This Conservative government looks set to usher in an era of rising income inequality not seen since the time of Margaret Thatcher, according to a new report published yesterday (February 1).
The respected think tank the Resolution Foundation predicted a significant drop in incomes for the bottom half of earners over the next four years, while the richest fifth of households will experience small gains. Middle income earners’ wages are set to stagnate.
The Foundation highlights that it is poorer families with children who will struggle the most. A typical family with children, for example, will see their disposable income after housing costs drop from £18,900 this year to £18,300 in 2020-21.
The report also found persistent income inequalities across regions and age groups. For example, it found that while most age groups are now experiencing household incomes starting to return to pre-crisis levels, younger people have not.
Regional income inequalities first became entrenched since the 1980s, but the Foundation found that little has changed since then – the North East, the poorest region, has average household incomes 20 per cent less than the richest region, the South East.
“In terms of employment too, the gaps between regions has narrowed only slightly if at all despite strong employment growth in all regions,” the report noted. “Even now, with historic highs both nationally and regionally, employment rates in the North East and Northern Ireland are lower than was ever the case in the best performing regions – the South East, South West and East – even before the recession.”
Any boost to households’ incomes felt in the last year or two, the Foundation noted, resulted largely from a drop in oil prices and rising employment, rather than any actual improvements in productivity.
But as inflation starts to pick up again, incomes will fall too.
The reasons for these falls are many, the report highlighted, with some being beyond the government’s immediate control, such as rising inflation sparked by the drop in the value of the pound after the Brexit vote and stagnant productivity.
But the Foundation warned that the government can take decisive action now to alleviate households’ coming income pain by reversing austerity and ending tax cuts that disproportionately benefit the already wealthy.
“How growth is shared is in many ways a simple policy choice,” the Foundation noted.
It warned that if its projections play out, “this would make the current parliament the worst on record for low and middle households since comparable records began in the 1960s.”
Resolution Foundation director Torsten Bell said that the ‘mini-boom’ in living standards in recent years will slow down as inflation rises, productivity flatlines and employment growth slows.
“The squeeze in the wake of the financial crisis tended to hit richer households the most,” he explained. “But this time around it’s low and middle income families with kids who are set to be worst affected.
“This could leave Britain with the worst of both worlds on living standards – the weak income growth of the last parliament and rising inequality from the time Margaret Thatcher was in Downing Street,” Bell argued.
“Whatever the change people voted for in the Brexit referendum it wasn’t this one,” he added. “Doing something about it means a more sensible tax and benefit policy mix, and pressing ahead with increases in the National Living Wage. But it also means recognising that unless we sort out stagnant productivity we haven’t built a sustainable base for rising household living standards.”
Shadow chancellor John McDonnell slammed the government for carrying on with policies that have exacerbated income inequality.
“Labour called on the government at the autumn statement to end the unfair cuts to in work benefits, while they were going ahead with tax giveaways to a wealthy minority, but Philip Hammond chose to carry on with the work of his predecessor,” he said.
“It is becoming clearer by the day that working families will be forced to pay for a Tory Brexit that favours the rich and not the rest of us, as our country faces its biggest rise in inequality since Margaret Thatcher.”
Unite assistant general secretary Steve Turner agreed.
“Households who have already endured years of struggling to make ends meet since after the financial crisis cannot afford to be hit with another fall in their incomes,” Turner said. “As the bottom falls out for the poorest, the UK’s already gaping income inequality will become even wider.
“But as the Resolution Foundation has highlighted, it takes only political will to stop this from happening,” he added.
“In the short-term, the government can and must immediately reverse austerity cuts and end tax reforms that disproportionately benefit the richest,” he noted. “To ensure future economic gains are broadly shared, the government must adopt an industrial strategy which commits to the sort of mass public investment we need to kick-start an economy that’s now lying dangerously stagnant.
“With unions leading the way amid a renewed emphasis on sector-level collective bargaining, we can make inroads into a new economic order in which everyone has a share in our collective wealth.”