Inequality is falling, but that doesn’t mean we can stop worrying
I was struck by the coincidence of two news items yesterday. On the one hand, the World Economic Forum highlighted rising income inequality as one of four “global risks in 2017” because it threatens social cohesion and democratic societies’ ability to take action on other problems. On the other, the BBC’s ‘Reality Check’ debunked Jeremy Corbyn’s statement that “we cannot go on creating worse levels of inequality”.
Yesterday the Office for National Statistics published a report on Household disposable income and inequality in the UK, with a very nice set of statistics behind it. Disposable income is what we call the amount that’s left when original income is supplemented by benefits and tax credits and after deducting direct taxes (mainly Council Tax, income tax and NI, but not including indirect taxes like VAT) and this measure of how much money your family has got to spend instinctively feels like the right measure.
There are many ways to measure income inequality, one is to measure the ratio between the incomes of people at different ends of the distribution. The ONS figures include a series for the 80:20 ratio, that is households with higher disposable incomes than four-fifths of the country and those lower than four-fifths. The figures are equivalised to take account of factors like the different numbers of people in different households.
This tells you something about inequality in a country, but it misses out on some aspects, such as whether people over 80 or under 20 have rising or falling incomes. A more technical measure, known as the Gini coefficient, measures inequality across the whole population, ranging from 0 (everyone has the same income) to 1 (one person has all the income).
We’ve got these figures for nearly 40 years, and they show a similar story:
You need to be aware that the economic cycle affects inequality. It tends to come down during recessions, when market incomes grow slowly while benefits match inflation (or at least they did till 2010) and then rise again during the recovery when benefits rise more slowly than wages and profits. The impact of the Lawson tax cuts, benefit freezes and the re-organisation of the benefit system, meant that inequality rose to a peak in 1990. Since then inequality has, on the whole, been falling, especially since the recession.
Now, let’s think about what this means. Lots of things have been getting worse for a long time – as the ONS itself points out, living standards have been stagnant since the recession (at least). But the assumption that income inequality is one of them is wrong and if these statistics help stop progressives making this mistake they’ll have done some good.
But let’s also think about what it doesn’t mean.
It doesn’t mean that we can stop worrying about inequality. Both the charts above show that we still haven’t recovered the ground lost in the 1980s. And I’m not optimistic about whether inequality will continue to fall. My colleague Geoff Tily shows that the improvement in inequality has come about by everybody being poorer On the policy front, cuts in top rate income tax and years of benefit freeze don’t bode well. More importantly, as the ONS argue, a lot of recent progress is down to rising employment. More people in jobs has meant that even with low pay levels, people who move off benefits and into jobs are likely to see their incomes rise (though they may well still be in poverty) and most economists expect this trend to slow down or halt in the near future – the latest Treasury round-up of independent forecasts has ILO unemployment rising to 5.4 per cent in the fourth quarter of this year from the current 4.8 per cent.
Compared to other Western European countries, our level of inequality is disgraceful, as the table below demonstrates.
And, most importantly, it doesn’t mean we can stop worrying about poverty. As I’ve mentioned before, we’ve got massive cuts to Universal Credit coming that will hit low-paid workers, and the IFS expects the proportion of children living in poverty to rise substantially by 2020-21. The UN Committee on Economic, Social and Cultural Rights has called on the UK to reverse the cuts in the 2012 and 2016 Welfare Reform Acts and to restore the link between the rates of benefits and inflation. Inequality is falling but many aspects of poverty are still getting worse.