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New evidence of Britain's unequal society - and our future public spending policy dilemma

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Britain has become a dramatically more unequal society in the last quarter century. Two-fifths of the total growth in personal disposable incomes since 1979 has gone to the richest tenth of the population; more than a sixth has gone to the top one per cent; and about an eighth has gone to the top half per cent. Changes at the bottom of the income distribution have been equally dramatic: the share of the poorest 10 per cent has fallen by over a third.

These are among the findings published in a new book on inequality by leading public policy analyst and member of the Pensions Commission Professor John Hills|.

Professor Hills notes that social spending - on education, health and social security -plays a major role in reducing inequality. Indeed, policy changes since 1997 have reduced child poverty and have benefited the bottom half of the income distribution.

But looking ahead, official forecasts that paint a comparatively reassuring picture of future pressures on social spending assume that most cash benefits will remain linked to prices while other incomes rise much faster - potentially making inequality even worse. If instead benefits were to maintain their relative value (and allowing for demographic change and other pressures), the total of social spending in 50 years' time would have to be 4.5 per cent of GDP greater than it is today (unless other factors such as retirement ages change dramatically).

Public attitudes to inequality
The book shows that the current degree of inequality is not popular. A large proportion of the population believes that the gap between rich and poor is too large and that it is government's responsibility to reduce it. Most people substantially underestimate the pay of highly paid occupations, but still think it should be lower.

Most people believe that there is 'quite a lot of real poverty' in Britain, and give views that are consistent with notions of a poverty line that rises over time as society becomes more affluent. Less than a quarter of the population blames 'laziness or lack of willpower' on the part of the poor for their low income.

Explicit support for redistribution towards those with low incomes has declined since the early 1990s though it remains positive. People support the idea of flat rate benefits and services for all and progressive taxation - and they appear to support the redistribution that results as a by-product of the two.

Policy choices on social spending and taxation
Professor Hills examines future policy choices on social spending in the face of demographic pressures. He sets out five potential strategies:

  • Reduce or limit social spending in relation to national income. For most social security benefits for working age people, current policy links their values to prices, so that they fall back in relation to average incomes and their relative cost falls. But this implies deepening relative poverty for those who remain dependent on them.
  • Maintain social spending, but concentrate it on the poor. This is the current strategy for higher education and future state pensions. But it implies more means testing, which is generally unpopular. And the strategy of giving more to the poor within a fixed total implies less for those in the middle, which may be unpopular.
  • Maintain spending for most with selective increases for the poor. This has been the policy followed for tax credits and other benefits for children since 1999, with success in reducing child poverty. The strategy implies that taxes would eventually have to rise but without improvements in services for those in the middle.
  • Increase spending across the board to keep up with demographic and other pressures. This has effectively been the recent approach to school spending. If applied across all spending, it ultimately implies higher taxes. People's willingness to pay may be limited to certain services and to visible improvements in them.
  • Increase spending faster than the external pressures so that services can improve. Current policy on NHS spending is for a rate of growth faster than implied by demographic pressure or the need to keep health service salaries up with others. Both the quality of services and the amount available for given needs should improve. As a general strategy, it clearly implies higher costs and higher taxes.

John Hills concludes: 'The tax and spending dilemmas facing policy-makers are likely to become more acute over coming decades. They face an uncomfortable trade-off between accepting rising costs and taxes in the long-term, reductions in generosity that increase relative poverty, or changes in structure that increase reliance on means testing and reduce the value of services for those with middle incomes.'

Ends

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Notes for editors

Inequality and the State by John Hills is published by Oxford University Press on Thursday 21 October 2004. More information on the publication is here|.

John Hills is professor of social policy and director of the Centre for Analysis of Social Exclusion (CASE) at LSE. He is also a member of the Pensions Commission, chaired by Adair Turner.

The book was launched at LSE on Thursday 21 October, when Professor Hills delivered the latest in the Ralph Miliband Lecture Series on Inequalities, followed by a reception.  

Press cuttings

Financial Times
'Unpalatable choices lie ahead' in quest for more equal society
Governments and voters face a set of unpalatable choices, including higher taxes, if the public is to get what it says it wants - a more equal society with good public services - says a study by leading public analyst John Hills.
http://news.ft.com/cms/s/ae3b4b06-23c6-11d9-
aee5-00000e2511c8.html
| 

Bloomberg
UK minimum wage should rise to seven pounds an hour, study says
A separate study released yesterday said the UK has seen a 'dramatic' widening in the gap between the rich and poor in the past 25 years and more social spending may need to be devoted to narrowing it...said Professor John Hills of LSE in a new book about wages.
http://quote.bloomberg.com/apps/news?pid=
10000102&sid=aFyLBuIuiJLk&refer=uk
| 

22 October 2004

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