Will austerity increase inequality?

Will the government’s austerity policies make the UK a more unequal society over the next few years? Many, especially on the left, are convinced that they will.

John Rentoul thinks not, though. In a follow-up to his piece on inequality, which I wrote about on Tuesday, he concludes:

My guess is that overall inequality, as measured by the Gini coefficient, would be more or less unchanged.

This is hard to believe, I know, but the Treasury and the independent IFS conclude that the tax system will be more progressive under the Coalition than under Labour, and that this will counterbalance the regressive effects of cuts in benefits. The overall effect of Coalition policy will probably be to leave the gap between rich and poor unchanged.

His basis for this are calculations by the Institute for Fiscal Studies that show the combined impact of tax and benefit changes hitting high earners hardest, at least in terms of percentage of income.

Screen Shot 2013-01-01 at 14.26.16

In other words, taxes and transfers will continue to mitigate the effects of unequal incomes, as they have over the past couple of decades. The rich may get richer but they will pay more in tax.

UK Gini coefficient before and after taxes and transfers 1975 – 2012

Screen Shot 2013-01-01 at 11.34.04

Source: OECD

The problem is that, as Chris and Paul point out, the poorer people are, the less likely they are to have savings put aside to cushion them from the effects of falling incomes. Rich people may, indeed, see their incomes fall by 8 percent while the poorest ‘only’ fall by 5 percent. But, while an 8 percent fall from £150,000 to £138,000 might be uncomfortable, a 5 percent fall from £15,000 to £14,250 could be enough to tip a household with no savings over the edge.

But there’s another transfer factor beside taxes and benefits. The OECD reckons that public services play a significant role in reducing inequality – more so in Britain than in many other countries.

Social spending in the UK relies more on public services (such as education, health etc.) than on cash transfers: spending on services amounts to over 15.4% of GDP while spending on cash transfers is some 10%. These services reduce inequality more than almost anywhere else, and this impact has increased over the 2000s.

In other words, a lot of services that people pay for in many parts of the world are subsidised or free in the UK. And, of course, spending on all these services is being cut. Even those which are supposedly ring-fenced are facing de facto cuts. Over the next few years, a lot of things that used to be free or subsidised won’t be. As the state reduces or abandons the provision of some services, the redistributive effect of Britain’s public sector will almost certainly be reduced over the next few years.

Another UK peculiarity highlighted by the OECD is this country’s high level of self-employment. It blames the rise in self-employment for half the increase in inequality since the mid-1980s:

About one-half of the increase in individual earnings inequality is explained by changes in self-employment income as on the whole the self-employed earn less than full-time workers. Their share in total earnings increased by one fifth since the mid-1980s and among the self- employed, the gap between high and low earners has risen.

While a few self-employed people have high incomes, the majority earn less than their employed counterparts. Most of the newly self-employed are not entrepreneurs or business owners but odd-jobbers scratching around for work. The former social worker interviewed by the BBC’s Mark Easton is typical:

Only last week I wrote about the youth worker Karen Creed made redundant by Norfolk County Council and now operating as a freelance. Her income has been cut to a third of what it was…

Continuing public sector redundancies and rising self-employment are likely to depress the earnings of those in the middle income groups. As the OECD says, self-employment has raised the UK’s Gini coefficient. Many more Karen Creeds will only make it worse. On top of that, if the overall unemployment level rises, more people will find themselves sliding into lower income groups.

We won’t know for a few years what effect the Coalition’s policies have had on levels of inequality. John Rentoul may well turn out to be right. Higher taxes for the wealthy may mitigate the effects of austerity. But there are other factors at work. I wouldn’t want to bet against inequality rising and the UK’s Gini coefficient going up over the next few years.

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7 Responses to Will austerity increase inequality?

  1. Pingback: Will austerity increase inequality? - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. Jim says:

    I’m not surprised that a ‘freelance youth worker’ has suffered a drop in income of two thirds. It just goes to show that in the real world (ie outside the public sector taxpayer funded bubble) there isn’t any demand for such services. If she had some real skills it would be a different story.

    • MaryMary says:

      Oh come on. Are you really so dense? Who do you think needs youth workers? It’s not going to be Oliver Minted from St. Privilege’s School for the Comfortably Off, is it? If all the cancer nurses and oncologists went private, you’d probably conclude that demand for their services had gone down, rather than people dying because they couldn’t afford the fees.

      • Jim says:

        ‘Would do you think needs youth workers’

        Simple answer – no-one who spends their own money rather that someone else’s. Unlike cancer nurses for whom (sadly) there is a lot of work. If you gave a cancer victim the cash to spend on a nurse, but said they could spend it on anything else they liked if they chose, my guess is that most would spend it on the nurse. Whereas if you gave the cash to a parent to spend on a youth workers time, my guess is they might find all sorts of other ways of spending it. Ergo there is genuine demand for cancer nurses, but not youth workers.

        • MaryMary says:

          Firstly, if you’re going to quote me, do please try and get the words right. Secondly, youth workers are there to support those for whom, for whatever reason, the parental support is not sufficient/available/appropriate. Who are these ‘people’ who you seem to think are choosing not to pick up the bill? The parents, who may have no spare money themselves, and/or a very difficult relationship with the child in question? The local authority whose budget has been slashed? That’s a strange definition of ‘choice’ as far as I’m concerned.

          You say that *if* people were given money to spend on treatment, they would do so. Of course a cancer patient would very probably spend the money on treatment. But do you think it’s wrong to give someone money to help a child or young person off drugs, off the street, back into school or into work? That is what you’re saying when you dismiss the value of a youth worker. You’re also writing off those children and young people. Did you never have an adult mentor, or someone you looked up to, who put you right at some point in your life? Most people need that at some time or other, and in some situations the adults themselves are under the kinds of strains themselves that support and advice may only be available if provided deliberately by government intervention of some kind.

          Anyway, my point is about what happens when the money is *not* there to spend.

          Finally, and most importantly in relation to the current government’s problems, you clearly fail to understand that there is a difference between ‘need’ and ‘demand’. You’re in good company there – I think a number of Tory (and Labour) advisers and politicians are committing the same basic category error. Maybe the cancer example was too emotive and distracted from my point, which is that if (for example) I had no food and no money, I could not buy food. Hence there would be no ‘demand’ from me in a commercial/economic sense. But I would still *need* food. Similarly, if I had no money, and only money could get me vital medical attention, I might well die. This happened in the past in this country, before the NHS was founded, and it still happens in the US because their health system is so tied to employment. Sadly, this issue affected a close family member of mine relatively recently.

          The concept of ‘demand’ is defined by the ability to pay. Need is not. You may think that youth workers are a luxury for which someone may choose not to pay; I think they are a vital support to young people in need, and that there is a wider long-term societal benefit to *all* of us to getting them onto a more even keel.

  3. Rentoul’s chief dishonesty is to focus on income tax and NICs to the exclusion of wealth taxes, i.e. capital gains, dividends and property. These continue to be highly advantageous for the rich, which is why marginal changes to income tax and pension relief thresholds are less of an issue. While many of the rich did take a hit as their assets depreciated in 2008/9, the policies of government (QE pushing up share prices, engineered scarcity in housing) have restored their balance sheets already.

    At the other end of the income scale it is now clear that the key dynamic is one of work distribution – i.e. many more people obliged to rely on part-time work or self-employment while wages stagnate and in-work benefits become more necessary. Ultimately, this is the result of long-run technological change (and its effects through globalisation and automation): we can no longer generate enough work for everyone. This initially manifests itself among the unskilled, but it’s only a matter of time before it starts to affect more skilled roles. Jim misses the point in thinking that the freelance youth worker tale is one of the relative waste and ineffciciency of the public sector. What it actually indicates is that middle-class roles are now under threat, in the private sector as much as the public.

    The reality masked by the Gini “paradox” is two countervailing tendencies: wealth continues to be concentrated at the very top while work (and wages) is increasingly shared at the bottom.

  4. Keith says:

    You and Rentoul seem to ignore housing costs and benefit cuts. The Governments policies will greatly increase inequality as they involve huge increases in rent levels combined with reductions in housing benefit. Which will reduce the disposable income of the poorest people as they must rent and cannot afford to buy. Ditto with council tax benefits and re definitions of incapacity and disability criteria to reduce elagability. Like all the other middle and upper middle class Journalists including those on The Guardian the reality of the policies seems to be lost on commentators. This is the biggest attack on the poor since Thatcher with all the cuts targeted hardest at the bottom. General calculations about income are totally misleading without looking at housing costs.

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