The Blog

Budget 2014: George Osborne's Chutzpah on Inequality

The chancellor said income inequality is falling.. and, astonishingly, he's right. But he can't take credit for it - oh, and it's about to start rising again. So why did Ed Miliband let him get away with it?

"The independent statistics," declaimed George Osborne in his Budget on Wednesday, "show that under this government income inequality is at its lowest level for 28 years."

Could he really be telling the truth? Well, yes.. to an extent. The Office for National Statistics (ONS) did acknowledge, in July 2013, that "the most recent figures have shown a fall in inequality. The Gini coefficient for disposable income in 2011/12 was 32.3%, a fall from its 2010/11 value of 33.7%, and the lowest level since 1986."

Ergo, "lowest level for 28 years".

There are, nevertheless, four rather significant things that Osborne didn't tell us which, taken together, makes his claim on income inequality so audaciously disingenuous.

First, as history shows, income inequality tends to fall in recessions, as the rich lose a little of their income, especially capital gains, while the poor are financially supported, to an extent, by 'automatic stabilisers' and the social security safety net. So, on income inequality, what we have experienced, since 2008 at least, is not new - and nothing for Osborne to try and brag about. (The US experience, this time round, is a different story.)

Second, the chancellor was careful to refer to income inequality. Wealth inequality is an altogether different issue. As Matthew Whittaker, chief economist at the living standards thinktank, the Resolution Foundation, tells me, the data on wealth inequality - for example, breaking down households with mortgages by net worth, over time - suggests "things have become more skewed since the financial crisis". On Monday, a study by Oxfam revealed that the UK's five richest families now own more wealth than the poorest 20% of the population. In August 2012, it was revealed that "the richest 10% of households in Britain have seen the value of their assets increase by up to £322,000" as a direct result of the Bank of England's programme of electronic money creation - or 'quantitative easing'. To pretend wealth inequality is falling "under this government" flies in the face of the available evidence.

Third, the fall in income inequality had little to do with Osborne; the ONS says it was "driven partly by earnings falling for higher income households and partly by changes in taxes and benefits". Much of these changes were inherited by the chancellor from his Labour predecessors. Isn'it ironic that Osborne wants to blame Labour for the financial crash and subsequent recession - but wants to take credit for Labour's success in slowing the massive rise in income inequality that we witnessed under Margaret Thatcher.

"The IFS [Institute For Fiscal Studies] explain why inequality fell so sharply.. Part of the rise in equality was because 'the largest falls in income took place at the very top of the income distribution'; the introduction of the 50p income tax rate 'is one of the major drivers' of that fall. So a measure enacted 37 days before the coalition came to power - and halved in magnitude in that coalition's second budget - is responsible for a lot of the fall in inequality."

This leads me to my fourth, final and most important point: due to a raft of policy decisions taken by this chancellor, from slashing the aforementioned 50p tax rate to introducing a range of cuts and changes to social security payments, income inequality is about to start rising again. On Osborne's watch.

Don't take my word for it. Here's the Institute for Fiscal Studies in June 2013: "Income inequality fell substantially between 2007-08 and 2011-12, but is projected to rise again from 2011-12, almost (but not quite) reaching its pre-recession level by 2015-16."

As Robert Joyce, a senior research economist at IFS and one of the authors of the paper, explained:

"If the OBR's macroeconomic forecasts are correct, then most of the falls in real incomes associated with the recession have now happened for middle- and higher-income groups. But much of the pain for lower-income groups is occurring now or is still to come, because these groups are the most affected by the ongoing cuts to benefits and tax credits. Overall, we expect the period of recession followed by austerity to leave income inequality in 2015-16 about the same, or slightly lower, than in 2007-08."

The Resolution Foundation's Whittaker concurs. "The assumption is that inequality will grow from this point, with benefit and tax credit cuts hitting harder at the bottom and wage growth returning at the top," he tells me.

The real question isn't why Osborne didn't mention any of this (duh!) in his Budget statement yesterday, but why Ed Miliband - who is supposed to be seizing the 'inequality moment' - didn't call him out on it. The 'I' word only appeared once in the Labour leader's exchange with the chancellor - and, astonishingly, it was Osborne who deployed it.

Open. Goal. Missed.

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