This budget will heighten income inequality

By Guest Contributor
March 26, 2012

–Daniel Tarling-Hunter is an economist at Euromonitor International. The opinions expressed are his own.–

The 2012 Budget has highlighted the divide between the richest and the poorest. Two standout policies have come under scrutiny; a reduction in the top rate tax, and support for the lowest income groups by raising the personal allowance. Though these changes don’t shift the fiscal position of the government, Euromonitor International forecasts that the UK’s existing income inequality is set to widen further with more pressure on the poorest consumers.

Income inequality in the UK, measured through the Gini Index, has risen each year since the coalition government came into power in 2010. Euromonitor International expects the Gini Index to continue to rise to 34.3 by the next general election in 2015 from the 2010 figure of 33.0 (where 0 equals perfect equality and 100 equals perfect inequality). A combination of recession following the global economic downturn of 2008-2009 and subsequent fall-out from the eurozone debt crisis, and government austerity measures have all acted to squeeze the country’s lower and middle-income consumers since 2008. The latest budget will exacerbate income divides further.

The controversial 50p tax cut is a deeply ideological move. The claim that the five percentage point reduction to 45.0% will cost the government just £100 million in lost revenue is questionable given the estimates are based on a short period of data. Funding for the cut comes from closing loopholes for tax avoidance by the wealthy, an increase in stamp duty and higher effective taxes elsewhere.  However, the richest 10% of households in the UK had an average disposable income 10 times that of the poorest 10% of households in 2011.  Given the level of inequality already, many will question further tax relief affecting the richest in society.

As a result of the financial crisis, during this parliament (2010-2015) Euromonitor International expects the average household disposable income to decline by 2.6% in real terms, a £903 reduction. However, the decline is most pronounced in the lowest income decile 1 (the poorest 10% of households) where real household disposable incomes are expected to decline by 7.8%, while the highest income decile 10 (richest 10% of households) is expected to be the only group to see positive growth of 1.0%.

Real Average Annual Household Disposable Income by Decile Performance: 2010-2015

Source: Euromonitor International from national statistics

Given the fiscally neutral position of this budget, even a policy focussed on reducing inequality (such as the increase in the personal income tax allowance to £9,205 effective from April 2013) has been countered by raiding tax allowances elsewhere. Instead of a genuine redistribution of wealth from higher income groups to the lowest, it redistributes an estimated £3.6 billion, according to HMRC, between 2013 and 2016 from the elderly to provide for those of working age. Given weak economic conditions and an ageing population, an increasing number of over 65 year olds are staying in work; between 2007 and 2011 Euromonitor figures show a 34.7% increase in 65+ year olds working. It is important to note that in 2011 the average gross income of 65 year olds and above was already the lowest of all age groups above the age of 24.

Euromonitor also forecasts that regional inequalities will widen. Income in the North and Midlands were disproportionately affected by the recession as manufacturing industries situated in these regions saw some of the largest contractions in output while the public sector has also been hit hard. The North West has seen average household nominal expenditure decline between 2005 and 2011 by 4.4%. The chancellor’s announcement to look into public sector regional pay is likely to further exacerbate these income inequalities.

The chancellor’s focus on tax reform and long term growth has left few concessions for short term economic support. High oil prices and costly public transport has meant transport costs made up 22.7% of per capita discretionary spending in the UK in 2011. The average UK consumer will continue to feel the pinch with reduced propensity for discretionary expenditure. Discretionary spending (everything outside of spending on housing and food/non-alcoholic beverages) will account for 68.9% of consumer spending in the UK in 2015 in real terms, down from 71.5% in 2006. However, inflation is expected to average 3.4% in 2012 compared to 4.5% in 2011 which will reduce the squeeze on incomes.

The fiscal neutrality of the budget with a continued focus on austerity is unlikely to have a significant impact on the UK’s economy. However, income inequality will increase across Western Europe in this period of austerity; between 2012 and 2017 the UK is expected to have the second fastest rising Gini score in Western Europe.

 

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