Think you know all about house prices and pay inequality? Think again

The triple lock has ensured that pensioners’ incomes have risen faster than those of working-age people over the past 15 years. Meanwhile, the growth in house prices has locked increasing numbers of young adults out of owner occupation, with far fewer owning their own home than in 2010. And, of course, income and wage inequality have increased as the better-off have continued to scoop the pool.

How do those statements sound to you? I’m guessing they might sound plausible. In fact, if those three statements were part of your intellectual furniture, then I’m afraid it’s time for renewal. Each is false, but probably perceived to be true by rather too many of those who ought to know better. Perceptions take a while to catch up with reality.

That’s why it has become accepted wisdom that the last Conservative government presided over a boom time for older generations and locked the young out of the housing market. In fact, home ownership rates among those aged 25 to 34 are almost exactly the same today, at about 40 per cent, as they were in 2010. The big drop occurred from around the turn of the millennium, when rates approached 60 per cent.

Moreover, since 2012 median pensioner incomes have risen by about the same as the incomes of working-age households. It was in the decade before 2012 that pensioners did far better than others: their incomes rose by a seriously impressive 22 per cent, while the incomes of working-age households actually fell slightly. Because perceptions lag reality, our sense is that these are more recent changes than in fact they are.

Pensioners are still far better off than was the case 30 years ago, but pensioner poverty rates have increased over the past decade. There are about 300,000 more in poverty today than there were in 2011. Pensioners also have experienced bigger tax rises since 2010 than people of working age. The demise of generous occupational pensions means that the next generation may well end up less well-off than retirees. Things change and, especially when it comes to pensions, policy often needs to anticipate that change. The danger is that it won’t respond until years after the change has occurred.

Yet it is the prime minister’s understanding of what has been happening to wage and income inequality that causes me most concern about a potential clash between perception and reality.

Again, let’s start with a few facts. Steve Machin, a professor at the London School of Economics, has shown that inequality in hourly wages has dropped since 2010. Back then, those 90 per cent of the way up the wage distribution ladder earned four times as much per hour as those a mere 10 per cent of the way up. In the 13 years after 2010, that ratio has dropped sharply to only three to one, almost reversing the increases that occurred in the two decades after 1980. A lot of that is down to the success of the national living wage, the value of which has risen quickly but which has been accompanied by near-stagnation in wages for middle and, especially, higher earners. That stagnation is a symptom of the deeper problem of a lack of productivity growth. In the public sector, policy has explicitly held down the wages of better-paid and higher-skilled workers relative to the lowest-paid. That is creating problems of its own.

It’s not merely hourly wages that have become more equal. Household incomes have as well, though in this case by nowhere near enough to reverse the increases in inequality that occurred during the 1980s. Despite benefit cuts, the disposable incomes of the poorest 10 per cent of households, after housing costs, rose by about 10 per cent between 2009 and 2022. That’s pretty feeble growth over more than a decade, but it’s still about four times more than the increase enjoyed by those 90 per cent of the way up the distribution.

Policy has played its part. Regular readers will know that I am keen to burst various conspiracies of silence between the main parties. One about which both are extremely keen to remain quiet is that the Conservatives hammered higher earners. The share of income tax paid by the top 1 per cent of income tax payers rose from 24 per cent to 28 per cent between 2008 and 2023. The threshold for paying the additional 45p rate has near enough halved in real terms. More than a million people now pay it. The number paying income tax at 40 per cent has more than doubled as the higher rate threshold has also been cut by a quarter in real terms. Pension tax relief, too, has been reined in for top earners.

Those are all reasonable choices, though I’d prefer it if they had been more transparent. They do mean, though, that a government looking to those with the “broadest shoulders” needs to recognise that it has inherited a tax system under which those broad shoulders are already bearing far more than was ever the case under the last Labour government. That said, and I’ll say more about this before October’s budget, there definitely are ways to improve and reform capital gains tax, inheritance tax and council tax, such as to raise more from the wealthier (as opposed to those on high incomes). But much care is needed to make sure such reforms are well designed.

Bear in mind, too, that those with more averagely sized shoulders are paying less in direct taxes than they have in a very long time. There is a limit to how far you can take that while maintaining an effective welfare stare. Perhaps that is why there is pretty much no other country where public spending is higher than it is here and where taxes on average earners are as low as they are in the UK.

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