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For richer, for poorer, by Nick Pearce

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15 April 2005

As the election battle hots up for hearts and minds of 'hard-working families', contradictory messages are emerging about poverty and inequality. Who is telling the truth? The IPPR sifts through the figures

During the 2001 election campaign, Newsnight's Jeremy Paxman famously asked Tony Blair: do you care about the gap between rich and poor? 'I want to tackle poverty, not inequality,' was the prime minister's answer.

In reality, the Labour government did both in its second term. As we found out at the end of March, new figures on household incomes showed that the 2002 rise in national insurance and the introduction of tax credits had cut average incomes, but reduced inequality and poverty. Disappointingly, both the media and the political parties focused on the first half of the report, rather than the much more important shifts in inequality and child poverty.

The Times front page spoke of a 'tax assault on the middle class' and the shadow work and pensions secretary said it was a 'devastating evaluation of what Labour has done to hard-working families'. Labour responded by pointing to the fluctuating fortunes of the self-employed and talking up long-term rises in average incomes.

So who was right? And does it matter? The Conservatives talked about average incomes falling by 0.2%, whereas Labour pointed to median income — that of the middle household in Britain — rising by 0.5%.

But looking at a single indicator is often misleading. What actually happened was that 80% of the population were a bit better off, but the richest 20% were a bit worse off.

Because average income is more sensitive to changes at the higher end of the income distribution — the 30% of households that earn more than £22,800 a year — this meant that although average incomes fell, most people's incomes rose, including those of the electorally crucial 'middle' household.

Yet growth was slow compared with that of the wider economy and previous years, largely due to the rise in national insurance in 2002. So the key question is: would we have been better off without the tax rise?

The answer is a simple 'no'. The money raised from national insurance changes has been spent on improving public services. Slightly lower income growth is a price worth paying for longer and healthier lives, better schools, lower crime and a fairer society. The quality of people's lives depends on far more than the amount of cash in their pockets, and a myopic focus on people's incomes misses this crucial point.

The second glaring omission from the debate was that inequality in Britain has fallen for the third year running. It is still far higher than it was before 1979, but at least the trend towards an increasingly unfair society has started to be reversed. This is no small achievement and Labour should be proud of it.

IPPR research earlier this year showed that most people think inequality in Britain is too high and that the government should reduce it. Yet while Labour remains reluctant to build on public support by talking about a more equal society, it will be hard-pressed to leave a lasting political legacy or to shift debate in a progressive direction.

Perhaps even more importantly — and strikingly low down in most commentators' priorities — was the news that the government is likely to miss its target of cutting child poverty by a quarter by 2005 and 'eradicating' it by 2020.

Achieving this ambition would dramatically improve the lives of millions of children and make Britain a fairer, more dynamic society. Until early this year, most commentators thought that this target would be met. But child poverty fell by only 100,000 last year, so 432,000 more children must move out of poverty next year or the target will be missed.

The problem is that the government needs to run to stand still. Although it raised the threshold of the Working Tax Credit and increased spending on Child Tax Credits by £480m in this year's Budget, this falls short of the £2bn increase the IPPR believes is needed by 2007/08. Steadily increasing employment rates, particularly for single mothers, and generous tax credits will continue to make a difference, but the prospects are gloomy without a big increase in spending.

Ultimately, the big question for Labour is whether it will continue to track the centre ground of public attitudes to inequality, quietly making progress on different fronts; or whether it will seek to shift opinion in a more progressive direction, as it has done on public services. Its manifesto suggests it might choose the latter course.

Irreversible change is likely only if the public supports a new direction of travel. Social justice is a big prize and it is there to be won.

Nick Pearce is director of the Institute for Public Policy Research

PFapr2005

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