced it. In the second half of the story, many people will have exhausted their entitlement to contributory benefits and austerity will be reducing the generosity of means-tested support. Their concluding sentence is as relevant to the UK as it is to the rest of the OECD:

If sluggish growth persists and fiscal consolidation measures are implemented, the ability of the tax-benefit system to alleviate the high (and potentially increasing) levels of inequality and poverty of income from work and capital might be challenged.

One Response to Inequality, social security and the recession

  1. justin thyme
    May 31st 2013, 8:20 am

    I don’t understand? This is not inequality – this is murder:

    Social Fund – abolished.
    Crisis Loans – abolished.
    Independent Living Fund – abolished.
    Severe Disablement Allowance – abolished.
    Incapacity Benefit – being converted to ESA,
    Disability Living Allowance – being converted to PIP.
    ESA for long-term sick – sanctionable subject to jobsearch.
    JSA – sanctionable up to three years.
    Workfare – up to 6 months for JSA claimants.
    Workfare – indefinite for ESA WRAG claimants.
    Tax Credits – tougher eligibility rules.
    Council Tax – part payable by all claimants.
    Bedroom Tax – payable by anyone with “spare” room.
    Legal Aid – removed for benefit cases.
    Rationing of aids – 3 nappies a day for incontinent disabled children.
    Cuts in care provided by LAs for the same cost to the claimant.
    All this in just the past two years – plus a 20% rise in familial homelessness and a 40% rise in street homelessness in London.
    Families moved to B&Bs, Premier Inns, etc. and landlords refusing to take benefit claimants, evicting them on an unprecedented scale.
    If Universal Credit ever comes in, there will be a whole new cohort of people (about 3 million) subject to the same conditions as JSA and ESA claimants are now, irrespective of how many hours they work.
    Average waits for benefit processing – 4 weeks JSA, 6 weeks ESA, 3 months DLA. No Crisis Loans available, so people have to rely on food banks – and hope that their landlords and utility providers will wait.
    Meanwhile, IDS gets censured by the ONS for lying with statistics, and his department decides to delay publication of the workfare figures – then, he offers to cut another 3 billion from his budget so that other spending can be saved from Osborne’s axe.
    The DWP now have it as policy to refer people to food banks

    The welfare state is dead