Economics: Tory choice that hurts the poorest

A NYBODY who wants to know why a minority of people have such a strong detestation of Tories in general, and of Margaret Thatcher in particular, should read last week's explosive Government report on Households Below Average Income (HBAV). It shows that the poorest 10 per cent of British people have suffered real falls in their income since 1979 despite the enormous increases for everyone else.

The average household income rose by 36 per cent in real terms between 1979 and 1990/1, while the income of the bottom 10 per cent fell by between 1 per cent and 14 per cent, depending on the precise measure of living standards. This is an extraordinary and depressing finding which cuts right across the traditional debate about the poverty line.

These people did not become relatively poorer because their incomes rose less rapidly than others. They became poorer, full stop. So much for trickle-down. In terms of incomes and life chances, Britain is inexorably splitting into two. We are growing a vast underclass with little stake in our common future.

The extent of the social shift, which marks a fundamental break with the post-war trend towards equality, is revealed by looking at shares of total income. The bottom half of the population took 32 per cent of income in 1979, but this had fallen to just 27 per cent in 1990-1. In other words, the top half took nearly three quarters of all income.

The figures on income after housing costs show the most dramatic drop for the poorest. However, the sharp rise in housing costs - by 287 per cent against a general rise in the retail price index of 135 per cent between 1979 and 1991 - was partly due to high mortgages incurred in the Eighties, and partly to the 15 per cent mortgage rate.

A million home-owners found their disposable income falling so fast that they were plunged into the bottom tenth of the income distribution. Arguably, the cut in mortgage rate will have eased that effect. Before housing costs, the drop in real incomes of the bottom 10 per cent was 1 per cent. But it was still a fall against a large rise for everyone else.

Another distortion may be because the self-employed sometimes make losses. Since the survey also shows that some of the people who record negative income have very high spending, there may be some under-recording of the 'black economy'. But even when the self-employed are excluded, the drop in the real income after housing costs of the bottom tenth is 6 per cent while the average rise is 35 per cent.

So the contrast remains similar even if the detail alters: the graphs show that the mountain of people around the middle income bands in 1979 has had its top sliced off. People have been scattered from the middle of the income distribution towards the bottom and top. At the very top, the number of people earning more than pounds 600 a week (in today's money) rose from 130,000 in 1979 to 1.58 million in 1990/1.

What has been going on? The first explanation is that pay for those in work has become more unequal. The Government's New Earnings Survey shows that the gap between the earnings of the top and bottom tenth of employees is now wider than at any time since records began in 1886.

In fact, it is even wider than in the Edwardian period, the high-water mark for wage inequality. The top 10 per cent earned more than 249 per cent of the bottom 10 per cent in 1990. The ratio was 209 per cent in 1886 and 236 per cent in 1906 (2).

There are several reasons for the trend. The rise in unemployment has been particularly marked among the unskilled, in turn depressing earnings for the working unskilled. The erosion of trade unionism and minimum wages has contributed. The floor for pay is set by the social security level, and this has been raised in line with prices but not earnings.

There has also been a rise in the value of education. The evidence suggests that this is not just due to the high growth of knowledge-intensive industries like pharmaceuticals, computing and the media, but has also occurred within traditional industries. New processes are more information- and knowledge-intensive.

A second fundamental reason for rising inequality has been the shift away from full-time work and towards both unemployment and self- employment. The HBAV shows that the number of people living in families where someone was a full-time employee fell from 35.2 million in 1979 to 29.7 million in 1990-1. The numbers in unemployed families rose from 1.4 million to 3 million, while self-employed families rose from 3.4 to 5.9 million.

But the third reason is the most important: the changes in the tax and benefit system. A recent analysis from the Institute of Fiscal Studies separated the effects of the shift from work, the rise in wage inequality, and the tax and benefit changes. The authors conclude: 'Of the three, changes to the tax and benefit system clearly had the most impact.' (3)

The top rate of income tax has plunged from 83 per cent on earned income in 1979 to 40 per cent, one of the lowest in the world. The benefit reform of 1988 did not raise total spending, but redirected money from pensioners and working-age childless to families with children.

The cut in top tax rates may have helped both our economic performance and tax revenues (by discouraging avoidance), but the failure to abolish reliefs meant that the better off benefited greatly. And there is very little evidence that this shift in income distribution is helpful to our economic performance.

After all, the World Bank's figures show that the bottom fifth of Britain's population took 5.8 per cent of total income in 1979 against 6.8 per cent in Germany and 8.7 per cent in supercharged Japan. Britain's poorly performing generals - the top 20 per cent - took 39.5 per cent of income against 38.7 per cent in Germany and 37.5 per cent in Japan.

Nor is the trend to inequality a universal phenomenon. There has been a similar shift in other Anglo- Saxon economies bitten by the Reagan-Thatcher bug: the United States and Australia. But inequality was relatively constant in France, Norway and the Netherlands. (2)

We are, in sum, making the most profound of social choices. In time, our form of capitalism will come to resemble the American variety. We will not regard ourselves as part of a society, but merely as individuals who must fend for ourselves as best we may, and devil take the hindmost.

With even more of the poor always with us, we will not seek to provide security as a public good; we will buy burglar and car alarms, anti- theft radios, private picket gates. We will earn more and spend more just to maintain the same sense of security we had when society was kinder and fairer. We will drive from a night-watchman-protected dormitory through ghettoes of the underclass to security-coded office buildings. Shut out the world, we want to be rich - whatever the cost.

(1) Households below average income 1979 to 1990-1, Department of Social Security, HMSO, pounds 16. (2) Paul Gregg and Stephen Machin: Is the rise in UK inequality different?, NIESR, London (mimeo). (3) Paul Johnson and Steven Webb: Explaining the growth of UK income inequality 1979-1988, Economic Journal, March 1993.

(Graph omitted)