How growing inequality poisons democracies, and leaves Britain ill-prepared for the coming election
It is harder to think of the greater good when you feel personally short-changed. Resentment is not conducive to generosity
I have recently come across two striking facts about Britain: the disparity in incomes on these shores means we’re closer to some developing countries than to richer economies, and one fifth of the UK population lives in poverty.
Income inequality in the UK is among the highest in the EU. It is also above the average for the Organisation for Economic Co-operation and Development, a group of 36 mostly wealthy countries, including the US.
As pointed out in a report released last week by the National Institute of Economic and Social Research (NIESR), income is only one measure of economic inequality. There are also large disparities between generations, regions and individuals’ total wealth.
Those born in the 1980s are the first post-war generation to have lower incomes during early adulthood than the previous generation did, according to the paper. Moreover, a decline in home ownership among young people over the past two decades means they are accumulating significantly less wealth than previous generations. The reverse is true for elderly households: they are now much wealthier than people of the same age were a decade or two ago.
In fact, wealth is distributed far more unequally than income in the UK, as measured by the Gini coefficient, a common gauge of inequality. In 2014-16, the Gini coefficient for wealth was almost double the coefficient for income, with higher readings indicating greater inequality. The wealthiest 10 per cent of UK households hold over 50 per cent of total household wealth, to quote one example.
What makes Britain particularly unusual is its dramatic regional disparities. The unemployment rate in what Oxford Consultants for Social Inclusion call “left-behind areas” is more than double the national average, and the gap has been growing in recent years. These areas are located in the periphery of major cities in the north and midlands and in towns along the east coast. Meanwhile, annual household income – at £23,814 – is over £7,000 lower on average than across England as a whole.
Income inequality shot up in Britain in the late 1970s and 1980s. Since 1980, the share of total income going to the top 1 per cent has more than doubled to around 8 per cent, much as in the US, notes the NIESR report.
After some ups and downs, income inequality reached a new peak in 2009-10 before dipping back to the still-elevated level seen around 1990. Once housing costs are taken out, inequality is even higher than that level. (That’s because poorer households tend to spend a larger share of their income on housing than better-off families.)
Although there is a common perception that the 2008 financial crisis amplified economic disparities, its effect was small. For instance, income inequality is now lower than it was just before the crisis.
But the crisis made pre-existing inequalities much more visible, with bankers’ bonuses and massive taxpayer-funded bailouts suddenly in the headlines.
The near-decade of austerity that soon followed hit some groups disproportionately hard, making the contrast between haves and have-nots even starker.
Arguably, then, David Cameron could not have picked a worse time to hold his EU referendum – seen by many voters as a chance to upset the economic status quo, rather than just as a vote on our EU membership. Multiple studies have shown that the Leave vote was primarily driven by lower-income households.
Britain now faces another historic vote – a snap general election widely expected before the end of the year. This election will surely be dominated by the parties’ Brexit stance rather than the usual dissection of their various policy proposals. As such, it will be an extension of the original, hugely divisive vote on leaving the EU, and the outcome is unlikely to heal the nation, divided as it is both along ideological and economic lines.
In more normal times, the best thing voters can do is pick the politicians with the most convincing ideas on how to deliver economic growth that will benefit all groups.
But it is harder to think of the greater good when you feel personally short-changed. Resentment is not conducive to generosity. This is why growing inequalities can be particularly dangerous for democracies. The political polarisation they produce eventually leads to government deadlock, as happened in the US and the UK in recent years.
And with problems as urgent as pre- and post-Brexit divisions, an ageing population and stagnant living standards, deadlock is the last thing we need.