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Unequal Britain

John Grieve-Smith examines the reasons for the widening equality gap opening under new Labour.

Achieving a more equal and fairer society has been a basic objective of the Labour Party since its foundation. This was epitomized in its 1945 election slogan ‘Fair Shares For All’. But there is little sign that New Labour any longer subscribes to this ideal. Although the government have taken a number of measures to help the least well off, such as Pension and Tax Credits, they have taken care to do little or nothing which would adversely affect the most affluent. There has been no deliberate attempt to reverse the Thatcherite revolution, which shifted the balance of power away from workers and unions, in favour of those at the top –a shift which was partly a consequence of the sharp increase in unemployment to over three million in the 1980s, and partly the result of a right wing determination to ‘put the unions in their place’. Unemployment has fallen since 1997, but much of the Thatcherite legacy remains. The Institute of Fiscal Studies has estimated that after allowing for benefit and tax changes, the Labour government’s measures have halted, but not reversed the growth of inequality.

While the changes in social security have been redistributive, the reliance on means testing has had serious adverse side effects. This is particularly obvious in the pensions field where it is clear that the means tested Pensions Credit deters people on lower incomes from saving for retirement. In addition the complications of the system mean that that many people are not applying for, and missing out on, the benefits to which they are entitled. Gordon Brown is credited with the idea that combining the administration of means tested benefits with that of collecting taxes would remove the stigma traditionally associated with means testing, but the practical difficulties of combining the two have proved disastrous. The Tax Credit system has become a complete shambles.

In the case of pensions, there is now a very wide consensus (excluding the Treasury) in favour of raising the basic state pension to a level which would minimize means testing - and then index it to earnings rather than prices. I would also argue for replacing the present means tested system of child benefits with a flat rate system. In both cases the benefits should be treated as taxable so that the least well off would benefit most.

The paradox of the present system is that the poorer you are, the higher the proportion of any extra income the state takes back in either reduced benefits or higher tax payments. There are now over two million people who stand to lose 60 per cent or more of any extra income through cuts in means tested benefits. This level of ‘withdrawal rates’ compares with the Income Tax rate of 40 per cent paid by the better off on their additional income. So we now have a regime where those at the bottom of the income distribution pay the highest marginal income ‘tax’ rates, while those at the top pay substantially less; and those in the middle pay the lowest. This may be good for the marginal voters in ‘Middle England’ - if they realized how lucky they were - but it is not one which anyone would consciously design as a recipe for a fairer society. Do the rich really need greater incentives than the poor?

Leaving benefits on one side, one aspect of the present structure which is little recognized is that taking both indirect taxes on expenditure and direct taxes on income into account, those on the lowest incomes pay as high a proportion of their income in taxes as those who are best off. This is because, while Income Tax is progressive, indirect taxes are the reverse, with the worst off paying a higher proportion of their income on indirect taxes such as VAT, tobacco and alcohol duties. It is estimated that in 2003/4, households in the lowest fifth of the income scale paid as much as 28 per cent of their incomes in indirect taxes, whereas the top one fifth only paid 11 per cent. This more than offset the fact that the lowest fifth paid only 10 percent in direct taxes as against 25 per cent for the top fifth. In total, taxes take much the same proportion of people’s income at all income levels The tax system as a whole is not progressive. The redistributional effects of the public finances stem from the fact that in relation to their incomes those on lower incomes benefit more from equal access to public services such as health and education and from the benefit system.

The moral is that in looking at ways of raising extra money to finance improvements in public services such as health or education, or to raise the basic state pension, we should concentrate on taxes on income and wealth. There is, for example, a good case for increasing the top rate of tax from 40 to 50 per cent for those at the top, and for removing the upper earnings limit on national insurance contributions. Taxing increases in land values resulting from planning permission for development should also be on the agenda. We should beware of the distributional effects of increasing indirect taxes as a means of achieving health or environmental objectives. Taxes on alcohol and tobacco, or fuel or road charges tend to hit those on low incomes the hardest

Whilst the tax and benefit system requires a critical review, it is as important, or more important, to reverse the increase in inequality in incomes before tax which took place in the Thatcher era, and is now in danger of becoming a permanent legacy of the neoliberal counter-revolution. From 1979 to 1994-5 real incomes of the richest tenth of the population rose by 60 per cent; but those of the poorest tenth only rose by 10 per cent - and after allowing for higher housing costs actually fell by 8 per cent. The change in the economic balance of power associated with the reemergence of mass unemployment was accompanied by a striking change in attitudes. Salary levels and perks for those at the top, which would previously have been regarded as obscene, became widely accepted, and are now taken for granted. At the bottom, we do now have the minimum wage, and this should gradually move up relative to the average.

One route to achieving a fairer society is to ensure a greater voice for ordinary workers and the unions that represent them. This is where participation and consultation at all levels of a firm are vital. We should be welcoming EU measures to encourage this, not opposing them. The success of German firms shows how valuable this can be in ensuring firms take the long term view which is essential in developing technology based or capital intensive industries – rather than the short term view which afflicts firms dominated by financial markets. The government should be actively encouraging union participation both within firms and at industry wide level. It should also establish machinery for regular consultations with the TUC and CBI on economic policy and employment issues.

Worker directors are now a forgotten subject, but my own experience of them in the British Steel Corporation in the 1970s was that they played an invaluable part in ensuring that management decisions took into account workers’ views and that workers felt they were having their say. One small step, which would have widespread public support, would be to make it mandatory for employees to be represented on company Renumeration Committees. This would help to limit disparities in pay and excessive rewards for directors.

Most basic of all, we must return to genuine full employment. The present five per cent level of unemployment is well above the levels both Labour or Tory governments considered acceptable in pre-Thatcherite days. In addition there is considerable hidden unemployment, particularly in the older industrial areas. It is all very well the government thinking that changing the rules on Incapacity Benefits will get more people into work, but this ignores the chronic shortage of jobs in the areas mainly affected. We need more effective regional policies and incentives for industrial development in these areas, and a willingness of the Bank of England and the Treasury to run the economy at a higher level of demand. At present the Bank’s remit is (in true neo-liberal style) limited to achieving a target rate of inflation. It should be widened to include that of maintaining a high level of employment.

This is only part of the agenda for achieving a fairer society in all its aspects, but greater equality of income and a stronger voice for workers and unions are a key element. and a Labour government should not to be afraid to acknowledge this.

John Grieve Smith is the author of There Is A Better Way: A New Economic Agenda For Labour.