Income inequality at its lowest since 1986 – a good result for the Liberal Democrats in Government?

The Office of National Statistics has released information showing that income inequality is at its lowest rate since 1986.

From the BBC:

The largest fall during this period was a 6.8% drop for the richest fifth of households. They still had an average income, before tax and benefits, of £78,000 in 2011-12.

This was 14 times greater than the poorest fifth of households, who had an average income of £5,400. However, this group has seen their average income rise by 6.9% since the economic downturn.

After all taxes and benefits were taken into account, the top fifth of households had an income of £57,300, compared with £15,800 for the poorest fifth – a ratio of four-to-one.

The ONS has produced a nifty infographic to show the current situation:

ONS infographic on income inequality

 

The biggest fall in income inequality in 27 years is certainly progress and would not have happened without the Liberal Democrats ensuring that tax cuts were aimed at people on low incomes, not rich dead people as the Conservatives wanted with their desire to cut Inheritance Tax. To have achieved a fall in a time of economic turmoil is also worthy of credit. You don’t expect the Tories to give two hoots about equality, but Labour, which is supposed to believe in social justice, should have done better in their 13 years in power. This infographic shows that it’s in fact the Liberal Democrats who are starting to turn things around:

Income Inequality

However, this is a baby step or two down a very long road. How on earth do households cope on an income of £5,400 as the poorest fifth must? Our dream of a “fair, free and open society where no-one is enslaved by poverty, ignorance or conformity” is a long way off. We might say that we have done better than Conservatives or Labour governing alone. We’d be right. The raising of the tax threshold and the Pupil Premium have been instrumental in that.  But this is not the time to sit back and relax. These figures show a need to roll up our sleeves and get on with the job of tackling poverty.

* Caron Lindsay is Co-Editor of Liberal Democrat Voice and blogs at Caron's Musings

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44 Comments

  • Switch on Channel 4 news about the Spare Room Subsidy and stop spouting your rubbish about how well your doing in government.

  • Alex Harvey 10th Jul '13 - 7:22pm

    Income inequality at its lowest since 1986 – a good result for the Liberal Democrats in Government?

    No.

  • ^ LOL.

  • This is a woefully misleading graph. You do not show the axis from zero, suggesting a much larger change than has occured. The difference between 36 and 32.5 is not amazing – and certainly is not due to the liberal democrats.

    I know i should not be surprised by spin doctoring in politics but really, lib dems, you are holding on by your teeth, relying on the educated, young population to survive and you expect to get away with shoddy work like this?

  • Caron Lindsay Caron Lindsay 10th Jul '13 - 8:13pm

    Tim, of course – but even £15,800 is not really sufficient to have a decent quality of life. That’s what we really have to tackle. But you are right – Labour and Tories have not managed to achieve this sort of result.

  • Daniel Henry 10th Jul '13 - 8:15pm

    Bear in mind that this is a snapshot from over a year ago, before the welfare reforms came into effect.

  • “Bear in mind that this is a snapshot from over a year ago, before the welfare reforms came into effect.”

    Indeed, the IFS says:
    “For those on middle and higher incomes, falls in real income happened largely between 2009–10 and 2011–12 because real earnings fell sharply. For example, income at the 90th percentile grew by 8.0% less than the Retail Prices Index (RPI) over those two years. For those on lower incomes, more dependent on income from the state, falls in real income will happen largely as a result of welfare cuts that began after the initial recession and are continuing up to and beyond 2015–16.
    Consequently, income inequality fell substantially between 2007–08 and 2011–12, but is projected to rise again from 2011–12, almost (but not quite) reaching its pre-recession level by 2015–16. Overall then, it is the timing of income losses – rather than the magnitude – that varies most strikingly across the income distribution.”
    http://www.ifs.org.uk/pr/inequality_recession_june2013.pdf

    What’s scandalous is that – after the 10% of households with the highest incomes – the group most heavily penalised by this government’s tax and benefit changes is the 10% of households with the lowest incomes, followed by the other low-income deciles.

    To speak of “the Liberal Democrats ensuring that tax cuts were aimed at people on low incomes” is simply a lie. The income tax cuts have benefited equally all basic rate taxpayers – about 40% of whom are actually on above-average incomes – and of course many low-income households haven’t benefited from them at all.

  • A Social Liberal 10th Jul '13 - 9:13pm

    The IFS has said that by 2020 child poverty will have increased to 3.4 million and is as a direct result of policies put in place since 2010.

    Those using foodbanks are increasing month on month, although Lord Freud does opine that it because foodbanks are there and not because there is a desperate need for them.

    Thousands more social tenants are in rent arrears as a result of the Bedroom Tax.

    But despite all the above the LIb Dems think that inequality is narrowing and its all down to them – all the while ignoring evidence from the IFS showing that it is in fact due to top salaries being squeezed during the resession and that the gap is set to widen again. Funnily enough due to Lib Dem supported policies.

    The article reporting the IFS work http://www.huffingtonpost.co.uk/2013/06/03/gap-between-rich-and-poor-to-widen_n_3379539.html

  • Liberal Neil 10th Jul '13 - 9:24pm

    @Caron – whether £15,800 is enough to lead a decent quality of life depends a lot on your circumstances. Single pensioner households, many of which will be in the bottom 20%, would be delighted with that level of income. Nearly all students will also be in the bottom 20% and will have a great time on less than that.

  • “whether £15,800 is enough to lead a decent quality of life depends a lot on your circumstances. Single pensioner households, many of which will be in the bottom 20%, would be delighted with that level of income. Nearly all students will also be in the bottom 20% and will have a great time on less than that.”

    The IFS uses “equivalised household income”, which means income is rescaled according to the composition of the households. The £15,800 figure would be for an adult couple with no dependent children.

  • Alex Harvey 10th Jul '13 - 9:48pm

    I love how you haven’t engaged with the posters who have used evidence to demolish your partisan argument.

    Caron, you are clearly an intelligent and kind person. Why are you propping up this economically and morally incompetent government and right-wing party leadership?

    Why?

  • @Adrian:

    “The difference between 36 and 32.5 is not amazing……………”

    True

    ” – and certainly is not due to the liberal democrats.”

    You put it down maybe to Rod Stewart? Pope John Paul? Kermit the Frog? And your evidence is?

  • Tony Greaves 10th Jul '13 - 10:25pm

    There is little doubt that those elements of this narrowing that follow changes in the bottom 20% are substantially a consequence of LD influence in raising the tax threshold. And the overall level of inequality is important whatever the actual numbers at each end, even though some of it is due to lower incomes in the top 20%. So far so good.

    But the figures would look rather different if instead of being based on quintiles they were based on deciles or even smaller percentiles. It seems that the top 1% are doing rather well. And as I keep pointing out here, the people whose incomes are too low to pay any income tax (whether on benefits or on a mixture of wages and benefits) – the bottom 10%? – are getting actually and relatively poorer. So work still to be done.

    Tony Greaves

  • @Alex: I don’t see any actual evidence presented in the comments that Caron has ignored. Ironic really that you’re misreading the evidence of the content of the comments by saying there’s something in them that there isn’t :)

  • “I don’t see any actual evidence presented in the comments that Caron has ignored.”

    In that case you presumably haven’t seen the comments that have been “held in moderation” and/or deleted.

  • As Tony mentioned above, the graph is very misleading because dividing people into just five broad income groups completely masks the way tax and benefit changes have left the poorest in an even poorer state than they were to begin with. If you looked at just the bottom 10%, or the bottom 5% or even the bottom 1%, the results would be far less favourable.

    Although raising the personal allowance to £10,000 is not a terrible policy, unfortunately it does absolutely nothing for those who were already earning less than original personal allowance. Furthermore, those who were only slightly above the old threshold do not benefit from the full £700 tax cut.

    If it weren’t bad enough that the poorest weren’t helped by the policy, unfortunately, it gets worse. The VAT rise actively harms the poorest, and disproportionately so! Sure some things are zero rated; however, many common foods like fruit juices or cornflakes still attract VAT, as do things like washing up liquid, soap etc.

    If you look at the supporting documents the Treasury issued with the 2013 budget – in particular Chart 2F on page 12 of this document… https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/188366/budget2013_distributional_analysis.pdf.pdf … you begin to get a better picture of what is going on.

    As you can see: 1) The poor are now poorer (as is every income group); 2) The bottom decile is hit hardest by raises in ‘indirect taxation’ i.e. the VAT rise. 3) The bottom decile is the second hardest hit when all tax/benefit changes are taken into consideration – and they are only hit slightly less hard in percentage terms than the very top decile.

    This is terrible because a similar percentage cut in income is much harder to bear for the poorest than it is for the richest. Furthermore, if one were to conduct an even finer grain analysis that looked at the bottom 5%, it would show that they would be even harder hit (possibly more so than any other income group), because, in percentage terms, they would benefit less from the personal allowance rise and possibly be hit harder by the VAT rise.

  • Quick correction to my last post… I shouldn’t have every income group was poorer as a result of the tax/benefit changes, the 6th, 7th, and 8th income deciles are actually better off.

  • Adam Corlett 11th Jul '13 - 1:44am

    “The biggest fall in income inequality in 27 years is certainly progress and would not have happened without the Liberal Democrats ensuring that tax cuts were aimed at people on low incomes [...] To have achieved a fall in a time of economic turmoil is also worthy of credit. ”

    Just no. The fall in income inequality was largely down to the economic turmoil, with the big drop in income amongst richer households whilst benefits increased with inflation. It most likely would have happened without the LD personal allowance policy, not least because the latter is not aimed at low income *households* at all.

    “Thanks to our £700 tax cut, income inequality is lower than at any time under Labour.”

    Again, that attribution is just untrue. By itself, the personal allowance policy has actually increased relative poverty (by benefiting richer households more) and probably measures of income inequality too.

    We shouldn’t hold up 2011 as something to show off. Let’s wait til the numbers are out for 2015. For example, the government has explicitly cut working-age benefits in real terms precisely because they kept up with inflation post-crash while richer households’ incomes did not. It is literally trying to undo this inequality decrease, which may be helped by rebounding wages for some.

    To share the IFS’s recent conclusions:

    Looking forward, a return to real earnings growth and cuts to benefit and tax credit entitlements imply an upward trajectory for income inequality. The reduction in inequality as a result of the recession is likely to prove a temporary rather than permanent phenomenon. In the short run, however, year-on-year movements in inequality will be affected by the fact that ongoing changes to the taxation of very- high-income individuals influence when they choose to realise their incomes. This is likely to continue until at least 2013–14.”

    And on ‘poverty':
    “Looking to the future, both absolute and relative poverty among children and working-age adults look set to increase, in large part due to cuts in benefits and tax credits being implemented as part of the fiscal consolidation.”

    Personally, I’m looking forward to the party producing opportunistic graphics to take credit for the good weather and Wimbledon victory.

  • Adam Corlett 11th Jul '13 - 2:03am

    And, from @birdyword and @cjsnowdon comes the point that the £700 tax cut won’t be fully delivered until next April. Back in 2011 it was only a £200 (nominal) tax cut. So, on top of the issues above, the lower income inequality is even attributed to a tax cut that hadn’t/hasn’t happened yet. It pains me to see Paddy Ashdown and even Julian Huppert sharing this press office nonsense.

  • Eddie Sammon 11th Jul '13 - 5:30am

    This just comes across (Lib Dem HQ’s fault) as though that we don’t really care about making the poor poorer as long as the rich are less rich. It just makes us look like a spiteful party and I think the graphic was a bad idea.

  • Eddie Sammon 11th Jul '13 - 5:59am

    Also, why are the graphs praising a mainly Conservative government? Having a Conservative prime minister has been a disaster for the poorest and the best thing we can do is praise our party’s achievements, rather than the government’s.

  • Ed Maxfield 11th Jul '13 - 6:00am

    Judging by that snapshot it looks largely cyclical to me – so that 3 years from now we might expect it to be back in the mid 30s. With changes since the late 90s having as much to do with New Labour as anything else…

  • John Roffey 11th Jul '13 - 6:58am

    I have sympathy for anyone whose job it is to promote Lib/Dem achievements as part of this Coalition. Clearly the rise in Personal Allowances is a worthy accomplishment. However, this pales into insignificance when the Party has supported the Tories war of attrition against virtual all workers and unemployed in the UK – and many of the harshest measures, particularly those resulting from IDS welfare blitz, are only just coming into force.

    Life for the vast majority in the UK is going to get increasingly tougher as a result of the Coalition’s overall policy of creating a demoralised workforce who have few rights and little or no security. The Coalition, under the guise of reducing the nation’s debts, only real success is in creating an environment where global corporations can maximise their profits – of course whilst paying little corporation tax [why is this group so favoured by Cameron/Osborne?].

    Given that the target seems to be for the UK’s workforce is to compete with those in places like Bangladesh [£25 pm?] – there is still a long way to go! From the Guardian:

    American retailers’ plan for Bangladesh factory safety branded a sham

    http://www.guardian.co.uk/world/2013/jul/10/bangladesh-factory-safety-sham

    Can there be some articles on what is really going on?

  • Why is reducing income inequality, per se, A Good Thing? Surely what matters to the poorest in society is their income relative to the cost of living, not relative to another persons income? Would we be happy with total income equality – or does that reek of (theoretical) communism? Why are we even looking at Income – a wealthy pensioner with little income drawing down accrued capital in later life would show as having little income, but could not be considered poor, and you would not think that we should be looking to increase their income. All in all – a meaningless measure – whoever is trumpeting the achievement or otherwise.

  • The reality is who is interested. Come the election the Conservatives will get the credit if there is any to be had.
    Martin is just an angry man, no party, no person, no organisation, not even Martin himself can get everything right.

  • “Although raising the personal allowance to £10,000 is not a terrible policy, unfortunately it does absolutely nothing for those who were already earning less than original personal allowance. ”

    Raising the allowance in itself is mildly progressive, because although the benefit is equal in cash terms for all basic rate taxpayers, that does represent a smaller percentage of income for the higher-paid.

    The problem is that it’s very expensive to give a tax cut to 85% of those who pay income tax. It has to be paid for somehow – such as through raising indirect taxes and cutting spending. Those are the things that are hitting the low-paid hardest.

    If the concern had really been helping the low-paid, that could have been done in a much more targeted – and therefore much cheaper – way. On the other hand, if the purpose was to put money in the pockets of voters in leafy Con/LD marginal constituencies, raising the allowance fits the bill very well. And of course the party can keep telling people that it’s a tax cut “aimed at people on low incomes”.

  • richardheathcote 11th Jul '13 - 9:46am

    i had to finish work a few years back due to my wife having a stroke, I receive a very small ammount in carers allowance for working looking after my wife day and night frequently, after working since i was 16 for over 25 years it has been a difficult transition. I have zero interest what charts show, i just know what i can get for my money has changed and it is getting worse all the time. fuel, to run to and from hospital, fuel for the home gas and electricity the cost of food have all gone through the roof in recent times. We have had a number of atos checks where they constantly ask the questions they want rather than finding out what the problem is. we have had to appeal for dla after initially being dropped 18 months to low rate personal care by atos i appealed and we where granted medium rate care. even though i care for my wife day and night. recently i was talking to a friend who said even this wasnt right due to the time i spend caring for my wife. so i appealed again recently which was rejected finally going to a tribunal where we did finally get the correct classification and high rate dla although they wouldnt backdate it. my son has had santions when he told local job centre he had to move over to esa for a short period as he wasnt fit enough to work due to illness this was backed up by a note from doctor.he was instantly classed as not looking for work and sanctioned ending up with no money for him his partner and his baby son. the idea of sanctions for the poorest people in society, unofficially they have a 5% target for sanctions, is something i will never forgive this government for. he survived by asking for food bank and crisis payments from the council. As i said before the charts mean nothing when life at the bottom is as bad as this.

  • A Social Liberal 11th Jul '13 - 10:04am

    I really have to take issue with Mark Pack and his not seeing any evidence for Caron to acknowledge. I will speak only of my post

    Are you saying, Mark, that the nunbers of people accessing food banks has not increased out of proportion since the coalition has come to power, or are you stating that this is not a consequence of coalition policy? Or do you maintain that this is not indicative of continued inequality between rich and poor?

    The same questions above can be asked of my second point – that of rental arrears due to the bedroom tax.

    Now Mark, I accept that these two points can be seen as anecdotal given that I have not provided links – but given the fact that they have been in the public domain and are accepted as the actuality I really didn’t think I needed to provide said links,

    The third point however was backed up with a link and so could be easily referenced. It is, therefore, evidence disproving the articles claims. That Adam had to lay it out on a plate for you does not gainsay my (more brief) summary.

  • @A Social Liberal: Your reference to food banks rather makes my point about lack of evidence. The number of people using food banks doesn’t directly contradict the fall in income inequality. One can go up whilst the other goes does, or the other way round, or the both move in step. Yet in your first comment you presented food bank stats as being evidence that inequality isn’t falling. That’s not evidence, that’s fault logic.

    (It’s also not the whole story, as the number of people using food banks was already on an exponentially growing trend pre May 2010, helped in large part I think due to the changes in rules over who gets referred to them. So even those figures need to be taken with care not to misinterpret them.)

  • Ed Maxfield 11th Jul '13 - 1:03pm

    What Lennon said.

  • Geoffrey Payne 11th Jul '13 - 1:33pm

    Well I think that Lennon and Ed ought perhaps to be very concerned that the living standards of those on the lowest incomes is in absolute terms going down because of the benefit cuts. I look forward to their articles on LDV opposing these cuts.
    As for whether we should be concerned about relative poverty, I would say certainly we should. There are plenty of countries in the EU that give this a high priority without being communist. No country in the world has ever set the same pay for every person on that country, so it is ridiculous to suggest that is what liberals or anyone else is seeking to achieve. Perhaps the converse question should be asked; is there no level of wealth inequality that you would find unacceptable? Are you opposed to the Lib Dem policy of raising tax thresholds that seeks to tackle inequality?
    People get paid an amount that usually depends on market forces. That is unfair. You could become a millionaire running a business that peddles pornography from poor people exploited in the third world.
    Or you can be paid peanuts as an auxiliary nurse, even if you save someone’s life – as many public sector workers do of course.
    The ideal would be that you get paid a fair amount depending on what you contribute to the well being of society. That in itself is an impossible Utopian dream. However I believe it is up to Liberals to find ways to get closer to this ideal. And Ian rich country like ours, no one should be made destitute by withdrawing benefits or low pay. As it says in the preamble of our constitution.

  • “Clearly the evidence shows that income inequality has fallen since 2008. This is good news, and it exposes as a lie the opposition charge that the poor are being made to bear the brunt of the downturn while the rich are getting off scot free.”

    That’s a straw man, though.

    What people are objecting to is the fact that the government’s tax and benefit changes have hit the lowest-income decile almost as badly as the highest-income decile – while those who have done best (or least worst) are those on above-average incomes, except for the very top 10%.

    It would be interesting to see:
    (1) the equivalent statistic based on a comparison of the poorest 20% with the middle 20% rather than the richest 20% (using the same shorthand as in the ONS ‘infographic’ above, where ‘poor’ is shorthand for ‘low-income’ and so on) and
    (2) the equivalent statistic since 2010, rather than 2008.

  • In the article by Carol Lindsay there seems to be an issue with the amount of change. We should dismiss any claim based on the year 1986 and just look at the second graph. In 2005 inequality was under 33 and in 2012 it was nearly just above 32. Does this mean it has decreased by 0.5%? However in 2011 it increased on 2010 and then fell in 2012 so coalition achievement was limited.

    Carol then makes claims about the ONS infographic that charts the change since 2007-08 to 2011-12. The fall from 2008 to 2010 (under Labour) in the second graph is slightly bigger than the fall from 2010 to 2012 (under the Coalition).

    I wonder why anyone on £78,300 needs £2,500 in benefits. However the really worrying figure is that the poorest 20% pay 36.6% in taxes while the richest pay 35.5%.

    @ Chris – he quoted from the IFS stating that the reason why the fall has happened was because earnings fell for the top 20% and also stating that in the future inequalities will increase. We Liberal Democrats may not be happy about this but there is no escaping the fact that as part of the coalition our leadership has agreed to it (below inflation rises to benefits, changes to Council Tax Benefit) as a price worth paying.

    However from the posts above including one from Tony Greaves it appears that inequality has not improved for the bottom 10% compared to the top 10%.

    Therefore for me this would only be something worth praising if it was true for the bottom 10% as well and we were pursuing policies to ensure the fall continued until 2015-16 and beyond.

  • Chris,

    I’m glad you think it is a straw man. It is the sort of thing I regularly hear shouted across the council chamber.

    I understand the objections you are making. I think what this illustrates is that looking at the “tax and benefit system” as a whole makes sense in normal times. But when you have a large shock to the economy, incomes and tax revenues, this becomes much more difficult. A neutral position that treated all public spending as equally important, so trimmed it evenly, and treated all taxes as equally justified, so raised them uniformly, would actually have a big impact on inequality. How do we disentangle the big impact that results from the shocks, from the effects of policy choices?

    It becomes a little clearer when we look separately at
    a) the effect of the shocks themselves
    b) the changes to tax policy as compared to a uniform increase – here we have clearly made the tax system much fairer
    c) the changes to benefits, compared to an across the board cut in line with the cut to public spending overall – here we have largely but not completely protected benefits.

    Add these three factors together and it is no suprise that we see a large decrease in inequality. Albeit one that should only be celebrated by the Green Party because it has been achieved largely by the recession reducing incomes at the top, rather than by growth boosting incomes at the bottom.

    The position you seem to be arguing is that the decrease in inequality resulting from recession should be taken for granted, but that the baseline to measure tax and spend choices against is one that pretends that recession didn’t happen. That framing fails to disentangle the effects of policy choices from the effects of the 2008/9 recession.

  • “The position you seem to be arguing is that the decrease in inequality resulting from recession should be taken for granted, but that the baseline to measure tax and spend choices against is one that pretends that recession didn’t happen.”

    How on earth do you come up with that from what I wrote?

    As a courtesy, I’d be grateful if you could refrain from inventing things I haven’t said and putting them into my mouth.

  • Joe

    “So when you make arguments along the lines of “the government’s tax and benefit changes have…”, you seem to be arguing as I describe.”

    I’m simply quoting the conclusions of the IFS and others, who have analysed the effects of the government’s tax and benefit changes. There’s nothing conceptually complicated going on.

  • Joe

    We may indeed as well stop – if you really cannot comprehend what I explained to you in the comment above!

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