To have a strong growing economy you need less inequality

In this morning’s City AM Ryan Bourne from the Institute of Economic Affairs suggests that since the recession inequality is falling whilst growth is plummeting and asks why egalitarians aren’t celebrating. He suggests that this shows that people who are concerned about inequality are arguing from an absurd point. The odd thing about it is that he’s half right.

Inequality has fallen since the recession. The Gini coefficient has fallen as he explains in his piece. However, it’s only fallen from a recent peak of 36% in 2007 to 34% last year. That’s a similar place to where it was in 2003-2005. It’s nowhere near the 24% it was back in 1975[i] or the high 20s where many of our more equal neighbours are. But there is still a real fall in inequality and so Ryan’s question doesn’t completely go away.

Firstly it’s worth saying that this fall in inequality does represent, if not something good, at least something less bad. Those on the lowest incomes have been sheltered, at least to some extent, from the worst effects of the recession. Tax credits and housing benefits initially after the recession kept pace with inflation meaning those with the least didn’t suffer the most. It would surely be a worse thing to have a recession where the poorest were hit much harder than everyone else and inequality increased.

This brings me to the second more important point – we don’t have to choose between reducing inequality and growth. Research linking high levels of inequality with economic instability, and an inability to maintain sustained growth, has convinced the IMFOECD, and the CBI to warn about the dangers of inequality. We don’t need to choose between being rich and unequal or being poor and equal. In fact it seems if we want our economy to do well we may have to become less unequal.

This link between inequality and growth is also why it’s better to not think about things that drive inequality as either being ‘good’ or ‘bad’ as Ryan suggests. Globalisation and Technology may have driven growth and inequality but rather than viewing these as good or bad things surely we should look at how we can reduce inequality in light of these developments so that we can grow more in the future. There are also easy targets which don’t help growth but do increase inequality. One example that we think is worth looking at is fixing the tax system so that the poorest pay less tax and the richest pay more. Why not start by fixing council tax?

Tim Stacey, Senior Policy and Research Advisor


[i] To be clear this last figure is GB whilst other figures are UK but a similar gap could be expected.