Extractive capitalism: Britain has been a high-inequality, high-poverty nation for most of the last 200 years, with significant consequences for life chances, social resilience, and economic strength

Stewart Lansley writes that Britain’s model of ‘extractive capitalism’ – with a small elite securing an excessive slice of the economic cake – has created a two-century-long high-inequality, high-poverty cycle, one broken for only a brief period after the Second World War.

Over the last four decades, Britain has moved from being one of the most equal of rich nations to the second most unequal (after the United States). The same period has also seen a surge in levels of poverty, with the child poverty rate more than double that of the late 1970s (figure 1).

That these two key measures of social fragility have moved in line is no surprise. History cannot be clearer: poverty and inequality are critically linked. Poverty occurs when sections of society have insufficient resources to be able to afford a minimal acceptable contemporary living standard. Its scale is ultimately determined by how the ‘cake is cut’. Barring the short post-war period, Britain has been a high-inequality, high-poverty nation for most of the last 200 years, with significant consequences for life chances, social resilience, and economic strength. Because of the impact of inequality, the poorest fifth of Britons are today much poorer that their counterparts in other, more equal nations (chart 2). Germany’s poorest, for example, are a third better off than those in Britain.

Poverty and inequality levels are ultimately rooted in the outcome of the political and economic power games that play out between big business, state, and society. With the exception of the immediate post-war era, the struggles for share over the last 200 years have been won by the richest and most affluent sections of society, often with the compliance of the state.

For most of the nineteenth century, Britain was a near-plutocracy, with society run mostly by and for the richest sections of society. Colossal and heavily concentrated wealth sat beside crushing poverty through a form of collective monopoly power exercised by a small landowning, industrial and financial elite. The governing and wealthy classes created a form of ‘extractive capitalism’ aimed at securing a disproportionate share of the economic gains from industrialism, often by steering economic resources into unproductive use, with no or limited addition to economic value. ‘The efforts of men are utilized in two different ways’ declared the influential Italian economist Vilfredo Pareto in 1896. ‘They are directed to the production or transformation of economic goods, or else to the appropriation of goods produced by others’.

The long high poverty/inequality cycle and the strength of extraction are inter-connected. The cycle has only been broken once, when from 1945 the bitter ideological battle of ideas was finally won by pro-equality thinkers. The achievement of peak economic equality and an historic low for poverty in the 1970s was a seminal moment in British history. Yet it was short-lived, with the ideological baton passing to a group of New Right evangelists who proclaimed, falsely as it turned out, that a stiff dose of inequality would drive economic progress. As Sir Keith Joseph, a key adviser to Margaret Thatcher, put it in 1976: ‘the pursuit of income equality will turn this country into a totalitarian slum.’ From that point, egalitarianism was replaced by an entrenched bias to inequality. But instead of creating the promised economic and entrepreneurial renaissance, the new licence to get super rich simply triggered a second era of extraction and of Pareto’s ‘appropriation’ and a second wave of high poverty and inequality that is still in place.

Few other nations have applied a pro-inequality economic strategy as comprehensively as Britain and the United States. With the world’s top one per cent emitting twice the carbon emissions of the poorest half, the return of extraction also lies at the heart of the global climate crisis. Corporate leaders have exploited their growing muscle using business practices that have played havoc with pay, jobs, and livelihoods. As the American megabank Citigroup wrote in a confidential note to its clients a few years ago, the United States has long been aplutonomy, one that allows ‘the economic disenfranchisement of the masses for the benefit of the few’.

Examples of complex and carefully hidden extractive devices have included the application of monopoly power through the ruthless destruction of rivals and the rigging of financial markets, to the ‘skimming’ of trading profits – a process City traders like to call ‘the croupier’s take’ – and the engineering of company accounts. The boom in the private takeover of public companies since the millennium, from the AA to Boots and Morrisons, has enriched a generation of private equity barons, often at the expense of the survival of the targeted companies themselves. The long list of companies destroyed by such financial manipulation include ICI, GEC, BHS and Debenhams. Under extraction, economic activity becomes detached from new wealth creation, with the boost to profitability and rising corporate surpluses of recent times used to reward executives and investors rather than boost productivity. In 2019, global stock markets paid out record dividends of $1.37 trillion.

What has been at work is a form of levelling up at the top by levelling down at the bottom.  While egalitarians have yet to regain the ideological high ground, one of the big questions of political economy of the next few years must be the extent to which an entrenched anti- egalitarian model of capitalism can be reformed?

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Note: the above draws on the author’s new book, The Richer, the Poorer, How Britain Enriched the Few and Failed the Poor, a 200-year history ( Bristol University Press, 2021).

About the Author

Stewart Lansley is a visiting fellow at the University of Bristol, a Council member of the Progressive Economy Forum and the author of Breadline Britain, The Rise of Mass Poverty (with Joanna Mack, 2015) and The Cost of Inequality (2011).

LSE Blogs

Official statistics underestimate wealth inequality in Britain

The latest statistics from the ONS are a welcome but limited insight into what has been happening to wealth in Britain, write Arun Advani andHannah Tarrant. Limitations in survey response mean they will underestimate the share of wealth at the top. But while they will not tell us what has happened as a result of the pandemic, we can use them to provide an educated guess.

The ONS’s latest figures on what has been happening to wealth in Great Britain, released in January 2022, are already out of date, covering only the period up to March 2020, and therefore missing the effects of the pandemic. But they are also limited in another way: they underestimate the share of wealth going to the richest households. Given the debates about inequality, discussion about wealth taxes to pay for COVID-19, and the growing importance of inherited wealth as a share of lifetime resources, it is important to get this right.

Total wealth is underestimated

Looking back at the past 12 years of the ONS survey, the figures show that total wealth in Great Britain has risen from £10.4tn to £14.6tn (in 2016–18 prices), meaning average household wealth has risen from £402,100 to £564,300. Over the same period, the share of all wealth held by the wealthiest 10% of households has risen very slightly, from 44% to 45%. However, there are two problems with these figures. First, they do not include business wealth, which is an important source of wealth for the wealthiest households. Second, they substantially under-record the total wealth held by wealthy households, since, unsurprisingly, the very wealthy do not tend to respond to such surveys.

Adjusting the data to account for business wealth – which is measured in the survey but excluded from official statistics – we find that total wealth in Great Britain is £0.7tn higher in 2016–18. This is about 5% of the current estimate, and the proportional underestimation has been similar back to 2010–12. After adding in wealth observed in the Sunday Times Rich List, and using a statistical approach to correct for the under-representation of other wealthy households, total wealth is higher still, by £0.5tn in 2016–18. Total GB wealth is therefore underestimated in the ONS figures by about 8%.

Top wealth is higher than officially reported

After making these adjustments, the level of inequality is also higher (Figure 1). Adding business wealth into the calculation, the share of wealth owned by the wealthiest 10% of households actually rises significantly, by two percentage points. Consistent with the ONS figures, this has remained broadly steady over the period. Correcting for missing wealth at the top, we find the share of wealth going to the top 10% is further increased slightly, to around 47%, and still flat.

Notes: Constructed using data from the Wealth and Assets Survey (WAS) and the Sunday Times Rich List (STRL). ‘Including business’ adds business wealth to the ONS measure of wealth used in official statistics. ‘Also correcting top wealth’ additionally includes the wealth from the STRL and a ‘Pareto correction’ for under-reported wealth among the wealthiest households. See Advani Bangham and Leslie (2021) and Advani Hughson and Tarrant (2021)for details of the correction method. Top shares are measured at household level, consistent with the ONS.

Political movements after the financial crisis, and the work of economists like Thomas Piketty, have favoured looking at wealth concentration among smaller groups – specifically the top 1% wealthiest households. The ONS does not provide figures for this group. Constructing this measure ourselves, we see the importance both of including business wealth and of correcting for under-coverage at the top. Together, these adjustments add around 55% (6 percentage points) to the share of wealth owned by the top 1% in 2016–18 (Figure 2).

Notes: same as for Figure 1.

Other inequalities in wealth

There are also important demographic differences in wealth holdings that are worth highlighting. Men typically have higher levels of wealth: they hold almost 40% more wealth than women, on average. Wealth is concentrated among older individuals. This is partly because individuals close to retirement have had their whole working life to save, but they also benefited ‘from both benign economic developments (such as rapid rises in the value of their homes, generous occupational pension provision and decades of healthy wage growth) and generous government policies (such as free university tuition, big tax breaks for pension saving and capital gains on main homes, and the ‘triple lock’ on the state pension)’.

Wealth differences between households from different ethnic groups are stark: households whose ‘Household Reference Person’ (HRP, the main respondent to the survey) is of white ethnicity are four times more likely to have wealth in excess of £500,000 than households with a black African HRP. There are important differences in household wealth portfolios too: Pakistani and Indian households are less likely to hold pension wealth, with home ownership being more important in their asset holdings.

Previous analysis by the ONShighlights significant regional variation in household wealth. Median wealth is more than 2.5 times higher in the South East compared to the North East. This variation can largely be explained by differences in house prices, with changing house prices contributing to a growing divergence in wealth levels across regions.

Wealth trends since the pandemic

Although these latest figures will not provide direct information on what has happened to wealth since the start of the pandemic, a look at the historic survey data does provide some insight. Dividing the population up into deciles, there are clear differences in asset holdings across the distribution. We know that the average house price rose by 16% between the start of the pandemic and October 2021, and these gains were middle-weighted (Figure 3). Falling interest rates also increase the value of pensions, which are similarly middle-weighted. Meanwhile, stock market growth of around a third since the pandemic lows has disproportionately benefited richer households, though the impact of the pandemic on private businesses is less easy to measure. COVID-19 has also led to those at the bottom of the distribution, who experienced the biggest hit to their savings, falling further behind the rest.

Notes: The lowest decile is excluded as net wealth is negative. Source: Advani, Bangham and Leslie (2021).

What does this mean for the effects of the pandemic on wealth inequality? Overall, the wealthiest have clearly gained most in cash terms over the pandemic. But apart from among the super-wealthy – where there has been very rapid wealth growth – the effect on wealth concentration is likely to be less visible because there are large gains relative to initial wealth for those in the middle as well as those at the top.

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About the Authors

Arun Advani is Assistant Professor in the Department of Economics at the University of Warwick.

Hannah Tarrant is Research Officer in the International Inequalities Institute at LSE.

https://blogs.lse.ac.uk/politicsandpolicy/official-statistics-underestimate-wealth-inequality/?utm_source=feedburner&utm_medium=email

Progressive Internationalism & why a Corbyn government is the only cure for a terrible Brexit – openDemocracy video interview

Progressive Internationalism & why a Corbyn government is the only cure for a terrible Brexit – openDemocracy video interview

Progressive Internationalism & why a Corbyn government is the only cure for a terrible Brexit – openDemocracy video interview


— Read on www.yanisvaroufakis.eu/2019/10/21/progressive-internationalism-why-a-corbyn-government-is-the-only-cure-for-a-terrible-brexit-opendemocracy-video-interview/

Britain’s Economic Boom?

As the British economic crisis becomes more prolonged the outbreak of stupidity that greets every new piece of important economic data becomes more generalised. Previously there has been a campaign to suggest that austerity has led to recovery when the opposite is the case. The recovery is based unsustainably on rising consumption, led by government consumption. The publication of the latest GDP data for most major economies has now led to wild suggestions that Britain is booming and is the strongest major economy in the world

The level of real GDP in Britain since the recession began at the beginning of 2008 is shown in the chart below. It is compared to the US and the Euro Area. British growth has been almost exactly the same as that of the Euro Area as a whole and significantly worse than US GDP growth.Image

It is widely known that many countries in the Euro Area have experienced a severe Depression. Since British growth is now almost exactly the same as the average for the Euro Area as a whole during the crisis it follows that it must be worse than some and better than others. This is shown in the chart below, where among the larger economies Britain’s GDP growth is stronger than both Spain and Italy but worse than both France and Germany.

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Outside the Euro Area the British economy is free to set its own monetary policy and to devalue the currency. Via Quantiative Easing and a large fall in the pound it has taken advantage of both of those yet its growth is no better than the average of the Euro Area and is markedly worse than both France and Germany. British growth is also markedly worse than that of Sweden, the next largest EU economy outside the Euro Area.

The cumulative change in real GDP for selected industrialised economies is shown in the chart below. Despite the potential advantage of independent policy setting the cumulative growth of the British economy is worse than the average, although not as poor as Italy and Spain. (The growth of the US economy is slightly overstated because official data now show that the US recession did not begin until the 3rd quarter of 2008)

.Image

In no case is this a robust recovery in the industrialised economies either by historical standards or compared to the most dynamic economies in the world currently. Over the same period from the 1stquarter of 2008 the Chinese economy has grown by approximately 60%.

Even compared to the last US recession, current performance has been variously described as ‘sluggish’ or ‘disappointing’. The US is frequently held out as a model of economic recovery. But it has recently entered its fifth year of economic expansion and GDP is just 10% above its low-point in 2009.

The British ‘boom’ is much worse. The low-point of GDP occurred in mid-2009 and since that time has increased by just 5% in 5 years. And the Labour Party was responsible for just under half of that, GDP rising 2.4% in the quarters following the increased investment of the 2009 Budget. 

‘Secular stagnation’ 

Authoritative economists such as Larry Summers (video) and Gavyn Davies and others have instead been discussing the ‘secular stagnation’ of the industrialised economies. Paul Krugman wonders whether this is ‘a permanent slump’

In the chart below Gavyn Davies shows the actual level of GDP in four economies combined (US, Euro Area, Japan and Britain) are shown along with the consensus forecasts for growth (the blue lines). The trend growth rate of those economies is shown the red line. The dotted yellow line shows the average estimate of potential output. 

The red line represents previous level of growth whereas the dotted yellow line represents the average of estimate of what is now possible for growth. In both cases, actual and forecast GDP is set to remain below those levels for some time. But much slower growth projected by the depressed level of estimated potential output shows that the dominant idea is something close to ‘secular stagnation’ for the leading industrialised economies, something like 1.2% growth per year.

Image

Summers and others correctly identify the main cause of the crisis as the slump in business investment, as SEB has argued. However he argues that this is because interest rates are above the level of anticipated return on investment. Yet the widely-acknowledged cash hoard of western firms belies this notion. The large firms which overwhelmingly account for investment have no need to borrow to invest as a result of this cash mountain. They are hoarding cash because the anticipated return itself has fallen. The anticipated return is otherwise known as the profit rate.

The stark long-term consequence of this trend towards declining profitability, lower rates of investment and cash hoarding are shown in a recent chart from the OECD, below. A turning-point in the world economy occurred at the beginning of the 1970s as the long post-War boom was brought to an end. Since that time each recovery from recession in the OECD has been weaker than the preceding one. The Reagan/Thatcher offensive to restore profits has led instead to a progressive weakening of the OECD economies. 

The current slump had the weakest growth prior to the recession and the most severe downturn as well as the weakest recovery from it. A hat-trick of neoliberalism. 

 

The growth of the British economy conforms to these patterns and sits in the middle-to-lower band among the OECD economies. The OECD predicts 1.4% GDP growth in Britain for 2013 and 2.4% in 2014. 
Only a complete fraudster would describe the British economy as the strongest in the world. Only someone entirely ignorant of both recent and historical economic trends would describe either current or forecast growth in Britain as a boom.

 

 

 

 

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Why Northerners don’t vote Tory

by in Commentary, Editor’s picks, Front Page and Politics
Mon October 21, 2013 9:32 a.m. BST
 

YouGov President Peter Kellner on why the Conservative party’s trouble with northerners may have less than to do with economic, ideological or social factors than one might expect

Karl Marx was wrong; or, at any rate, unfair. He complained that philosophers “only interpreted the world” when the point was to change it.  The trouble is, change is likely to work only when we understand what is wrong. The Conservatives badly want to change the voting habits in the north of England; but to do so, they must first answer the fundamental question: why don’t northerners vote Tory?

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Some do, of course. George Osborne (Tatton, Cheshire) and William Hague (Richmond, North Yorkshire) have safe seats. But these are rare. Just 31% of northern voters backed the Tories in 2010, 12 points less than in the rest of England.

It used not to be like that. When Winston Churchill led the Conservatives back into power in 1951, the gap was just three points (North 47%, rest of England 50%). Over the decades, the North has drifted away from the rest of the country.

The past 60 years have seen massive economic and social changes. Perhaps these explain the remorseless decline of northern Tories? The problem with this explanation is that the most obvious change should have had the opposite effect. The old coalmining, ship-building, steel-working areas have gone. The old Lowry landscapes of billowing factories have all but disappeared. One might have expected Labour’s hold over the industrial North to have weakened, and for the Conservatives to have benefited from the transition to newer, less unionised and more fragmented northern economy. And, indeed, Labour’s support is down, from 52% in 1951 to 38% in 2010. But it has not gone to the Tories. The net swing between 1951 and 2010 was 1% to Labour in the North – but 5% to the Tories in the rest of England.

There is one specific explanation for a part of the Conservatives’ long-term decline in the North. In some cities working-class loyalties used to divide along religious lines. Catholics voted Labour while Protestants voted Conservative. This was why Tories won five out of nine Liverpool seats in 1951. But by the Seventies, this effect had largely gone – yet the relative decline of the northern Tory vote continued. Today, there are no Conservative MPs in Liverpool, Manchester, Sheffield, Leeds, Bradford or Newcastle upon Tyne.

One possible explanation is that votes correlate with income. Northerners are worse off and therefore less likely to vote Conservative. However, this explanation does not wash. For a start, standards of living for typical families are actually much the same in the North and South. Overall, spending power is substantially higher in London and the South East; but these figures are heavily influenced by the minority of very higher earners in and around the capital.

If we define the South as the South East and South West regions (that is, excluding London; it is the definition of “South” used in the data for this article), then median pay rates in the North are just 10% lower than in the South. Then, when we take account of living costs (in particular rents and house prices, which are far higher in the South), then that 10% difference almost completely disappears as far as most working families are concerned.

What, though, about non-working families? Isn’t unemployment far higher in the North? Could this explain Tory unpopularity? Again, the answer is little, if at all. True, unemployment in the North (9%) is higher than in the South (6%). But unemployment in the West Midlands is higher still, at 10% – yet the Tories still managed to win 40% of the vote there three years ago.

Even if living standards are comparable, two other factors are worth examining: social class and the division between public and private sector jobs. Northerners are more likely than southerners to have manual jobs and to work in the public sector.

To examine these, I have aggregated YouGov polls from September this year. They provide data on more than 40,000 people across Britain, including more than 9,000 northerners and almost 13,000 southerners. This enables us to look in some detail at the demographic groups within both parts of Britain.

Social class first. As with pay rates, the differences between North and South are not massive. Using the normal definition – the job held by the head of household, 46% of northerners are working class compared with 41% of southerners. This is not enough to explain more than a fraction of the difference in voting patterns. Indeed, if we look at the Conservative share of the vote within each social class, the regional differences remain vast:

As those figures show, unskilled workers in the South are as likely to vote Conservative as managers and professionals in the North. It’s a similar story with public and private sector employment, with public sector workers in the South supporting the Tories in much the same proportions as private sector workers in the north.

To explore these, I have looked at a variety of recent YouGov surveys and also put some new questions to YouGov’s panel. The results allow us to test four possible sets of reasons why northerners don’t vote Tory.However we carve the figures, objective factors – whether economic, social or employment – account for only a small part of the gulf in Tory fortunes between South and North. It follows that most of the differences, therefore, are subjective, and relate to the way northerners and southerners think.

First, financial. Even if living standards are comparable, do northerners feel differently about their current circumstances and future prospects? The chart shows that there is no material difference on three out of four measures – how comfortable people feel today, their (low) optimism about the next 12 month and their (much higher) optimism about the long-term future.

1. Financial South % North %
Are very/fairly comfortable financially 37 35
Expect household finances to improve in the next 12 months 17 16
Workers worried that job is secure 38 44
Optimistic about “what life hold for you over the next 10-20 years” 59 60

In one respect attitudes do vary to a modest extent. Northerners in work are slightly more worried than southerners about losing their job. However, this seems to bear only a loose relationship with party loyalty. Once again, Midlands voters share similar economic numbers with the North (42% of Midlands workers feel insecure, versus 44% of northern workers) without sharing the same antipathy towards the Tories.

Second, ideology. From time to time YouGov asks people where they place themselves on a seven-point scale from “very left-wing” to “very right-wing”. Northerners and southerners show little difference, with only one in four describing themselves on “fairly” or “very” to one side or the other. At both ends of England, this minority divides evenly between left and right.

As for the role of government, the main, but again modest, difference is that northerners are more likely to have firm views one way or the other. More of them want the state to do and tax less – and more (though not many) want the state to do and tax more. Southerners are more content with the status quo.

2. Ideology South % North %

Regard themselves as very / fairly left-wing

Regard themselves as very / fairly right-wing

12

12

14

12

In long term, government should do less and tax less

In long term, government should do more and tax more

21

4

25

10

Private sector should play bigger role in delivering public services

Public sector should play smaller role in delivering public services

23

37

19

31

Think free market is best way to distribute goods and services 29 24
Would bring railways back into public ownership 61 64
Think Top tax rate should be 50% or more 49 55

In other respects, northerners are more likely to hold traditional left-of-centre views: more of them would like the private sector to play a smaller role in delivering public services; fewer of them agree that the free market is the best way to distribute goods and services and more think the top rate of tax should be raised to at least 50%. On the one explicitly socialist policy we tested, nationalising the railways, almost two-thirds of people at both ends of Britain back the idea. Overall, the small ideological gap explains a bit of the north-south party divide; but that is all.

Third, social attitudes. Here, the only difference to excite a statistician concerns welfare. Big majorities in all parts of Britain share the Conservative view that welfare benefits generally should be reduced; but southerners (79% of whom think this) outpace northerners (71%). On other issues – immigration, gay marriage, prison sentences, the EU and Syria – the differences are negligible. Whatever is driving northerners away from the Conservatives, it is not social attitudes. Like southerners, they want Parliament to get tough with immigrants, criminals and welfare recipients; and like southerners, they broadly support gay marriage and are divided on Europe.

3. Social attitudes South % North %
Want to stop all migration 48 50
Think welfare benefits generally should be reduced 79 71
Support gay marriage 53 56

More convicted criminals should be sent to prison

Fewer convicted criminals should be sent to prison

49

23

50

27

Would vote to stay in EU

Would vote to leave EU

39

43

40

41

Supported military action against Syria ahead of Commons vote

Opposed military action against Syria ahead of Commons vote

26

46

25

47

Ed Miliband is keen to present himself as a “One Nation” leader, stealing from the Tories the clothes designed by Benjamin Disraeli, who famously described England as “two nations between whom there is no intercourse and no sympathy”. Even if Disraeli’s two nations – the rich and the poor – persist in England today, they have little geographical expression. Whether judged by circumstance, experience or attitude, the striking thing about northerners and southerners is not how different they are, but how alike.

Which simply sharpens the question – if the obvious reasons for Conservative unpopularity in the North do not really hold up, what does explain why they are so disliked? The time has come to test the issue directly – attitudes towards the two main parties.

4. The parties. The data need to be viewed with care. It is only to be expected that Conservative supporters will give “pro-Tory” and “anti-Labour” answers to attitudinal questions about the two parties – and vice versa for Labour supporters. Moreover, it’s hard to tell whether a pro-Tory response is a cause for, or a consequence of, supporting the party.

What we can do is look at how the differences between North and South vary. Where views are pretty similar, it is reasonable to suppose that these do NOT explain the gulf in party loyalties; rather, we are looking for the big differences in view.

4a. Conservatives South % North %
Big Differences
Conservatives care more about the rich and affluent than ordinary people 62 73
Cameron out of touch 32 42
Cameron doing well as PM 45 36
Think coalition is bad ‘for people like you’ 51 59
Cameron has no clear principles 39 47
Modest differences
Think state schools would improve if Conservatives win next election 28 21
Think economy would grow stronger if Conservatives win next election 40 34
Small differences
Think Conservatives have taken tough but necessary decisions 52 48
Think coalition is good ‘for people like you’ 24 22
Conservatives have changed for better since their time in opposition 35 34
Think immigration would fall if Conservatives win next election 28 28
4b. Labour South % North %
Big differences
Think economy would grow stronger if Labour wins next election 19 30
Miliband doing well as Labour leader 26 35
Small differences
Miliband out of his depth 48 46
Miliband too willing to give in to unions and left-wing 49 47
Labour has seriously lost touch with ordinary people 59 59

This process helps us to rule out a number of explanations. It’s not that northerners are significantly less likely to think that the coalition is “good for people like you”, that the Conservatives “have changed for the better since their time in opposition” or that they “have taken tough but necessary decisions” to turn round Britain’s economy. Nor do they have less faith in the Tories’ ability to control immigration – few people in any part of England think this.        

On the other side of the political ledger, northerners and southerners share similar views on whether Ed Miliband is too left-wing or out of his depth. A clear majority of southerners, 59%, think Labour “has seriously lost touch with ordinary people”; the proportion of northerners who think this is exactly the same.

There are modest differences when voters consider the practical consequences of Conservative rule. Southerners are slightly, but only slightly, more hopeful that a future Tory government would improve the economy or run state schools better.

Which brings us, finally, to the big differences. Northerners dislike David Cameron. They are significantly more likely to say he is out of touch and lacks clear principles, and much less likely to say he is doing well as Prime Minister. And despite the comparable living standards and levels of optimism, northerners are much more likely to think the coalition “is bad for people like you”. The widest gap of all, eleven points, concerns the proposition that the “Conservatives care more about the rich and affluent than ordinary people”. Big majorities in all parts of Britain think this, but the sentiment is especially intense in the North.

Not that the Tories have all the problems. Labour has parallel troubles in the South, where few voters think that Miliband is doing well or that the economy would grow stronger under Labour. The party has lost much of the respect, both for its leader and its competence, that it enjoyed under Tony Blair. Labour’s “southern discomfort” is alive and ill and living in towns and cities from Kent to Cornwall.

But the focus of this analysis concerns the North. The Tories’ problems did not start with Cameron, but neither have they lessened under his leadership. Rather, he reminds many northerners just why they dislike the Tory Party. It’s not because they are poorer, or more pessimistic, or further Left or more reliant on the state for their job: they aren’t – or, at any rate, not enough to explain their reluctance to vote Conservative. Nor is it because of what the coalition has actually done in the past three years – at most, this explains a fraction of the difference.

In the end, the Tories’ problem is not what they do; it’s what they are. Their trouble is their brand. They lost Scotland because they lost their reputation as a unionist party and came to be seen as an English party. They are losing the North because they are seen increasingly as a Southern party. This need not stop them winning a future election: there are enough constituencies in the Midlands and the South which, when added to the Tories’ isolated seats in the North, can give them a parliamentary majority. But few, even on the Conservative benches, would regard that as a wholly healthy prospect.

Leading Conservatives often admit they need more women and non-white faces on their benches. This analysis suggests that they also need many more people with regional accents. On its own, this won’t suddenly make the Tories popular on Merseyside or Tyneside; but as part of a long-term strategy to revive the Tory brand north of the Wash, it would be a start.

A £10,000 personal allowance: who would benefit, and would it boost the economy?

Authors: James Browne

Despite the planned net fiscal tightening of £123bn per year by 2016-17, the coalition government has sought to cut income tax for low-income individuals by increasing the income tax personal allowance to £10,000 by 2015-16. Significant increases to this allowance – the amount of income that is not subject to income tax – have already been implemented or announced, at a combined cost to the government of nearly £5 billion per year: it increased by £1,000 in 2011-12 to £7,475, and it will increase by a further £630 in 2012-13 to £8,105 (£700 and £210 more than it would have gone up by under default indexation rules in those years respectively).

How much more would it cost the government to meet its target of reaching a £10,000 personal allowance by 2015-16? Normal price indexation of the personal allowance (the assumption underlying the Office for Budget Responsibility’s forecasts for the public finances) would mean that it would reach £8,885 in 2015-16 without any discretionary policy changes given current inflation forecasts. Compared to this baseline of £8,885, a personal allowance of £10,000 in 2015-16 would mean that tax revenues were £5.3 billion lower in that year. To reach that ambition earlier, as several Liberal Democrat and Conservative politicians have recently advocated, would reduce income tax revenues by more than this, as shown in the table below:

Year £10,000 personal allowance introduced Annual cost to the Exchequer
2012-13 £8.9bn
2013-14 £7.7bn
2014-15 £6.5bn
2015-16 £5.3bn

Note: Costs are for the year in question: if the personal allowance were subsequently increased in line with inflation (the default indexation policy), the cost would remain roughly the same. Alternatively, if the personal allowance were frozen at £10,000, the cost would fall as shown in the table.

Source: Author’s calculations using the IFS tax and benefit microsimulation model, TAXBEN, run on uprated data from the 2009-10 Family Resources Survey.

 

These figures all assume that the threshold at which the higher 40p rate of income tax starts to be applied is unaffected. This means that higher-rate taxpayers get the same benefit from the higher personal allowance as those who remain basic-rate taxpayers. If the government wanted to lower the cost of achieving a £10,000 personal allowance, it could prevent higher-rate taxpayers from benefiting at all by reducing the threshold at which the 40p rate starts to be applied: this would reduce the cost to the Exchequer from £5.3 billion to £3.3 billion in 2015-16. This approach would lead to a significant increase, of around 600,000 in the number of higher-rate taxpayers. Under current policy proposals this would also mean that about 200,000 more families with children would lose their Child Benefit because an adult in that family would become a higher rate taxpayer after the lowering of the higher rate threshold (these Child Benefit savings would account for about £300 million of the reduced cost to government of meeting its £10,000 target in this way).

The gain from increasing the personal allowance to £10,000 in 2012-13 (without changing the higher rate income tax threshold) would be £379 a year to each individual taxpayer aged under 65 with an annual income between £10,000 and £116,210. There are three groups of individuals who would not benefit: those aged 65 or over, who already have tax allowances exceeding £10,000 (other than those with incomes above around £29,000 who see their allowance reduced to the level of the allowance for those aged under 65); those who do not have incomes high enough to pay income tax anyway (more than a third of the adult population); and those who have the personal allowance fully withdrawn as their income exceeds £120,000. Those with incomes between £8,105 and £10,000 would see their income tax liabilities fall from less than £379 to zero. A gain of £379 is of course larger as a percentage of income to a low-income individual than someone with a higher income, although it is important to remember that the poorest third of adults do not benefit at all because their incomes are already below the personal allowance.

But if we examine the distributional impact at the family level (which is normal for this sort of analysis, since we would expect at least some degree of income sharing within families) we get a different pattern to the one we might expect. This arises because two-earner couples, who tend to have higher family incomes, can benefit twice over from the increase in the personal allowance because both members of the couple would see their income tax liabilities fall by £379, meaning that they would gain £758 in total. Thus, the highest average cash gain occurs in the second-richest tenth of the income distribution (some of the richest tenth would not benefit because of the withdrawal of the personal allowance above £100,000, lowering the average gain for this group). As a percentage of income, the gain is roughly the same from just below the middle to just below the top of the income distribution, with the bottom and the very top gaining by less than this.

To summarise, the common assertion that increasing the personal allowance is progressive is true if one considers the gains across individual income taxpayers. It is not true if one considers the gains across all families as relatively few of the poorest families contain a taxpayer and two-earner couples gain twice as much in cash terms as one-earner families.

Distributional impact of increasing personal allowance to £10,000 in 2012-13, by income decile group

Income deciles

Notes: Income decile groups are derived by dividing all families into 10 equally-sized groups according to income adjusted for household size using the McClements equivalence scale. Decile group 1 contains the poorest tenth of the population, decile group 2 the second poorest, and so on up to decile group 10, which contains the richest tenth.

 

Source: Author’s calculations using the IFS tax and benefit microsimulation model, TAXBEN, run on uprated data from the 2009-10 Family Resources Survey.

 

Some have argued that a higher income tax allowance would be a good way of introducing a short-term fiscal stimulus for the economy. In our annual Green Budget, we argued that the case for a fiscal stimulus was not clear cut, but said that if the government did choose to introduce one, it should be timely, targeted and temporary. Increasing the personal allowance does not seem to meet any of these criteria. An increase in the allowance would not be especially timely: individuals would not see the effect in their pay packets until the Autumn. It would not be well targeted: the Office for Budget Responsibility suggests that increased investment spending or spending on benefits (or indeed cuts to the main rate of VAT) would deliver a larger direct boost to the economy in the near-term. And being a long term government ambition it would not, of course, be temporary.

Increasing the income tax allowance takes low income people out of income tax. Therefore, it is the best way of focusing income tax cuts on those with lower incomes. And it will strengthen work incentives, especially for low earners. But it is important not to claim too much for a policy which, especially in the current fiscal climate, is expensive. By definition it will not help those on the lowest incomes, who do not pay income tax anyway. And in the current context it is clearly not the best way of delivering a short term fiscal stimulus – and it should not be pursued for that reason. Any stimulus needs to be timely, targeted and temporary.

http://www.ifs.org.uk/publications/6045