Growth and cutting inequality must go hand in hand for Labour

“Growth” got 49 mentions in the 130-page Labour manifesto, leaving no doubt about where the party aims to find answers to the many problems it’s inherited. Contrastingly, “inequality” appeared just once. This is notable, given not only party history, but also public attitudes. There is plenty of evidence that concern about inequalities is high and has grown since 2010.  

That said, the two are inextricably related. Over the past 15 years incomes and earnings have grown at a feeble rate. Income inequality between rich and poor has, if anything, fallen slightly. But the slow growth, accompanied by mostly ultra-low interest rates, has driven another kind of inequality. It penalises younger generations relative to older groups, who had accumulated wealth before growth stopped. And it changes the determinants of inequality: young people are more dependent on the economic position of their parents, over which they have no control, than in many generations.

The resumption of growth would help avoid further entrenching these inequalities, and perhaps reverse them. It would also mean more public money available to spend on things that can lift everyone up. New Labour spent growth proceeds on higher benefits and tax credits — helping to ensure that all groups saw substantial income growth — and on health, education and other public services. Get more growth, and their successors may well do the same.

This isn’t to say that growth necessarily reduces inequality. The 1980s stand out in the UK as a decade of very rapid increases in earnings accompanied by unprecedented increases in inequality. The effects are felt to this day in “left behind” communities. Indeed, that is perhaps the clearest example of why we can’t just assume that impacts on those less favoured by change can be dealt with later, using the extra wealth created. In truth that kind of “compensation” never really happens. And in any case, people generally prefer to be able to make their own way in the world, not to be forced to depend on charity. It is striking that Labour’s manifesto places more emphasis on making work better than on increasing redistribution.

One policy with concerns about inequality at its core is the commitment to build 1.5mn new homes. That will help, over the long term, to reduce generational inequalities, and to provide opportunities for those without wealthy parents. Local communities will often object. There are winners and losers. This time, though, the losers are typically relatively privileged, and the winners those who have been shut out from owning, or indeed renting, their own home. 

Despite ditching the phrase “levelling up”, geographic inequalities are also clearly a concern of the new government. We currently have one corner of our country that is close to the productivity frontier of the high-income world, and the rest lagging well behind. The latter will only catch up if their economies can grow.

Labour has already made clear its ambitions for ensuring we get to net zero carbon emissions. The challenge here is different. You can sell this as a policy aimed at reducing inequality — between generations or the rich and poor world. But perhaps the biggest challenge will be to make the transition in a way that is mindful of the distributional impact today. It will be expensive. It could be disruptive. Ignore the potential effects on vulnerable households, or even those on average incomes, and the whole project could be derailed.

The lesson of the past 50 years is that macroeconomic policy, provision of public services, trade, immigration, housing and a whole lot more matter for inequality. Get the policy wrong and you risk either increasing inequalities in ways you won’t like, or in ways that will eventually derail the original objective. Labour’s manifesto may barely mention it, but consideration of inequality must nevertheless be at the heart of its agenda.

The IFS Deaton Review of Inequalities has recently been published by Oxford University Press. This article was first published by the Financial Times, and is reproduced here with kind permission.