Simon French: The true battleground on inequality policy is what to do about wealth

Few economic data generate quite as much comment as inequality statistics. They are used by politicians and campaigners across the political spectrum to buttress arguments and advocate for policy changes. Inequality data define the frontier between the economy and wider society – the interplay of efficiency, equality, and equity.

Data for 2021 – recently released by the Office for National Statistics – suggests that income inequality has barely budged for the last thirty years. This has stemmed from a sustained fall in long-term unemployment, the introduction of the minimum wage as well as restoring the earnings link to the state pension. Together these have meant that the big increase in income inequality seen during the 1980s has in fact levelled off under successive governments since the early 1990s. Whilst there is a fierce debate on whether the current level of income inequality is optimal, this is one of the few economic indicators to have remained stable in recent decades.

Whether this stability has also brought resilience is about to be put through one of its sternest tests. Energy prices and food prices are rising at 23% and 5% respectively – with more to come over the summer months. It will be those on the lowest income groups who will face the toughest choices. A healthy market economy is one where households can withstand the type of economic shock that no Chancellor or economist can foresee. War in Europe is just such a shock. It is first and foremost a humanitarian tragedy. However, it will also test the financial resilience of low-income UK households. Recent research by the Money and Pensions Service suggests that more than twenty-five million UK adults were already defined as “struggling” or “squeezed” ahead of the current surge in the cost of living. With 50% of households having an income of less than £31,400/year, their ability to absorb energy cost increases of more than £1,000/year will be the defining economic feature of 2022.

Income inequality however is only part of the story. Whilst income inequality has stabilised, total household wealth and wealth inequality has soared. The total value of pensions, savings and property has grown from three times the size of the UK economy in the early 1990s to nearly seven times today. As interest rates have moved lower, the reward to owning assets has steadily increased. Yesterday’s data revealed that whilst the top 10% of households earn wages that are 28 times higher than the bottom 10%, this disparity grows to 56 times for investment income. Simplistically, financial wealth inequalities are twice the level of wage inequalities. The story is similar for non-financial wealth such as residential property – an asset class worth almost £8 trillion. And this points to the true battleground on inequality policy, what to do about wealth?

Some of the most stinging criticism levelled at the Chancellor in recent days since his Spring Statement is that the government is shifting the burden of taxation away from all income – a category that includes investment income – and towards wages. An Income Tax cut alongside an increased levy on wages through higher National Insurance contributions would appear tone deaf to the latest patterns in the inequality data. For a smart Chancellor with a keen political antenna this has been an odd decision to put it mildly.

The counter from the Treasury and Her Majesty’s Revenue and Customs is that UK data on total wealth is notoriously incomplete and risks the accusation of “double taxation” where assets have been accrued out of post-tax income. The reality is that large parts of the tax system have failed to adjust to the implications of low interest rates and its corollary of rising asset values. The rising role of wealth has been allowed to develop without a review of whether this makes the traditional income redistribution mechanisms fit for purpose. As it stands the UK’s inequality policies risk missing the increasingly bloated elephant in the room.

Author: Simon French, Chief Economist and Head of Research at Panmure Gordon, writing for The Times

Simon French

Managing Director, Head of Research