Budget 2013: Reducing inequality should be at the forefront of Osborne’s mind today

The defining societal trend in the UK over the past 30 years has been the growth in inequality, with an ever higher share of the national income captured by a wealthy elite, while the wages of ordinary working people stagnate. Redressing the balance need not come at a cost to enterprise.

Luke Hildyard is a researcher at the High Pay Centre

The defining societal trend in the UK over the past 30 years has been the growth in inequality, with an ever higher share of the national income captured by a wealthy elite, while the wages of ordinary working people stagnate.

In 1979 the richest 1 per cent of the population controlled about 6 per cent of the national income. By 2007, this figure had grown to 15 per cent.

Since 1998, the pay packages of FTSE 100 company chief executives have risen by nearly 500 per cent – for the average worker, the pay increase over the same period has been around 15 per cent.

The UK is also the 7th most unequal OECD country, with only Israel and the USA, plus the poorer economies of Mexico, Chile, Portugal and Turkey, worse off.

It is the reversal of these destructive, destabilising and unfair trends that ought to be the government’s number one priority, at the forefront of George Osborne’s mind when he stands up to deliver his budget today.

In this context, Osborne’s decision to reduce the top rate of tax from 50p to 45p on earnings over £150,000 seems perverse.

Research for the High Pay Centre suggests that if 10 per cent of the income of those who fall into this tax bracket (about 0.9 per cent of taxpayers) were redistributed (or predistributed) to the bottom 25 per cent of earners, it would boost their income by an average of 55 pence an hour.

This would bring the average hourly wage of those in those in the bottom quartile to £7.35 – just 10p short of the living wage outside London.

In other words, a very minor reduction in the incomes of a tiny proportion of the population – who would remain very wealthy indeed by most people’s standards – would go a long way towards eliminating the problem of people in gainful employment remaining unable to support themselves, if appropriately redistributed.

Measures to make this happen could include, for starters, a reversal on the 50p tax rate. The link between social security payments and inflation should also be maintained.

Further revenue could be raised by reviving the tax on bankers bonuses, briefly introduced by Labour, and extending it to so-called ‘long-term’ incentive plans and the wider corporate sector, where performance related pay has also grown to distasteful levels, despite the absence of any apparent improvement in performance.

Bringing Capital Gains Tax in line with income tax would help to counter the growing share of national income accounted for by profits in relation to wages.

This has greatly benefitted the rich, who receive a disproportionate amount of their income in profits, at the expense of low and middle income households, whose earnings are mainly in the form of wages.

Redressing the balance need not come at a cost to enterprise.

In her ‘Re-balancing What?’ pamphlet for Policy Network, Mariana Mazzucato shows that there is little evidence to suggest that lower Capital Gains Tax rates have enabled greater private sector innovation – instead, they have merely increased the returns from the typical, short-term venture capital investments in companies that are already at an advanced stage of development.

Osborne will know better than most that these kind of measures are important, not just as a means of tackling inequality, but also for symbolic reasons.

The Conservatives plummeted in the polls after the 50p tax cut rate in 2012, and Tory peer Lord Tugendhat warned last week that when the incomes of the very richest in society “so far outrun those of the people who work for them and the population at large, they lose moral authority, their words will be discounted and the business case on economic and social matters will go by default”.

This is sage advice – and it is hoped that Tugendhat’s party colleagues in the Treasury will heed it.

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