Trends in UK Inequality and Poverty

 

Popular discussion of inequality or poverty in the UK is often confused because there are many different measures of both. [1] Some facts are largely immune to measurement issues, like the fact that UK inequality and poverty increased significantly in the 1980s. Bourquin, Brewer and Wernham provide a good discussion, and this chart is taken from there.

So, for example, the ratio of the post-tax income of the top 10% compared to the bottom 10% rose substantially in the second half of the 1980s (helped by cuts to the top rate of tax), but has, if anything, fallen slightly since then.

In the past I have looked at the outer edges of the income distribution, and in particular the share of income going to the top 1%. That’s an income of around £200,000. Here is data from the World Inequality Database, which unlike earlier is pre-tax. For post-tax data see the IFS here. (For more on the characteristics of the 1%, see here.)

I’ve included data since WWII just to illustrate that the post-war period was marked by a steady and significant decline in the 1% share, which was reversed in the 1980s. The 1% share continued to rise in the 1990s and peaked around the time of the Global Financial Crisis, falling back slightly since then.

Wealth inequality shows a similar story, but there are notable differences. The decline in the 1% wealth share in the post-war period was very marked, reflecting in part very high inheritence taxes,. Wealth inequality rose in the 1980s, but more modestly than incomes, and has been growing slowly but steadily since. In addition over the last few decades the overall level of wealth to income has increased substantially.

Recent trends in the UK are very different to the US, where top incomes have exploded dramatically. For example the top 1% wealth share in the US has risen from a low of around 25% before 1980 to over 35% today. The (pre-tax) 1% income share in the US had also risen steadily since 1980, and is now approaching 20%. At the same time tax rates for the very very rich have fallen dramatically.

Why should we care about the very top of the income distribution? Sometimes it is suggested that very high incomes do everyone else no harm, so why worry about what a small percentage of individuals earn? This argument is in my view simply wrong, for two main reasons. First, the scale of inequality at the top is substantial. After tax, the top 1% earn around 9% of all incomes. To put it crudely, that means that by halving these top incomes we could increase everyone else’s income by over 4%, which is a lot. This is the same as saying that if the rise in the share of the 1% since the 1970s had not happened, everyone else would now be over 4% better off. Advocates for the wealthy would say that reducing top incomes would reduce the size of the overall pie, but we have no clear evidence for that.

Secondly, extreme levels of income and wealth tend to impact all of us through politics. We just need to look at the United States to see how this can completely distort the political process in a way that favours the rich compared to everyone else. One reason that post-tax inequality in the United States has risen much more than in the UK, particularly among the billionaire class, is precisely because the wealthiest have so much political power.

What about the other end of the income distribution? The first chart shows a sharp rise in poverty in the 1980s, and then a decline at the turn of the century thanks in part to decisions made by the last Labour government. Since then poverty has been relatively flat, but the chart doesn’t include recent years, and doesn’t include housing costs. Here the story is all about increasing costs in the last few years, as calculations from the Resolution Foundation clearly show.

From these charts it is clear that, while stagnation in real income growth is not pleasant, the so-called cost of living crisis can only really be called a crisis for those on low incomes. Note also that while pensioners are generally better off than workers, pensioners with the lowest incomes have also been hit hard. These numbers seem to strengthen the case for restricting any help following recent energy price hikes to those on low incomes. The number of children in poverty has been slowly increasing since the end of the last Labour government. A major cause of that was the two-child limit, which has finally been abolished by this Labour government.

This is a very brief discussion of broad trends, but I hope it illustrates one crucial point, which is that the extent of both inequality and poverty depend crucially on political decisions about taxes and benefits. To a considerable extent levels of inequality and poverty are what societies choose them to be. But in democracies inequality and poverty are rarely major election issues, so perhaps it is more accurate to say that levels of poverty and inequality are what political elites and their influencers want them to be.  

[1] The best source of discussion of all kinds of inequality, from income and wealth to geographic, housing, education, health and so on, is the Deaton review by the IFS. This much shorter piece in the FT by Toby Nangle is also interesting.