Beyond Redistribution—Confronting inequality in an era of low growth | Policy Briefing for APPG on Limits to Growth

The second in our series of briefing papers on building An Economy That Works explores inequality in the UK. It examines the evidence for rising inequality over the last fifty years, estimates the economic welfare lost to society from an unequal distribution of incomes and addresses the critical question of managing inequality in the context of declining growth rates. It finds that:

• when measured using the Gini coefficient, income inequality increased by 50% between the 1970s and the financial crisis;
• measured using household income ‘after housing costs’, the Gini coefficient rose even further (60%) during the same period;
• the share of income going to the top 1% of households almost tripled between 1977 and 2009;
• in the immediate aftermath of the financial crisis, income inequality fell slightly on all three measures but the trend has since stabilised or reversed and income inequality remains substantially higher than it was four decades ago;
• wealth inequality in the UK is even higher than income inequality, suggesting that further rises in income inequality are likely;
• property wealth inequality and financial wealth inequality have increased substantially since the financial crisis;
• the richest 10% of households now own 61% of all financial wealth, while the poorest have substantial financial debts (negative financial wealth).

These inequalities generate other significant welfare inequalities in society. People in the richest areas have 20 more years of healthy life than those in the most deprived areas. Meanwhile, the richest households have a carbon footprint up to 30 higher than the poorest.

Recognising that inequality imposes significant welfare costs on society, this paper uses the Atkinson Inequality Index to measure the welfare losses associated with today’s level of inequality. It finds that:

• the welfare lost through inequality rose from a low of 6% of the GDP to almost 12.5% of GDP in 2016;
• in money terms, this equates to a five-fold increase in lost welfare over the last half a century;
• the absolute value of the welfare lost through inequality in 2016/17 was around £240 billion—almost double the annual budget of the NHS.

Finally, the paper addresses the challenge of reducing inequality in the context of declining growth rates. It finds no evidence to support the claim that inequality inevitably rises as GDP growth declines. On the contrary, empirical data show that lower growth rates are as likely to be associated with declining inequality in recent UK history. Further analysis reveals that the impact of declining growth rates on inequality depends critically on market conditions. The paper briefly discusses the implications of these findings for changes in technology and the world of work.