This week the OECD published its latest analysis of inequality in the UK, including (another) graph in which 1997 is not a turning point but rather this time 2005:
With inequality having been rising since 2005 there is so far not enough data in their set to show if the current government is doing much differently to that trend than Gordon Brown’s government, but some of their conclusions about what happened under previous governments are very relevant to current policy making:
- Transfers and taxes became less redistributive. Between the the late 1970s and mid 1980s, the tax-benefit system in the UK offset more than 50% of the rise in market income inequality. This effect has fallen in the subsequent decades.
- Benefits became less redistributive despite being more targeted towards the poor. This was largely driven by declining benefit amounts. It was also due to more people working, often at low-wage jobs and so not qualifying for benefits. And lastly due to tighter eligibility conditions.
- Taxes became less equalising. Reduced progressivity has cut the redistributive effect of income taxes approximately by half. Lower progressivity was due in part to the removal of the higher-rate tax brackets and a reduction in the basic tax rate.
- But public services improved their impact on reducing inequality. Social spending in the UK relies more on public services (such as education, health etc.) than on cash transfers: spending on services amounts to over 15.4% of GDP while spending on cash transfers is some 10%. These services reduce inequality more than almost anywhere else, and this impact has increased over the 2000s.
As a result, the OECD recommends looking at tax and benefits policies which would cut inequality but in addition points to employment and education as being key factors in determining levels of inequality.