Inequality Set to Rise, Ignoring Experts Won’t Make It Go Away

Things look ominous. Last month the Resolution Foundation warned we were set to suffer the biggest rise in inequality since Thatcher. Today the IFS echoed that, setting out its expectation that the fall in inequality since the recession will be reversed. Some people might “have had enough of experts,” but the Government simply cannot disregard these evidenced warnings.

So what does today’s report from the IFS actually tell us? It shows we’re set to endure the weakest growth in living standards in sixty years, with median incomes barely budging in the next two years and only picking up slightly after that. That’ll leave the average household about 18 per cent worse off in 2020/21 than might have been anticipated before the financial crisis. Practically, it means a couple with two kids will be over £8,000 worse off than expected.

Of course, sluggish average income growth doesn’t tell us about inequality and how different households across the income spectrum are expected to fare over the next five years. You might not be surprised to hear that the pain won’t be equally shared.

The IFS projects an increase in inequality, especially after housing costs are taken into account. Partly, the growing divide will be due to the fact that earnings growth (of any magnitude) tends to benefit better-off households, but there are active decisions at work here too. Government reforms to taxes and benefits will actually exacerbate inequality even further. The richest two-thirds will benefit from rises in both the personal tax allowance and the threshold for paying the higher rate of tax. Meanwhile, cuts to the real value of working-age social security through the benefit freeze and cuts to the Universal Credit work allowance will substantially reduce incomes for the poorest third. In fact, after housing costs, the poorest 15 per cent will actually have lower incomes in 5 years’ time.

Although the same households won’t necessarily be in the same part of the income distribution in 2022, families already struggling to make ends meet must somehow keep going in the knowledge that life isn’t about to get easier any time soon. The IFS confirms what many of us know instinctively: that increases in child poverty are not inevitable, and are ‘entirely explained’ by government reforms to taxes and benefits. We cannot justify continuing on the same course when the data is there in black and white that over a million more kids are going to be pushed into poverty by active government policy. Sticking to a schedule of tax cuts for the comfortable is only twisting the knife.

Next week’s Budget offers the opportunity to change course. We desperately need reforms to Universal Credit so that families can keep more of their earnings before the safety net of social security is removed. We need a full reversal of the cuts to the work allowance, which explain more than a third of the projected increase in child poverty. And while we welcomed the Chancellor’s taper rate reduction in the Autumn Statement, which means recipients have 63p rather than 65p of Universal Credit removed for every additional pound they earn, we need to see a much more significant reduction, to the 55p rate that was originally planned. The Government should also rethink the benefit freeze, especially in the context of a £1billion inheritance tax cut that only profits the wealthy.

The Government must heed these warnings on inequality increases and not shut its eyes to the effects its own policies are certain to have. It shouldn’t be afraid to abandon plans laid out by the previous Chancellor, and should honour its promise to build an economy and society for all.

Lucy Shaddock, Public Affairs and Campaigns Manager