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Is inequality in the UK on the rise?

You often hear the phrase ‘the rich get richer, and the poor get poorer’ within political and economic discourse, and the UK in particular gets singled out for high levels of inequality. It was against this backdrop of perceived injustice that many decried the Chancellor’s decision at last week’s Budget to raise the higher-rate income tax threshold from £46,350 to £50,000 as ‘a tax cut for the rich’, and a sure-fire way to widen the wealth gap in this country.

Yet how close are such allegations to the mark? And is our society really that unequal?

Delving into the numbers

A recent report by the Institute for Public Policy Research (IPPR) ranks Britain as the fifth-most unequal country in Europe. It found that over a fifth of our citizens live off incomes that fall below the poverty line (after housing costs), while the difference between the top and bottom 20 per cent (in terms of average income) is six-fold. The picture becomes starker when the metric changes to affluence, with the top decile of the UK population owning 44 per cent of our total wealth – five times more than that of the entire bottom half. In fact, average household wealth for Britain's poorest decile is 315 times less than that of the richest.

These figures are corroborated by those of the OECD, which, as at 2016/17, found the UK to have some of the highest levels of income inequality in the EU. Gini coefficient data for income does vary depending on the source, but the UK’s is estimated to be 0.34 for income before housing costs, and 0.38 after housing (lower-income households tend to spend a larger share of income on housing expenses, hence the increasing coefficient). For a comparative reference, the likes of Sweden, Belgium, Czech Republic, Finland, Iceland, Slovenia, Norway and Denmark all have Gini coefficients closer to 0.25 for income.

Interestingly, within the UK itself, London is by far the most unequal region according to a recent Sky News study. Around 20% of households in the capital have a total wealth of £1m or more, yet an almost-identical proportion have wealth of less than £20,000. 

The value of property held by Londoners now exceeds £1tn, while households in the South East have more than twice the wealth of their North East counterparts. In general, the richest demographic of people are likely to be pensioners living in London and the South East, while the poorest are single-parent families based in Wales or London.

Is the problem of inequality getting worse?

In short, the answer is no. OECD measures show that the UK’s Gini coefficient for wealth has actually fallen slightly since the 2008 financial crisis (0.62 to 0.61). These Gini index findings are backed up by those of an Office for National Statistics (ONS) paper from earlier this year. While the ONS agrees with the IPPR report that the top decile in Britain have wealth almost five times greater than the entire bottom half combined – this figure is actually unchanged since 2014.

The Department for Work and Pensions also published recent data confirming that inequality in terms of disposable income – which rose sharply in the 1980s, before plateauing in the 90s – was exactly the same in 2015/16 as it was in 2006/07. On top of this, the advent of auto-enrolment has actually served to narrow the wealth gap – cancelled out only by rising disparities in property value.

But are the rich paying their share?

Back to the Budget then, and the controversy surrounding the increase to the higher-rate threshold – or the so-called ‘tax cut for the rich’. Setting aside the fact that, for many, this gain will be significantly offset by an increase in the upper earnings limit for National Insurance contributions, it’s important to gain a bit of perspective and separate income from wealth. Bear in mind, gross income of £50,000 would put you in between the fifth and sixth decile (in terms of median income) if you’re the lone earner in a home with two adults and two children. Even in single-parent homes with one child, this tax cut will still benefit those within the top three deciles. So one shouldn’t be too quick to associate higher-rate taxpayers with the ‘rich’.

Against common perception, it turns out that high earners are paying their way too. We may be justified in our outrage when we read about wealthy tax avoiders, but these folks appear to be more the exception than the rule, with the top one per cent accounting for over 28 per cent of total UK income tax receipts. This is within touching distance of the record of 29 per cent, which was achieved in 2015/16.

Furthermore, according to a Treasury report titled ‘Impact on Households’, it turns out that those in the bottom income decile benefit from more than £4 in public spending for every pound they contribute in tax. Conversely, those in the top income decile receive just £1 for every £5 they contribute. 

The report also consolidates its data for gross household income per decile into a measure called ‘household equivalised net income’ to provide a more accurate picture. According to this metric, disposable income (in real terms, before housing costs) in the bottom decile has risen 8 per cent since the crisis, while median earners have enjoyed a 6 per cent increase. Yet the equivalent figure for those in the top decile is broadly unchanged over the last decade.

So where does that leave us?

The truth is that there are a variety of ways to measure inequality, and, at a secondary level, many more ways to interpret such data. Certainly no one would claim that our society is perfect – both relative to our fellow developed nations, and within our country itself across various regions and demographics. And indeed, the ambition of a fairer, more-equal society is one we should all be aiming for.

But let’s also not fall into the trap of being overly pessimistic by taking the words of those who shout the loudest at face value. An overwhelming level of data suggests that inequality has stabilised, or even narrowed in recent times. And while there remains room for improvement, we’d put forward that the growing levels of resentment towards those in more affluent deciles of UK society are sometimes unjust, or at least overstated.

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