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.
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.
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
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.