The richest have been hit hardest, but yes, it hurts them lessby Paul Johnson / January 23, 2013 / Leave a comment
Published in February 2013 issue of Prospect Magazine
George Osborne’s insistence throughout the recession that “we’re all in this together” has been criticised. Yet new figures show that the income of the wealthy has fallen (photo: HM Treasury)
At the start of the 1980s we experienced a deep recession. Unemployment soared to more than 3m—12 per cent of the workforce. During the following decade benefit levels were cut, earnings rose very fast especially for higher earners, and tax rates were cut for those on top incomes. Inequality grew at an unprecedented rate. By the end of that decade, on almost any measure, the UK was a much more unequal society than at the start. To have claimed that we were “all in it together” would have been fatuous.
Since 2008 we have experienced a much deeper and more prolonged recession than we did in the 1980s. Output fell by more and has still not recovered its pre-recession levels. Household incomes have fallen by more than at any time in many decades.
But the rest of the story is very different. We can debate exactly what we mean by “all in it together,” but 2010/11 saw the biggest fall in income inequality in the last 50 years while tax and benefit changes have hit the richest harder than any other income group.
Perhaps the most important feature of the last four years has been the relatively modest growth in unemployment which at 8 per cent is considerably lower than in was even in the early 1990s let alone the mid 1980s. Indeed employment levels have actually risen despite a loss of half a million public sector jobs. Whilst the unemployment rate is too high, we have—given what has happened to national income—escaped much more lightly than we might have feared.
Those in work have seen their incomes squeezed. Earnings have risen less quickly than prices. That is probably closely related to the relative robustness in job numbers. Workers are cheaper to employ, so more are employed. The incomes of those in work have actually fallen relative to the incomes of those not in work. That is one of the arguments that the government is using to justify three years of below inflation rises in benefit levels. Since 2007, benefit rates have generally increased by 20 per cent whilst earnings levels have risen by just 10 per cent.
And for the first time in decades it doesn’t look as if those on high (or at least quite high) earnings have been insulated. Real earnings have been falling right across the distribution.
Put all this together and in 2010/11, the latest year for which we have data, income inequality fell by more than in any single year in the nearly 50 years for which comparable data has been available. Real incomes fell right across the income distribution but by less at the bottom (1 per cent at the 10th percentile) than at the middle (3 per cent at the median), and less at the middle than at the top (by 5 per cent at the 90th percentile).
What about government tax and benefit reforms? They surely have protected the rich and hit the poor?
Well, up to a point. If you take the full set of tax and benefit changes implemented or announced since the start of 2010 it is indeed true that those most dependent on benefits—the bottom third of the income distribution—will, by 2015, have lost more as a proportion of their income as a result of these changes than will those in much of the upper middle parts of the distribution. There have been, and will be, real cuts to benefit levels and entitlements for many working age people. For those earning below about £50,000 there have been rather few tax increases.
But the group affected most by the overall consolidation package—not just in terms of pounds, but also as a proportion of their income—has been the richest. Those in the top tenth of the income distribution have been hit by a combination of increases to income tax and national insurance contributions, restrictions to pension tax relief and withdrawal of child benefit. Estimates by IFS researchers suggest that households in the top tenth of the income distribution will have lost about 7 per cent of their income as a result of the consolidation package, compared with between 4 and 5 per cent for those in the bottom third of the distribution, and about 3 per cent on average overall.
So to a large extent we really are “all in this together”—at least to the extent that changes in income have been spread across this distribution. Of course the rich remain rich and the poor remain poor, and similar proportionate falls in income for each may be more painful for the poor. But in this particular sense this has been a remarkably equitable recession. Employment rates have stayed high. Earnings have fallen relative to benefit rates, and the long-run trend to greater earnings inequality appears to have stalled. The richest have seen some substantial tax rises.
Naturally the story is much more complex than that, even beyond acknowledging that many individuals will have become a lot better off while other have suffered unemployment and big income losses. Some groups have done better than others. In broad terms older groups have done better than younger groups. That is true of pensioners relative to those of working age. It is also true of those in their 40s and 50s relative to those in their 20s and 30s. And families with children have been hit much harder by the overall tax and benefit changes than those without children, though they were also the group to benefit most from the last government’s massive tax credit programme.
We are living through very difficult times. Household incomes are falling further and faster than at any time in half a century. And very many of us are in this together.