Trickle-down dries up

Britain is getting richer, but the benefits have not been passed on to the majority of wage-earners. Does it matter? Jane Lewis reports

Is Britain getting richer?

Yes, and progressively so. Having already notched up 59 quarters of uninterrupted growth, the IMF forecasts that Britain will be the fastest-growing major advanced economy in 2007, piling on 2.9%. Average wealth is also rising: the UK now boasts the third-highest per-capita figure – $126,832 (£64,172) per adult – after the US and Japan. Old-style measures, such as the “misery index” – calculated by adding together a country’s inflation and unemployment rates – suggest we’ve never had it so good. Yet this rosy scenario doesn’t seem to tally with the personal experience of many ordinary Britons. Polls show that levels of optimism have declined dramatically in recent years. Many of us feel economically vulnerable.

Are these fears justified?

The full benefits of the boom have certainly bypassed the majority of British wage-earners. Real household incomes – the money available to spend on goods and services – have grown much more slowly than the economy as a whole. The latest Expenditure and Food survey shows that average incomes, adjusted for inflation, have risen by a negligible 0.35% annually since 2001-2002, while outgoings are rising fast. Rising interest rates have hit Britain’s debt-laden households hard and the Government continues to take an ever-larger chunk of the kitty: the tax burden has risen by £40bn since 1997, the equivalent of an extra £1,300 per family. Official inflation figures bear little resemblance to daily experience on the ground, particularly in the two key middle-class preoccupations of houses and education. Even professional families on six-figure salaries are no longer guaranteed what their forebears took for granted: a house in a respectable area, the prospect of a decent pension, and a good education for their children. According to the Halifax, only nine professions can now “comfortably” afford to pay school fees compared with 20 five years ago.

Why have ‘the haves’ become the ‘have nots’?

The simple answer is growing inequality of incomes. By almost every measure, inequality has become more pronounced after ten years of Labour government. Stellar pay rises for the richest 0.5% and below-par gains for the bottom 5% have offset the chancellor’s efforts to redistribute wealth to the poorest. But perhaps the biggest shift is the widening gulf between those in the middle and those at the top. Western economies have been hijacked by the super-rich, say Citigroup strategists Ajay Kapur and Niall Macleod. In these new “plutonomies” it is the spending power of the elite that holds sway. The chief impact has been on asset prices: big-ticket purchases at the top end have pulled up prices all down the scale. The housing market provides the best example: the rise of the super-rich has helped fuel a 180% increase in prices over the past decade, taking home ownership, particularly in the southeast, beyond the means of the average wage-earner.

Is this a global phenomenon?

Yes. Income inequality has been growing across the developed world for the past 25 years and is most pronounced in the US, where the gap between the richest and poorest households is at its widest since the 1920s. According to a study by investment bank UBS, real incomes among the second-poorest tenth of the population have fallen by 12.5% since 2000 – a decline that can “be fairly characterised as a severe recession for low-income Americans” at a time when “society as a whole is experiencing strong economic growth”. Economists cite numerous causes from rising corporate profits and executive greed to technological innovation. But globalisation, which has lowered the relative cost of unskilled labour and boosted the return on capital, is the factor underpinning everything. It has shaken up the established order, generating a geyser of wealth for highly skilled workers such as financiers, while others lose out.

What can be done?

Income inequality, in some measure, is crucial to healthy economies: pay differentials encourage the brightest into the most profitable firms and boost hard work. The difficulty, say economists, lies in achieving “the level of inequality that works best”. Few dispute the pendulum has swung too far. Yet reconciling the interests of the winners and losers is no easy task. Punitive taxation would be self-defeating: individuals and firms would simply move elsewhere, leaving the country poorer. The last time income inequality widened so sharply in the UK was in the 1980s. The recession of the Major era narrowed the gap. It may take an even bigger financial shock to iron out the extremes of today’s world.

What about the generational wealth gap?

The most visible inequalities between rich and poor are horizontal: compare the £9bn paid out in City bonuses this year with the meagre pay of those cleaning City offices. Much less attention is paid to the vertical dimension: namely, the widening wealth gap between the baby-boomer generation and those following them. A Bank of England report this week suggests that soaring property prices have led to a surge in the personal wealth of the over-35s at the expense of the young. Some call it “the great generational robbery”. Through their rent payments, the young subsidise mortgages of older landlords who bought property when prices were cheap. When they do buy into the market, it will mean a transfer of many millions of pounds from young to old. The implications are frightening. Half of Britain’s £6,000bn of financial wealth is in housing; half of the rest is in funded pension schemes. In financial terms, huge swathes of the under-35s are effectively disenfranchised.