Public spending mitigates inequality – at least, for now

The ONS published a report on the effects of taxes and benefits on household income last week. It showed a recent slight increase in inequality, as measured by the Gini coefficient, though nowhere near the sort of steep rise we saw in the 1980s and still not quite where it was in the early 2000s.

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It also indicated that, after a drop during the recession, the incomes of those at the top have started rising again while those of the bottom 80 percent have continued to fall.

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It is probable, given what we know about the income shares of the top 1 percent and the ‘just belows’ that the rise in top quintile incomes shown here is largely due to increases at the very top. HMRC projections show the share of the next 9 percent continuing to fall for the next couple of years.

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Chart via Michael O’Connor.

The data on taxation suggest that the tax system isn’t as progressive as we sometimes think. As you might expect, for the most part, people pay a lower percentage of their income in tax the further down the scale they are, until the bottom 20 percent, who pay the most.

The Guardian has put this data on a chart.

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When it comes to redistribution, though, it’s not just taxation that matters, it’s what you do with the money afterwards. What makes our system progressive is the redistribution through welfare and public services. In this report, ONS uses the term ‘benefits’ in its widest sense to include not just cash payments bout also benefits in kind, like the NHS, education and subsidised transport.

Taking all this into account, the system does a reasonable job of mitigating the disparities in income.

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As I was trying to catch up with the latest developments in the Piketty row, I came across the Chartbook of Economic Inequality, which has been developed by Tony Atkinson and Salvatore Morelli.

Atkinson and Morelli both work with Piketty on the World Top Incomes Database and I found their site quoted by Chris Giles in a piece following up on his criticisms of Piketty. They have come up with the simple but brilliant idea of putting different measures of inequality on the same chart.

Here is the chart for the UK. (Click on it to make it bigger.)

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This shows the household income Gini coefficient rising in the 1980s then levelling off in the 1990s. At the same time, though, the income share of the top 1 percent and top 0.1 percent rose steadily, albeit with a rude interruption during the recession. Both are now roughly where they were at the end of the Second World War.

A gap has also opened up between the 90th percentile and median earnings but, after a sharp rise in the 1980s, the number of households below 60 percent of the median fell during the 1990s and 2000s.

Despite the lines on the chart moving in different directions, these figures are not necessarily telling contradictory stories. As both sets of charts show, our tax, benefits and public spending system has softened the effects of the rise in the top 1 percent income share by redistributing income to the poor.

However, as we know, public service spending is to be cut severely and the next government, whatever its colour, will probably attempt to slash the social security budget too. This will reduce the redistributive effects of the system at a time when a gap is opening up in income levels.

You have probably read about the arguments over Thomas Piketty’s data. Those interested in picking over the stats will already have read everything they can find on this. For those with a passing interest and/or not very much time, there is a summary of the row here.

It’s important to remember, though, that the arguments over Piketty’s book are not about his data on income. They are about his figures for accumulated wealth and how much the top 1 percent’s share is rising. Here, for a number of reasons, the data don’t give a clear picture. 

Whatever the inequalities in wealth up to now, though, the direction of income inequality is pretty clear. Given the increasing share of income gained by those at the top, it would be astonishing if, over the next few decades, an equally sharp division in accumulated wealth didn’t open up. Add in slow economic growth and the dismantling of the welfare and public spending transfers that have mitigated the effects of inequality so far and Piketty’s prediction of a rising wealth gap looks likely, even if, perhaps, it doesn’t happen quite as quickly as he says.

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