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From Our Practical Politics Blog

The politics of income distribution

Countries make a choice about how national income is shared between different groups and the next election will be about which party offers the ‘squeezed middle’ and bottom 50% most hope that their living standards can improve.

These are the central messages I got from launch of the ResolutionFoundation’s Commission on Living Standards final report of the launched in Whitehall on 31 October. The Commission included top people from business, finance, unions, public services and academia, as well as the founder of netmums, to look at the evidence and find a consensus that could get support across the political spectrum.
The report, Gaining From Growth, shows how earnings of the bottom fifty percent hardly rose since 2003, despite a steady rise in national income and labour productivity. Half the population now get just 12 pence of every £1 earned in Britain (GDP), and by 2020 their incomes will fall by 15% from the 2008 level, down to the level in 1993.

Meanwhile people at the very top took an ever increasing share: incomes of the top 0.1% rose 65% from 2003 to 2007 (p38 fig 2.9), a rate of 13.4% a year compared with a rise of 1.6% a year for 90% of the population. At its peak the top 0.1% took 6p of every pound, while the bottom half shared just 12p. Low paid workers did not share in the benefits of increased productivity, as in the US since the mid-1970s, and this was a direct result of political decisions by successive governments. The impact on households was reduced by more women going out to work as well as tax credits and other benefits (Chapter 6), but this also has a cost. Tax payers now spend £4bn a year on low pay. The Commission presents a range of recommendations* which, it argues, would enable low to middle incomes to rise by 7% by 2020, instead of falling 15%. If it is right, and the recommendations are implemented, it could make a dramatic difference to people’s lives and British society. The report is a dense document with detailed arguments and graphs. Experts will argue about the details and consequences of different measures. Political activists will argue that the measures lack ambition or interfere in market forces, depending on their ideology. But most people will not even know about the report or the debate about the politics of income distribution. What many people experience is increasing insecurity at work, the squeeze on incomes and rising prices.

The practical political questions are
  1. What is the big picture story about productivity, incomes, taxes and benefits over the past 30 years?
  2. What is the most credible story about how to improve living standards over the next five to ten years?
  3. And what specific measures will actually bring about improvements?

This report provides evidence, arguments and recommendations, but does not tell the kind of story needed for everyday politics (and to be fair, that is not what it set out to do). Living standards will be a critical issue at the next election. How commentators and politicians tell the story and interpret what is happening will influence how people vote more the technical details, but it matters a lot what the measures are and whether they can deliver. This is where we need the intense, detailed scrutiny of what is proposed, but our political system does not have the forums for this kind of detailed discussion of policy. But arguments about income inequality are not just technical questions about how society shares the fruits of rising productivity, but what kind of society and economy we want to live in. Two years ago the IMF published a remarkable paper on Inequality, Leverage and Crises. This looks at how financial crises can arise as a result of changes in the income distribution. The periods 1920-1929 and 1983-2008 both showed large increases in the income share of the rich and a large rise in debt for the rest, which eventually led to serious financial crises which shrunk the real economy and impoverished many. The paper shows that this was a result of a shift in bargaining powers over incomes, from which the low paid loose out. It argues that increasing bargaining power of the lower income group is a more effective way of preventing financial crisis in future.

From a practical political perspective, this means making the case for increasing the bargaining power of the poorest in society as a means of creating economic stability for everyone.

It was encouraging, therefore, to hear Phil Bentley, Managing Director of British Gas, say that it was a great idea to make firms publish data on low pay “because we need more upward pressure on pay.” Firms should also say what they are investing in apprenticeships. “The Government, unions and employers need to be better coordinated” to improve skills and raise wage levels at the bottom. “Sectors like retail can pay more, because the jobs can’t be exported.” He also said the EU Agency Workers Directive was a useful tool to stop the downward pressure on pay.

*The recommendations are to
  1. improve intermediate skills, particularly among the young, and define outcomes for education at 18
  2. make the Low Pay Commission responsible for recommending an “affordable wage” for different sectors,
  3. foster innovation in local areas to reduce reliance on low pay
  4. require companies to report the proportion of their workforce below the Living Wage to encourage bottom-up pressure
  5. extend free childcare from 15 to 25 hours a week for 47 weeks a year
  6. introduce a second earner disregard in Universal Credit
  7. increase the NIC (National Insurance Contribution) threshold for older workers
  8. extend NICs past state pension age
  9. reduce the life-time allowance for Pensions Tax Relief from £1.5m to £1m
  10. means test Winter Fuel Allowance and TV licence for older people
  11. create new Council Tax bands for higher value properties to cut rates for lower value homes

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