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State of the Nation: inequality rising shows we’re not ‘all in this together’

Are we really? David Levene/Rota

Welcome to our State of the Nation series, which looks at the coalition government’s progress over the past five years, across a range of key policy areas.

In his first speech to the Conservative Party Conference as prime minister in 2010, David Cameron drew on the slogan: “We’re all in this together” in the face of the economic challenges facing Britain at that time. Five years later, however, it is clear that it is in fact the poorest who have paid most dearly as a result of various coalition tax and benefit changes.

In the immediate aftermath of the recession of 2008-2009, the social security system generally did its job of providing a safety net for people in need. Those on the lowest incomes were largely protected by the uprating of benefits in line with inflation, whereas income from earnings did not keep pace with price rises. So between 2009-2010 and 2010-2011, for example, incomes fell generally for all groups but those at the top saw their incomes fall more than most.

Initial improvement

The first couple of years of coalition government therefore witnessed a reduction of income inequality. Relative poverty also fell because average incomes were falling faster than incomes at the bottom, and this is how relative poverty is measured. But if we measure income changes against a fixed threshold we see an increase in (absolute) poverty rates between 2009-2010 and 2012-2013.

The changing levels of inequality in the first couple of years of the coalition government were not, however, due to coalition policy. They were a legacy of the previous Labour government’s policies, alongside economic trends such as increasing unemployment and wage stagnation. Rather than cut back on basic benefits in the aftermath of recession, the Labour government had protected these and raised revenue through a range of measures such as withdrawing the personal allowance for those with incomes over £100,000 and introducing a new marginal rate of income tax of 50% on incomes of more than £150,000.

Increasing inequality

Thus income inequality and relative poverty reduced during the first year or two of coalition government, due to a combination of economic trends and the previous government’s reforms. Since then, however, the coalition has introduced various policies which have started to – and look set to continue to – increase inequality. For example, it was only in 2013-2014 that we saw the introduction of a number of key reforms including:

  • Increasing most working age benefits by a maximum of 1% instead of inflation
  • An annual benefit cap of £26,000 including housing benefit
  • The bedroom tax/spare room subsidy
  • Replacing council tax with (reduced) local support
  • Replacing Disability Living Allowance with Personal Independence.

At the same time, the coalition cut income tax in 2013 for those earning more than £150,000, so the polarisation of earnings continues apace.

All these policies look set to increase inequality and the LSE has modelled the effects of all the tax and benefit changes during the coalition’s time in power. This modelling shows us that the country’s bottom 20% of earners have lost out more, as a proportion of income, than any other group. Their analysis also points out that food and fuel prices have risen over this time and so living standards will have fallen.

Social divisions

While differences between the various income groups are important to consider, other social divisions also emerge as a result of coalition policy. For example, there is a clear distinction being made between those over state pension age and those of working age. The coalition government have protected pensioners compared with others. For example, the basic state pension has improved, since 2011, according to the “triple lock” system, which ensures the state pension goes up by whichever is higher – inflation, wages or 2.5%.

This has meant that pensions have risen both in real terms and in relation to earnings. Plus, Winter Fuel payments and free TV licences for those aged 75 or older have also been saved from the threat of means testing or other cuts. So, while state spending on pensioners has continued to increase between 2010-2014 in real terms, spending on those of working age, particularly those with children, has fallen.

Pensioners have been better protected than others. Andrew Matthews/PA Wire

The long-term view

Placing the coalition’s record into broader perspective shows that the rises we are seeing in inequality are not unprecedented, but also speaks to the power of the social security system to improve equality. During the 1980s we saw a dramatic increase in income inequality: in 1979, the top 10% of the population received three times as much income as the bottom 10%. By 1989 the 90/10 income inequality ratio, which shows the difference in income between those above the 90th percentile – or the top 10% of earners – versus the bottom 10% of the population, had increased to over four times. Inequality then fluctuated a little but remained broadly at this level during the 1990s and throughout much of the Labour government’s time in power from 1997 to 2010.

Following the economic crash of 2007-2008, however, the 90/10 ratio fell to below four times by 2010-2011 for the first time since the mid 1980s and it has stayed at this level for the past two years where we have data (to 2012-2013). Once again, though we do not have figures for the second half of the coalition’s time in power, we have been warned that the poorest are about to be hit the hardest by the respected Institute for Fiscal Studies, as a result of the numerous cuts introduced by the coalition.

Social security’s insecure future

The social security system lived up to its name in the immediate aftermath of the economic crash and recession. It largely protected the incomes of those at the bottom while some at the very top paid more, not least due to the Labour government’s tax increase for those with earnings over £150,000.

But welfare reforms since 2010 have started to erode this safety net. Benefit caps and cuts for those of working age are starting to take effect and we are already starting to see the impact of this in terms of increased use of food banks, alongside increases in problem debt and evictions. The jobs growth of the past couple of years has not necessarily helped people escape poverty as wages are generally low. Half of all people in poverty are now living in families where at least one person has a job. And many people alternate between “no pay” and “low pay”.

So those with the broadest shoulders have not borne the greatest burden, despite the chancellor of the exchequer, George Osborne, insisting this would be the case in his 2010 Spending Review. The social security safety net is being dismantled and both inequality and poverty will rise if coalition policies are not reversed.

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