Rising inequality in the UK will become an electoral battleground

Households face falling real-term income growth and a spike in home-heating costs. Failure to tackle those will hurt when voters go to the ballot box, writes Phil Thornton

Rising energy bills are adding to householders’ woes (PA Wire)

Inequality of wealth and income looks set to become the dominant economic issue this year, now that Brexit has receded to become a debate over how best to implement that botched deal.

The yawning divide between the best and worse off in the UK was already well embedded before Covid-19, but the impact of the measures taken to control the pandemic have widened it. According to figures from the Office for National Statistics (ONS), the wealthiest 10 per cent of households held 43 per cent of all the wealth in Great Britain between April 2018 and March 2020. The bottom half held less than a tenth. The richest 1 per cent of households held wealth of more than £3.6m, while the least wealthy had £15,400 or less.

However, the divide is likely to have widened since March 2020, the month of the first Covid-19 lockdown in the UK, according to a survey of households released last month. It showed that more than a quarter (27 per cent, or 7m households) were either struggling to manage (4m) or in serious financial difficulties (3m). It found that for while a fifth of all UK households saw their financial situation get a little or a lot better, more saw their financial situation get a little or a lot worse (almost one in four)

Looking ahead, the outlook is bleak. Among households whose financial situation had already deteriorated substantially, the financial outlook was estimated to be poor or quite poor for almost three-quarters (72 per cent) of them. This echoes the Social Mobility Commission that in July found that every critical measure of low social mobility – child poverty, income inequality, access to stable housing, unemployment for young people and gaps in school attainment – was poor in 2019. The impact of Covid threatened to make each of these factors worse, it said.

The reason for the yawning divide between rich and poor is well documented. Cuts to interest rates and continued quantitative easing boosted asset prices, filling the pockets of home- and share-owners – the former also helped by a holiday on stamp duty for home purchases.

Lockdown restrictions allowed office workers to carry on with their jobs, while those in lower-paid sectors such as retail and hospitality either lost their jobs or had to rely on furlough.

For those with fragile finances, 2022 threatens to include three horseman that may bring a monetary apocalypse. Inflation continues to eat into household budgets. Bank of America’s economists see prices rising by 6.2 per cent a year by April and ending the year at around 5 per cent. Even strong wage annual growth of 3.5 per cent would mean that incomes would fall in real terms by around 1.7 per cent, or the worst since 2011.

Another blow comes from the expected rise in energy prices. Soaring wholesale gas prices could mean that the regulatory price cap on average bills rises from £1,277 towards £2,000 in April. Low-income families spend far more of their income on energy than the better-off.

A government elected on an agenda of reducing inequality by “levelling up” – albeit between regions rather than within them – should find it easy to respond. However so far, the response has been hesitant. One measure would be to cut VAT on energy bills, currently 5 per cent. Labour has seized this idea forcing the prime minister to say that it is a “blunt instrument”.

Tory backbenchers have called for the “green levies” in energy bills to be cut, but that an extra £200 a year goes towards the cost of insulation for the poorest households (and runs counter to the environmental claims made at COP26). Labour, the Liberal Democrats and some Conservative MPs want a windfall tax on oil and gas producers.

Now that Brexit has been delivered, albeit half-cocked and is itself a generator of inequality, the perceived unfair distribution of wealth and income will become the lightning rod of successful economic management this year. Inflation may fall back next year but, in the meantime, policymakers will need to come up with partial solutions such temporary measures to alleviate energy costs and windfall taxes, or more permanent relief through the tax and benefit system.

This is both a political and economic issue. Eight years ago Boris Johnson used a Margaret Thatcher memorial lecture to say that “some measure of inequality” was a spur to economic activity, an idea he repeated in the Conservative party leadership debate in 2019.

Since the groundbreaking book Spirit Level highlighted the "pernicious” effects that inequality has on societies, bodies such as the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) have shown that it hurts growth. In other words, it is not just that the pie is shared out unevenly – but the pie gets smaller.