How to reduce inequality
What works at cutting inequality? New figures show that we already do a great deal – and suggest how we could do even more.
There’s sometimes a terrible fatalism about inequality – most people agree that Britain is unequal and that this is a problem, but many believe that this is inevitable. This sense that nothing can be done about inequality is encouraged by Ministers who like to emphasise the large sums spent by the last government, and then add “but it didn’t do any good.”
A good example was Iain Duncan Smith’s statement response last week to the annual Households Below Average Income report, when he made a point of the “astonishing £150 billion injected into tax credits alone.”
But benefits and tax credits and the taxes that pay for them do make a difference to inequality – a massive difference. Today the Office for National Statistics published their annual report on The Effect of Taxes and Benefits on Household Income. This looks at the distribution of income before and after taxes and spending, looking at patterns of original, gross, disposable, post-tax and final income. Their summary of the figures includes a very useful diagram to show what these terms mean:
At each stage of this process this system reduces the level of inequality. If we look at original income – roughly, what you’d have if we didn’t have any taxes, benefits or services – the poorest fifth of people had an average income in 2009/10 of £4,847 while the richest fifth had £77,896.
If you look at disposable income – how much money you’ve got to spend – the poorest had £10,535, the richest had £60,388.
And if you look at final income – roughly speaking, taking into account how much you’d have spend on the public services you use – the poorest have £15,125, the richest £58,070.
In other words, this country would be about four times as unequal without taxes and benefits:
There’s two really important lessons we ought to take from these figures. One is that fatalism about inequality is really an expression of ignorance: we already do a great deal to equalise incomes. The other is that if we want to do more, there are instruments to hand and we already know they work.