Income inequality in the UK
The UK has one of the highest levels of income inequality in Europe. There was a sharp increase in all measures of economic inequality over the course of the 1980s. Measured by the commonly-used Gini coefficient, relative income inequality has stayed largely flat since 2000. But this means that the real income gap between richer and poorer households has been increasing in absolute terms.
Other measures of income inequality show a continuing rise over the same period. Between 2003-4 and 2018-19, the poorest 20% of non-pensioner households saw no overall rise in their incomes at all, while the incomes of the richest tenth and of the median (typical) household grew around 15%. The poorest fifth did see their incomes rise in 2019-20, but this will almost certainly have been reversed in 2020-21. In this period pensioner poverty has fallen, though it rose to just under a fifth (18%) in 2019-20, while the proportion of children living in poverty has increased to nearly a third (31%).
The Gini coefficient also hides the accelerating incomes of the richest 1%, who now take almost 14% of all national income, compared to around 7% in 1981.
The Equality Trust has brought together evidence on the drivers of inequality in high-income countries such as the UK in recent decades, including political systems, institutions and policies, technological change, patterns of globalisation and childhood and family factors.
The Resolution Foundation's annual Living Standards Audit examines trends in household incomes in the UK, including the impacts of the Covid-19 pandemic. It shows that while better-off households have been able to increase their savings and pay off debts, many of those on the lowest incomes have seen their debts increase.
Gathering multidisciplinary evidence from over 200 academics and research institutes, the British Academy has published a wide-ranging report on the likely long-term impacts of the Covid-19 crisis, and the policy implications. It forecasts that significant intervention will be needed to avoid an acceleration towards poorer health and social and economic outcomes and a more extreme pattern of inequality.
The final report of the Resolution Foundation's Intergenerational Commission sets our a comprehensive analysis of intergenerational inequality and a policy agenda to reduce it, including action on education, employment and housing.
Wealth is far more unevenly distributed than income. In 2016-2018 the wealthiest 12% of households owned half of the UK's wealth, while the least wealthy 30% of households held just 2%. The poorest tenth of the households have negative wealth: that is, their debts exceed their assets. Measured by the Gini coefficient, wealth inequality has increased since 2006-8, with financial and property wealth showing the largest rise.
Pension wealth has become more equal in this period, as automatic pension enrolment has been rolled out. The rise in property values has led to a sharp increase in intergenerational inequality. For the most part, income and wealth are closely linked, with high incomes allowing people to accumulate assets, which have consistently grown faster in value than national income over recent decades. The poorest households most exposed to income shocks often have no savings to fall back on.
One consequence is the increase in low income households turning to debt to cover essential needs - rent, food, utility bills - over the past decade, and the increasing use of food banks.
The World Inequality Database, established by Thomas Piketty, Gabriel Zucman, Emmanuel Saez and colleagues, provides a comprehensive set of data on income and wealth inequality in countries across the world.
The Resolution Foundation has published a series of reports outlining the extent and character of wealth inequality in the UK.
The Resolution Foundation's Intergenerational Commission has documented the inequalities between generations in the UK, noting in particular how today's younger generations are much worse off in terms of housing and pensions than previous generations.
Inequality and Covid-19
The impacts of the Covid-19 pandemic and economic shutdowns have not been evenly experienced. The evidence shows that the effects have largely played out along existing lines of inequality. In the UK people living in the most deprived areas and on the lowest incomes, and those from black and minority ethnic (BME) communities, have been both most likely to die from the disease and most likely to lose their jobs and to face serious financial pressure.
Globally Covid has also been experienced in very uneven ways. Varying national responses to the virus have made a big difference, but within most countries it has been those on the lowest incomes who have experienced the most severe effects, and internationally countries with the poorest health systems.
The extremely unequal distribution of vaccines has exacerbated the crisis, with much slower rates of vaccination between richer and poorer countries. Vaccination rates will largely determine how quickly countries recover economically from the pandemic.
Nobel laureate Joseph Stiglitz reviews the international evidence on inequality and Covid-19, and argues that systemic economic reform is needed to reduce inequalities.
The Institute for Fiscal Studies Deaton Review on Inequality has analysed how Covid-19 has affected various aspects of inequality in the UK. It shows how the pandemic has interacted with many longstanding inequalities, with those on low incomes and in disadvantaged areas, women and BME communities most affected by job loss and financial hardship.
The Institute for Health Equity's 'Build Back Fairer: The COVID-19 Marmot Review' examines the health inequalities and the socioeconomic determinants of health exacerbated by the pandemic.
A report by the World Health Organisation, UN Development Programme and Oxford University analyses the global distribution of vaccines and shows that the highly unequal rate of vaccination will largely determine the speed at which countries recover economically from the pandemic.
Racial inequality and migration
Reducing income and wealth inequality
The multiple drivers of income and wealth inequality mean that many different kinds of policies and approaches are needed to reduce them. One of the core features of the growth of inequality in most high-income countries since the 1970s is the significant fall in the proportion of national income which has gone to wages and salaries (the 'labour share') and the corresponding rise in the proportion which has gone to the owners of capital assets (such as company shares and land and property). This suggests that policy needs to focus, on the one hand, on raising the productivity of labour and the bargaining power of workers; and on the other on reducing the rate at which assets appreciate in value. Both kinds of approach would reduce the growth of 'market' income and wealth, before tax. Reforms to the tax system and welfare measures can then further reduce inequality.
In recent years the growth of low-paid and insecure jobs has led many to argue that there needs to be a revival of the role of trade unions in the labour market, able to bargain collectively on behalf of workers and employees. There is a strong correlation between the decline of union membership in most high-income countries since the 1970s and the rise of income inequality. Productivity improvement - for example through automation - will enhance wages, but only if the benefits are shared between workers and the owners of the automating technologies and software.
Over recent decades there has been an increasing concentration in the ownership of company shares, and the values of stocks and real estate have grown substantially faster than national income (GDP). Companies have become more 'financialised', using more of their profits for dividends and less for investment, and and banks (particularly in the UK and US) have lent increasing sums for land and property. Various proposals have been made to counter these trends, including stronger financial regulation, higher taxation of financial companies and transactions and new forms of corporate governance. There have also been proposals to widen the ownership of company shares, both to their workers and the population as a whole.
Writing for Economists for Inclusive Prosperity, Dani Rodrikand Stefanie Stantcheva have created an organising framework for policies to tackle inequalities, including a taxonomy of policies to distinguish the types of inequality being addressed and where the intervention takes place.
The TUC argues that collective bargaining is a public good that promotes higher pay, better training, safer and more flexible workplaces and greater equality. It proposes a range of measures to give unions greater access to workers and workers greater rights to join unions. Detailing trends in union membership and the evidence relating this to inequality, a report for the IPPR Commission on Economic Justice makes similar proposals.
A paper for the IPPR Commission on Economic Justice sets out how trends in automation and artificial intelligence are likely to increase inequality, and proposes a process of 'managed automation' to share the benefits of productivity improvements between workers - including those displaced - and the owners of capital.
The final report of the IPPR Commission on Economic Justice, Prosperity and Justice, sets out more than 50 policies which can reduce inequalities in income and wealth, between geographic areas and between genders and ethnic groups.
A report for the Friends Provident Foundation proposes the creation of a Citizens' Wealth Fund, a national sovereign wealth fund which would take gradual ownership of company shares on behalf of the public and distribute a dividend to citizens. IPPR has made a similar proposal.
A report published by the LSE's Inequalities Institute examines the economic consequences of major tax cuts for high income earners in a variety of countries over the last 50 years. It shows that such tax cuts increase income inequality but do not have any significant effect on economic growth or unemployment. A report for the IPPR shows how the UK income tax system could be made more progressive.
The wide disparities in the distribution of wealth have led to an emerging consensus that the way in which wealth is taxed needs to be reformed. While wealth has soared relative to incomes over recent decades, with these gains concentrated very narrowly among high-income households, the tax take from wealth has remained flat.
Property wealth constitutes an important part of this. House prices in the UK have tripled relative to incomes since the 1970s, a key driver of economic inequality. But soaring property values have been left largely untaxed, with a council tax system still based on 1991 property values. Economists point out that land and property taxation is an efficient mechanism since they are fixed and their rise in value often occurs without any work, effort or skill on the homeowners’ part.
Income from wealth , including dividends and capital gains, is currently taxed at lower rates than income from work, one reason why the very wealthy pay a much lower effective average rate of tax on their remuneration. The system of inheritance tax includes a range of reliefs and exemptions, which can allow the wealthiest estates to avoid it: the effective rate of inheritance tax paid on estates valued at over £10 million is half that paid on those with a value of £2-3 million. Tax avoidance schemes also allow the very wealthiest to circumvent tax. Among the wealthiest 0.01% of household, who hold 5% of national wealth, approximately 30-40% of wealth is held offshore.
Proposals for tax reform include equalising the rates of tax on income from wealth and income from work; reforming land and property taxation; reforming inheritance tax; and proposals for annual or one-off taxation of household wealth.
IPPR have published proposals to equalise the rates of tax on income from work and wealth and integrate all income into a single progressive tax schedule. It estimates that such reforms could raise around £100bn in annual revenue.
The Resolution Foundation outlines how a series of relatively minor reforms to the taxation of wealth which could raise significant sums without, it argues, significant political opposition.
The broadly-based campaign group Fairer Share outlines the case for a proportional property tax to replace council tax, thereby bringing property taxation into line with the principle that taxes should be progressive (rising with ability to pay). The Institute of Fiscal Studies has argued for the reform of council tax to make it more progressive, while IPPR has proposed the abolition of business rates and the introduction of a land value tax which would capture the increase in land value when planning permission is given.
University of California economists Emmanuel Saez and Gabriel Zucman outline how a progressive wealth tax could work, drawing on a wide range of evidence on wealth inequality, technical feasibility and economic impact.
The UK Wealth Tax Commission established by the LSE has explored the viability and desirability of a wealth tax in the UK. Its final report concludes that a one-off wealth tax set up to respond to the impacts of Covid-19 could raise £250 billion over five years. The IMF has proposed a similar temporary 'solidarity levy' on richer households to pay for measures to combat post-pandemic inequality.
IPPR proposes the abolition of inheritance tax and its replacement by a donee-based gift tax which would tax all gifts over a minimum amount, thereby encouraging the dispersal of estates and reducing avoidance.
The UK is more geographically unequal than any other comparable advanced economy. This regional inequality exists across output, income, productivity, employment, and political power.
The UK has long suffered from regional health inequalities. Even before Covid-19 people in the most deprived areas could expect to live 19 fewer years in good health than those in the richest parts of the country. The death rate from Covid-19 in the UK’s poorest regions was over double the rate in the wealthiest.
The economic fallout of Covid-19 could increase regional inequalities, with London and the Southeast experiencing smaller reductions in hours worked during the pandemic. But the increase in working from home, if continued, could benefit smaller towns, and rural and coastal areas, if firms and employees realise they do not need to be located in major cities.
The Institute for Fiscal Studies Deaton Review on Inequality analyses the extent and character of geographic inequalities in the UK and how they have changed in recent years.
Analysing the causes of geographical inequality in England, IPPR North ascribes these partly to the large highly centralised structure of government in England, with few powers held at local or regional level, along with the decade of regionally-imbalanced austerity since 2010. Its annual State of the North report identifies key tests for the government's 'levelling up' agenda.
The Centre for Local Economic Strategies (CLES) argues that reshaping local economic development to reduce inequalities requires policies which 'devolve, redirect and democratise' economic powers.
Cambridge economist Diane Coyle argued that addressing regional inequalities requires the devolution of economic decision-making power from Westminster.