Mind the gap: widening inequalities and anti-poverty strategies

The latest official figures show that, despite a number of government anti-poverty initiatives, income inequality continues to rise. Adrian Harvey questions whether a Government committed to tackling poverty can afford to ignore the growing gap between rich and poor and argues that if inequalities continue to be ignored the target of ending child poverty will not be met.

Rising inequality
The Government’s response
Poverty and inequality
Narrowing the gap

When Jeremy Paxman interviewed the Prime Minister just before the 2001 election, he elicited one very interesting answer. Pushed on whether he saw it as the Government’s role to reduce inequality through redistribution, he replied that ‘it is not a burning ambition for me to make David Beckham earn less money’. This crystallised the dilemma at the heart of Labour’s anti-poverty agenda: does the gap between the rich and poor matter, or is it sufficient that there is a high social ‘floor’ to protect the living standards of the poorest?

For much of the twentieth century, of course, it did matter. The left saw poverty and inequality as essentially the same issue: doing something about the former necessarily meant doing something about the latter. But something strange has happened. There can be little doubt about the Government’s commitment not simply to reduce, but to end, poverty. Blair set the tone in 1999: ‘Our historic aim will be for ours to be the first generation to end child poverty, and it will take a generation. It is a 20-year mission but I believe it can be done.’[footnote 1] An historic aim indeed, and one backed by a timetable and a set of indicators for its achievement. A series of major policy initiatives have accompanied this commitment, some backed by serious money. The list is familiar and does not need to be rehearsed here at length. The New Deal for the unemployed, the Sure Start programme, the National Strategy for Neighbourhood Renewal, the working families’ tax credit and the national minimum wage – all have had a massive and positive impact on the lives of the poorest.

Rising inequality
Yet, despite its industry, it is not at all clear whether Labour still regards inequality as an issue worthy of concern within the anti-poverty strategy. Paxman’s question had been prompted by headlines in Summer 2001 about Labour’s failure to reverse the inequality of the Tory years during its first term. First a report from the Institute of Fiscal Studies showed that in each year from 1997 to 2000, the net income of the top fifth increased at twice the rate of the poorest (2.8 per cent compared with 1.4 per cent – see the table below). This takes into account the progressive tax and benefit changes – the Government’s ‘redistribution by stealth’ – over the period, without which the gap would have been much wider.

The next piece of bad news came in July 2001 with the publication of the annual official inequality figures, Households Below Average Income (HBAI). The report, which defines low income as being below 60 per cent of the median, showed that between 1994/95 and 1999/2000 overall inequality had actually risen, albeit slightly. Further, the proportion of people living in households with incomes below the 60 per cent threshold had remained broadly unchanged over Labour’s first three years. But it is clear that the real division is between those in work and those dependent on means-tested benefits: HBAI found that two-thirds of those on low incomes lived in workless households.

Those in work have seen significant rises in earnings. This has been particularly the case for the rich, but most people in work have seen their incomes rise substantially – even some public sector workers have seen dramatic pay increases. However, benefits such as income support increase only at the rate of price inflation, which has been historically low throughout Labour’s term and has been far outstripped by wage inflation. The price of having a fixed income in a buoyant economy has been that those reliant on basic welfare benefits have seen their incomes fall further behind.

The Government’s response
The Government’s primary response to these inequality figures has been to argue, with some justification, that their main anti-poverty measures – the working families’ tax credit in particular – were not introduced until late in the period in question. This reveals a sensitivity to the issue: the implication being that, in time, the measures will reduce the gap between rich and poor.

However, some ministers have also suggested that income inequality in itself is unimportant if the poor became wealthier in absolute terms. This was the point being made by Blair in his Newsnight interview; it is an argument that has reappeared recently in response to the latest ‘Fat Cat’ pay scandal. A Guardian-Inbucon survey of executive pay found average increases of 28 per cent: the response has been that the Government has no problem with ‘big rewards for big success’.

This is consistent with some recent rhetoric: there is an evident tendency to view the wealth of the affluent as disconnected from poverty and social inclusion. Earnings at the top end are about competitiveness and success; the proper concern of Government is with raising the floor on the poor’s living standards. Inequality is a distraction, a secondary concern to improving the standard of living for those at the bottom. What matters in eradicating poverty and delivering opportunity for all is ensuring a high social floor, combined with an open and meritocratic society.

Poverty and inequality
But is this a viable position for a Government committed to ending poverty? Certainly, ‘lifting the floor’ is a legitimate piece of first aid. The priority for Labour’s first term was, rightly, to improve the living standards of the poorest as quickly as possible. However, this is not the same as a 20-year strategy to eradicate poverty. At a very basic level, there are already significant contradictions. This is perhaps most acutely relevant to Government in regards to the target for ending child poverty. This target is based on inequality measures: if the gap between rich and poor remains as wide, let alone widens, the Government will not meet its target, no matter how high it raises living standards at the bottom.

Yet there are other, more fundamental reasons why inequality must remain central to any Government’s anti-poverty strategy. In short, poverty cannot be isolated from wealth because it is defined by it. The idea that poverty – much less social exclusion – is fixed and absolute is deeply flawed. All notions of poverty are relative, being dependent on the norms and extremes of a given society. General affluence ratchets up the cost of living for the poorest, both the costs of participation in society and of basic needs. For example, it is easier to live without electricity in rural Africa, where solid fuels can realistically be collected directly from the environment, than in a tower block in London. In each context, what it means to be poor is defined by what it means to be rich. If the poorest are left behind, albeit with an absolute improvement in living standards, the Government will have failed in its task. There is a great deal of difference between the relief of poverty and ending it.

There are other reasons why a Government concerned with social inclusion and social mobility should also be concerned with inequality. All the evidence shows that those countries that are more equal are healthier, are happier with themselves and tend to be characterised by greater social mobility. A society characterised by deep inequalities in income and wealth cannot offer equality of opportunity. Existing inequalities will tend to be replicated - and, if unchecked, become further entrenched - over time, regardless of other measures to achieve mobility. It is an uncomfortable truth for meritocrats, but in a market economy affluence buys opportunities, and opportunity becomes the new privilege.

Narrowing the gap
So what is the Government to do? First and foremost, it must recognise that what happens at the top matters at the bottom. That means looking again at the contribution that the affluent make through their taxes. The Fabian Society’s Commission on Citizenship and Taxation proposed a 50 per cent rate of income tax be levied on taxable income over £100,000. This would raise an additional £3.1 billion for much needed public spending, but would also start to address the upper end of the widening income gap. There are other adjustments which could be made – for example around national insurance or inheritance tax – to make the system more progressive. But most importantly, the Labour Government needs to make the case for a more equal and inclusive society. The current resentment about high earners suggests that now might be a good time to start.

But there is also work to be done in ensuring that those at the bottom are not allowed to fall further behind because of the structure of our benefits system. The Government rightly says that the aim should be to lift as many people off benefit as possible, and a great deal has been done to transform welfare from a residual prop in poverty to an active support to escape. But there will always be those who depend on them at some stage, including during working age and, for them, Government has a duty to ensure that not only can they meet their basic needs but live with dignity. The simplest way to achieve this would be to replace the current price-linked uprating – itself based on a fairly arbitrary foundation – with formula based on average earnings or on some system of minimum income standards. No matter what level the thresholds were set – the debate would no doubt be fraught – such a move would ensure that the incomes of the poorest are not allowed to drift further behind those of the mainstream.

The Government’s record on inequality is not unmitigated. It has a good case in arguing that the full fruit of its anti-poverty measures has yet to be reflected in the inequality figures. Moreover, it is harder in some ways to reduce income inequality during periods of high growth. Yet it is not impossible: with the political will, good economic times can make it far easier to persuade the better off of the acceptability of redistribution. There is a hint that the Government is trying to make a virtue out of necessity; combined with its anxiety not to be seen as the enemy of success and its need to be loved, Labour could be trying to persuade itself that poverty can be eradicated without addressing wealth.

Perversely, an economic downturn might take matters out of the Government’s hands. If the gap between wage inflation and price inflation narrows, the inequality statistics might start to look more favourable. But the opportunity to make the case for a more equal society will have passed again, and with it the resources to improve the living standards of the poorest. In this, the Government is right to argue that narrowing the gap is not in itself enough. Income inequality is not the only issue, but it is still central to poverty. Labour must not lose sight of that.

Adrian Harvey is Research Director at the Fabian Society
A Fabian Society conference, Towards a National Anti-Poverty Strategy – Building Partnerships for Social Inclusion is being held on 11 December in London. Further information is available from 020 7227 4900, info@fabian-society.org.uk or at www.fabian-society.org.uk

Footnotes
1. Ending Child Poverty: popular welfare for the 21st century, Robert Walker (ed), The Policy Press, 1999 [back to text]

Poverty 110, Autumn 2001