The narrowing of inequality is almost certainly a blip
“The rich get richer and the poor get poorer,” as the saying goes. It’s widely accepted that, in recent years, economic inequality has accelerated in the West. As the best selling author Thomas Piketty has noted, this is the scale of income inequality we are now dealing with:
“In a few weeks, Wimbledon will return to our television screens. The top tennis players in the world will compete for prize money that, boosted by broadcast income from more than 200 countries, will this year total £25 million.
“Forty years ago, the total prize money was £91,000. Taking into account the rise in the cost of living, the players will receive 33 times as much this year compared with in 1974. Over the same period, average real hourly earnings in manufacturing have merely doubled.”
As the below graph helpfully demonstrates, from the late 1970s up to the current recession the share of income going to the top tier of the population increased significantly. The top 1 per cent have a 14 per cent share of national income today, compared to less than 6 per cent in the late 1970s, according to the World top incomes database.
And yet contrary to popular wisdom, since the onset of the recession income inequality in Britain has actually narrowed. Indeed, believe it or not the better off were the hardest hit in the early years of the downturn, while the very poorest were sheltered to some extent by their reliance on benefits and tax credits.
The fall in income since the recession has been “largest for the richest fifth of households. In contrast, after accounting for inflation and household composition, average income for the poorest fifth has grown over this period (6.9 per cent), according to the Office for National Statistics.
As the prime minister claimed during a session of PMQs late last year, inequality in Britain is at its lowest level since 1986.
This seems bizarre when you consider that we hear it said so often that the government is waging some kind of war on the downtrodden through its austerity agenda. It’s almost as if the coalition were enacting the economic agenda of the left or something.
But hold your horses for just a second. Inequality has narrowed in recent years, but it’s unlikely to stay that way; for while the incomes of the wealthiest fell the most during the initial stages of the economic downturn, it is the poor who are now feeling the squeeze and who will be the hardest hit as changes to the benefits system take effect.
The Independent Institute for Fiscal Studies (IFS), which has looked in detail at the cumulative impact of the government’s welfare reforms, said last year that much of the pain for lower-income groups was “occurring now or is still to come because these groups are the most affected by cuts to benefits and tax credits”.
“If the OBR’s macroeconomic forecasts are correct, then most of the falls in real incomes associated with the recession have now happened for middle-and higher-income groups,” senior research economist at the IFS Robert Joyce said.
If we look at some of the coalition’s reforms to the welfare system, it’s fairly easy to see why that might be the case, for many of the changes have only recently come into effect:
The Bedroom Tax – introduced in April 2013
Universal Credit – introduced in April 2014 (ongoing)
The Benefit Cap – introduced in April 2013
Changes to child tax credits – introduced in April 2012
Changes to Working Tax Credits – introduced in April 2012
In other words, and as the IFS has recognised, many of the government’s welfare reforms have only really started hurting the poor in the past year or so – and the pain will continue in the years to come.
At the other end of the income scale, pay is already outstripping inflation (wages including bonuses in the January to March period grew by 1.7 per cent. Significantly, for those who don’t receive a bonus pay is still lagging behind inflation). Top pay is also on the rise again. Research from last year found that the UK’s top 100 chief executives were paid £425m in 2012 – up by £45m 2011.
So what does this mean? It means that the narrowing of inequality is almost certainly a temporary blip. The recovery is well in motion for the rich, but there is a great deal of pain still to come for those at the bottom.