Can inequality be tackled without spending more on benefits?
Divided We Stand: Why Inequality Keeps Rising, today’s report from the Organisation for Economic Co-operation and Development, illuminates the debate on benefit levels and re-distribution. Of course, most of the initial comments have focused on the headlines about this country’s relative performance. The OECD has produced a very useful ‘Country Note‘ on the UK, with a stunning take-away quote up at the top:
Income inequality among working-age persons has risen faster in the United Kingdom than in any other OECD country since 1975. From a peak in 2000 and subsequent fall, it has been rising again since 2005 and is now well above the OECD average.
And the data shows that the UK is up there with Mexico, Turkey, the USA and Israel as one of the titans of inequality:
(Inequality here is measured using the Gini coefficient.) But there’s also interesting reading further down and in the detail of the report. In particular, there’s a vital discussion about the causes of the UK’s inequality, which suggests that cuts in benefit rates played a major part. The policy prescriptions in the main report says that it is going to be hard to make progress on inequality without redistribution – higher taxes and benefits. And promoting social mobility is difficult if inequality is left untouched.
Why did this country become more unequal? The OECD lists factors that include:
- The share of income taken by the top 1 per cent of earners doubled between 1970 and 2005 and higher paid workers have tended to work more hours.
- Self-employment became more common, and the incomes of self-employed people became more unequal. And, for those who think self-employment is always wonderful, the OECD notes that “on the whole the self-employed earn less than full-time workers.”
- People have become more inclined to marry individuals with similar incomes to themselves.
But, in addition to these factors, “transfers and taxes became less redistributive” and this was despite benefits “being more targeted towards the poor”. This sounds contradictory, but the explanation makes sense – partly its because the working poor became more common. But this change “was largely driven by declining benefit amounts “ though “tighter eligibility conditions” didn’t help.
At the TUC, we have argued that attempts to make social mobility a political goal as an alternative to cutting inequalityare unlikely to succeed – one goes with the other, and the main report rather supports this position. It points to previous work from the OECD that shows that income inequality “can stifle upward social mobility”, and that
Intergenerational earnings mobility is low in countries with high inequality such as Italy, the United Kingdom, and the United States, and much higher in the Nordic countries, where income is distributed more evenly …
It is becoming harder and harder to believe in a strategy to reduce inequality or relative poverty that does not involve redistribution.The Institute for Fiscal Studies’ fascinating report for the Resolution Foundation yesterday pointed out that “since 1980, low- to middle-income households’ incomes have only grown because of rises in other income sources, most notably benefits and tax credits.” This means that wage increases by themselves are not going to make a huge difference to them:
For these households to keep up with the average would therefore require an increase in income through another source, most likely increased employment or state transfers. If income from benefits did not rise, LMI households would need to increase their hours worked by around 5% on average in order to keep up.
The IFS forecast that the number of children in poverty will rise by 600,000 by 2013 and that the target of ending child poverty by 2020 will be missed by a long stretch follows on from cuts to benefit and tax credit levels. Although the Institute expects Universal Credit eventually to have a positive impact,
the net direct effect of the coalition government’s tax and benefit changes is to increase both absolute and relative poverty. This is because other changes, such as the switch from RPI- to CPI-indexation of means-tested benefits, more than offset the impact on poverty of Universal Credit.
There is a very useful section on “Lessons for Policies” in the main report and a handy couple of paragraphs in the UK Country Note. They point out, correctly, that getting people from the bottom of income distribution into work and increasing their human capital so that they can move into well-paid jobs has to be the bedrock of an anti-inequality strategy. And, of course, they counsel against “redistribution strategies based on government transfers and taxes alone” (and I can’t think of anyone I take seriously who’d argue for this). But there’s no getting away from the conclusion that:
Reforming tax and benefit policies is the most direct and powerful instrument for increasing redistributive effects. Large and persistent losses in low-income groups following recessions underline the importance of well-targeted income-support policies. Government transfers – both in cash and in-kind – have an important role to play in guaranteeing that low-income households do not fall further back in the income distribution.
At the other end of the income spectrum, the relative stability of higher incomes – and their longer-term trends – are important to bear in mind in planning broader reforms of redistribution policies. It may be necessary to review whether existing tax provisions are still optimal in light of equity considerations and current revenue requirements.
None of this is to argue that the current tax and benefit system does no good – as I’ve pointed out before, without taxes and benefits this country would be about four times more unequal. Indeed, the OECD report underlines just how important redistribution is. Two conclusions flow from this:
- The cuts and freezes in benefits and tax credits will increase inequality and poverty and reduce social mobility;
- A credible egalitarian strategy must include redistribution.
What does this mean for the future? People I respect have argued recently that no government will be able to spend more on benefits for a long time. In particular, the authors of the new pamphlet, In the Black Labour write about “very constrained funding for healthcare, pensions and welfare for the foreseeable future.” They argue that:
spending is not the only way to secure improvements in our country and the lives of its people. In fact it is often the least good way to do so. Structural or institutional reforms, which affect the causes of inequality and injustice, are often better – and invariably more enduring.
As must be obvious, I have severe doubts about this claim. The key elements of the European social model – redistribution, collective bargaining, public ownership – aren’t beyond criticism, but they have certainly been enduring. So far, they have been the only structural/institutional reforms so far to have a wide record of successfully reducing inequality.
The pamphlet talks about how “deeper and more ambitious reforms must be confronted to ensure the economy works for working people.” Well, yes, but I’d like to know a bit more about what they might be.
This caveat doesn’t, of course, show that more redistribution is possible. But it does mean that talk about continuing to pursue equality in a world where there are no more resources for redistribution is misleading. I’m not sure that I accept the argument that resources will continue to be that constrained for such a long period of time, but if they are, perhaps the question the In the Black authors might want to ask is: what objectives might an egalitarian pursue in a world where greater inequality is inevitable?
Never let it be said that it doesn’t matter who runs major institutions. Angel Gurria’s speech launching today’s report is remarkable for its insistence on the importance of inequality – it can’t just be brushed off as an unfortunate by-product of the policies that have to be implemented to achieve economic growth. You can’t imagine the OECD producing a report like this as recently as ten years ago. Of course, there is broader concern about inequality among mainstream economists since the global crisis began, but the contribution of the Secretary-General has been significant too.