Is the Prime Minister right to say that inequality has gone down?

Published on Wages & Income

In the brave new world of ‘alternative facts’, it’s natural to take politicians’ claims with more than the usual dose of salt. That’s particularly true when rivals appear to take very different positions on verifiable points of fact. With the Prime Minister claiming yesterday that “inequality has gone down under this government” and Jeremy Corbyn suggesting earlier this year that UK inequality “is getting worse”, it’s reasonable to wonder just who’s right? The answer may be both of them and neither of them.

With no direct measurement of household incomes across the population, we must look for answers in large-scale household surveys. These are less straightforward and less timely than many economic statistics, but hugely useful nonetheless. ONS results released back in January suggested inequality in 2015-16 fell to a level not seen since 1986, with a clear decline over recent years. Yet today we have somewhat conflicting figures for 2015-16, as captured by the DWP’s Households Below Average Income.

There are good reasons for differences between the two surveys, reflecting both methodological differences (the HBAI focuses specifically on income and sources of income, whereas the ONS survey is primarily concerned with expenditure) and scale (the HBAI is based on a survey of 19,000 households whereas the ONS survey draws on around 5,000), but it is today’s survey which is widely regarded as the most authoritative source of information on living standards and inequality.

So what does it tell us? The graph below combines what we already knew about inequality since 1975 with today’s 2015-16 addition. What we see is a small tick-up in inequality in the latest year (as captured by the standard Gini coefficient and by the 90/10 income ratio), suggesting that inequality is on the up.

Notes: Northern Ireland not included before 2002-03. 2015-16 figures are rounded.

Source: RF analysis of DWP HBAI 2015-16 and IFS Living standards, poverty and inequality in the UK: 2016

But there are a number of things to bear in mind. First, these figures are too uncertain to say anything conclusive about single year changes (in the technical jargon the changes aren’t ‘statistically significant’). Secondly, the pick-up comes off the back of relatively sharp reductions in inequality immediately following the financial crisis, when higher income households experienced large shocks and lower income households received some protection in the form of real-terms increases in welfare. And thirdly, any change over the last few years pales into insignificance to the dramatic rises in inequality recorded during the 1980s.

Stepping back, the big picture is that inequality has not changed substantially since the early 1990s. However captured, it remains broadly at the – too high – level reached at the end of Margaret Thatcher’s time in office. So, depending on the data source used and the precise time period covered, a case can be made both for falling and rising inequality in recent years: both May and Corbyn are simultaneously right and wrong.

But focusing on the intricacies of that debate misses two far more important points: first, whatever its distribution, overall income growth has been shockingly poor over the last decade; and secondly, the outlook for the next few years appears worse still.

Today’s figures confirm that there was relatively strong income growth in 2015-16. After accounting for inflation – and housing costs – the typical (median) household was 2.2 per cent better off in 2015-16 than the year before. This was a slowdown relative to the year before when growth was 3.4 per cent (though the IFS notes that the 2015-16 HBAI data may undercount the rise in employment that we know happened over this period).

Indeed, 2015-16 might be considered part of a ‘mini-boom’ – the recovery from the depths of the living standards squeeze that was significantly helped by low oil prices and large employment gains. Our 2017 living standards audit explored this in more detail, but the chart below highlights the extent to which the two years after 2013-14 resemble the sort of strong and shared income growth recorded during the long-pre-crisis period.

Nonetheless, given the depth of the preceding squeeze – highlighted by the red line in the chart – incomes in 2015-16 were only just above where they’d been in 2009-10. The implication is that political arguments about recent changes in inequality miss the broader point that households across the country have found their expectations on living standards unmet.

From this already disappointing base, it should also concern politicians of all parties that the medium-term outlook is so grim. With inflation picking up strongly in recent months, the recovery in household incomes is expected to have slowed significantly in 2016-17. Inequality is also likely to have picked up this year – despite progressive wage growth – as the freeze in working-age benefits has started to bite.

The projection for the next four years, to 2020-21, is a far cry from the strong growth of 2015-16. The latest OBR economic projections together with known tax and benefit plans, continue to imply only minimal growth in disposable incomes over the next few years. Worse still, for the poorer half of working-age households, incomes are expected to fall.

If nothing is done to change this outlook, the current parliament will go down as being the worst on record for income growth in the bottom half of the income distribution. It will also represent the biggest rise in inequality since the end of the 1980s. As with facts, the future has many alternative versions, and we must hope these projections are proved wrong. But, with employment already at record highs and inflation responding to the devaluation in sterling, avoiding this outcome is likely to rest on two things: boosting productivity growth (and therefore pay) and rowing back on the more than £12 billion of welfare cuts planned for this parliament. While we should continue to explore what has happened to incomes in past years and decades, it is this dire outlook that should be the focus of all concerned about UK incomes and inequality.