Inequality Is Bad for the Economy and Has Cost UK £135bn, Says Report

Pounds
A pile of one pound coins. Toby Melville/Reuters

Income inequality in the UK, which has been growing since the 1980s, has led to an estimated loss in GDP of £134.5 billion in the UK over the past two decades, according to a report released today by a leading economic thinktank.

The report, carried out by Paris-based Organisation for Economic Cooperation and Development (OECD), says that income inequality has a "statistically significant impact" on economic growth, citing educational opportunities for disadvantaged people as the main factor driving this inequality.

In 34 of the countries that are members of the OECD, the gap between rich and poor was found to be at its highest level in 30 years, with the richest 10% earning on average, 9.5 times that of the poorest, compared to just seven times as much in the 1980s.

The report measures the rise in inequality using the Gini coefficient, a measure of inequality where a score of zero represents exact equality of incomes and one represents all income going to just one person. In the UK, the Gini coefficient has increased from 0.31 in the mid-1980s, to 0.35 in the 2011/12 financial year, a rise of four 'Gini points'.

According to estimates made by the OECD, rising inequality by an average of three Gini points over the past two decades would result in a decrease in economic growth by 0.35% per year for 25 years, leading to a cumulated loss in GDP at the end of the period of 8.5%. Based on these assumptions, rising inequality in the UK is estimated to have reduced economic growth by 9% over two decades. With a GDP of approximately £1.49 trillion in 2013, this would have led to an estimated loss of £134.5 billion over the preceding 25 years.

In Finland, Israel, New Zealand, Sweden and the U.S. the Gini coefficient increased by more than five points according to the report, which would lead to a decline in growth of up to 14% over 25 years using the estimates given.

The only countries in the report to have seen a decrease in inequality were Greece and Turkey.

"This compelling evidence proves that addressing high and growing inequality is critical to promote strong and sustained growth and needs to be at the centre of the policy debate," said OECD secretary-general Angel Gurría in a statement. "Countries that promote equal opportunity for all from an early age are those that will grow and prosper."

The findings of the thinktank challenge the policy of 'trickle-down' economics, whereby it is believed that tax breaks or other economic benefits provided to upper income levels will benefit poorer members of society by improving the economy as a whole, a central tenet of 1980s Thatcherite economic policy, and still endorsed by the UK Conservative Party.

The report concludes by saying that the impact of inequality on growth comes from the gap between the bottom 40% and the rest of society, not just the poorest 10%.

"It is not just poverty (ie the incomes of the lowest 10% of the population) that inhibits growth … policymakers need to be concerned about the bottom 40% more generally – including the vulnerable lower-middle classes at risk of failing to benefit from the recovery and future growth. Anti-poverty programmes will not be enough," the authors say.

"Policy also needs to confront the historical legacy of underinvestment by low income groups in formal education," it says.

This, according to the OECD, is the main way inequality affects growth. Inequality, the report says, undermines education opportunities for children from poor socio-economic background, which has the effect of "lowering social mobility and hampering skills development".

"By contrast, there is little or no effect for the human capital of people with middle or high levels of parental educational background," the report adds.

"Strategies to foster skills development must include improved job-related training and education for the low-skilled, over the whole working life."

Therefore, the report suggests that anti-poverty measures will not be sufficient to reduce income inequality. Instead, the OECD suggests higher top rates of income tax, and getting rid of tax breaks that tend to benefit higher earners.

According to Duncan Exley, Director of the Equality Trust: "Today's report adds to the wealth of information that shows how extreme inequality is not only hurting society but also damaging economies. We know that more unequal countries have poorer health and educational outcomes and higher rates of violent crime, but we now have robust evidence that it is also holding back our economy."

"There has been a lot of talk about inequality in recent months, including from our politicians, but there seems a worrying reluctance to act. Reducing inequality is not just possible, there are already a number of sensible policies that can be adopted to achieve this. Raising the top rate of income tax, as suggested by the OECD is one such policy, but we also need a genuinely progressive property tax to replace our unfair and outdated council tax. We also need to tackle VAT, which hits the poorest hardest, and we need to move from a minimum wage to a Living Wage," Exley added.

According to Exley, the next government should agree to annually submit their policies to "inequality testing" by the Office for Budget Responsibility to make sure that their "their net impact will be to reduce the gap between the richest and the rest of us".

"These policies are practical and popular. Over 80% of people now agree that the gap between rich and poor is too great, and 70% believe it is the government's job to tackle this. If politicians don't wake up to this soon the prospects for our country, and their election next year, will be equally bleak," he says.