Lack of growth is at the root of all Britain’s other inequalities

On most measures, income inequality in the UK is somewhat lower than it was 20 years ago. Outside of the top couple of per cent it hasn’t changed much since 1990. In recent years increases in the national living wage have squeezed the earnings distribution. Yet concern about inequality is at record levels.

A book published this week, of which I am a co-author and which is the culmination of more than five years work with my former colleagues at the Institute for Fiscal Studies, sets out to explain this phenomenon, to show how inequalities beyond income inequalities matter, and to provide a guide for addressing them.

Income inequality may not have changed much in recent years but, having risen dramatically during the 1980s, it remains high by historic and international standards. Two decades of economic stagnation have baked in frustrations kept in abeyance when most people were enjoying improvements in their living standards — as they were until the mid-2000s.

Stagnation in combination with a high level of income inequality is a recipe for discontent. It exacerbates other kinds of inequalities. Wealth has become much more important relative to income. The older generation has thrived, the younger has not. Inheritances have mushroomed. For some. Social mobility has declined. Geographical differences have ossified. Life expectancy has stalled and health inequalities have increased. All this accompanied by shifting sands of political polarisation between the more and less highly educated, the old and the young, homeowners and renters.

As ever there are no simple answers. Some will say, it’s obvious — tax the rich and redistribute to the poor. There are three problems with that solution. First, doing a lot more than we already do risks undermining growth, creating additional problems. Second, such policies merely try to tidy up after issues have arisen — they don’t tackle underlying causes. Third, those on low incomes want to make their own way in the world, not rely on handouts. That’s confirmed by extensive research into people’s attitudes. Income earned in a job which provides autonomy, meaning, opportunity for advancement, is worth far more than a handout. For local communities that is vital.

Others might question concern about inequality at all. How often have we heard the mantra “I care not about inequality of outcome, but inequality of opportunity”? That is meaningless; a fig leaf. Highly unequal outcomes inevitably create highly unequal opportunities. The evidence is conclusive. And even if they didn’t, a level of economic inequality which led to massive inequalities in social standing, in political power, in sheer longevity, would surely be of some concern.

So where to go from here if we want a more cohesive society? The most important lesson is that economic growth is vital. Without growth, everything is a zero-sum game, any kind of reform becomes harder. There is no more money for public services, or for redistribution. If incomes stop growing then wealth, and who your parents are, becomes ever more important. It becomes harder to earn and save your way up the wealth distribution. Social mobility slows. Policies that aim to reduce inequality, but which also reduce growth, will backfire.

That does not mean always let the market rip. New technology, globalisation and agglomeration can create winner-takes-all outcomes that undermine competition and entrench market power whilst also creating extreme inequalities. Getting regulation right here is necessary economically, and as a way of managing inequality. Nor does it mean major economic policies should ignore distributional considerations. Do so and you will lose support for trade liberalisation, mass immigration, and net zero policies, even if they do promote growth and other objectives. Ignore inequality at your peril.

A redistributive tax and benefit system will always have a role. But really tackling inequality requires an overall strategy that achieves growth, and that takes account of social consequences. That’s a broad canvas, but here are three priorities. First, build more houses. Housing costs have taken an ever-growing chunk out of the disposable incomes of the younger and poorer as rents have risen, and a diminishing chunk from the older and wealthier, as more own homes outright. The best thing we can do is build many more houses. Also, urgently, reform the taxation and regulation of housing. Most policy in recent decades has been disastrous for both equity and growth. We urgently need to get this right.

Second, all education from the earliest years matters, but we must focus in secondary school and beyond on those not going down the A-level and university route. Prioritise further education, vocational training and learning within the workplace. The “missing middle” in the English education system has long been a source of both economic weakness and social division.

Third, address regional inequalities. Easier said than done, but absolutely vital. The UK is most unusual in having so much of its highly productive and remunerative employment in just one corner of the country. Regions outside London and the southeast have tumbled down European league tables. Many areas are still suffering the effects of deindustrialisation that occurred a generation or more ago.

Increasing numbers of graduates in those regions cannot find graduate-level employment, but nor can they afford to move to London. It is inequalities between places — not between rich and poor, or men and women, or old and young — which people report as being of most concern. Income inequality may be stable, but lack of growth has led to an increase in other inequalities and brought concern about them to the fore. Our combination of a stagnating economy and high inequality is threatening both social cohesion and long-term prosperity.

Growth must not be sacrificed in the name of equality — we need a long-term economic strategy which recognises their interdependence. Growth and fairness are two sides of the same economic strategy coin.

Challenging Inequalities, by Paul Johnson et al, is published by Princeton University Press

Paul Johnson is provost of The Queen’s College, Oxford, and a senior adviser at Frontier Economics

This article was first published in The Times, and is reproduced with kind permission