The Year in Review: British society

A society divided by its own dreams

This year, Britain woke up to the fact that it has fractured once again into jagged shards of privilege and poverty. Class the oldest of British subjects became inescapable, a hot-button issue even in middle-class Middle England. At the top, people were partying like it was 1929, 1987 and 1999 all rolled into one the biggest of big bangs. Every night at the shimmering London nightclub Movida, the merry denizens of London's overclass spend 7,000 on a single bottle of Cristal champagne without thinking, and when they are in a good mood splash 35,000 on a single cocktail, made out of rare cognacs and served in a crystal glass spruced up with an 11-carat white diamond. It is in such places that the unprecedented 19bn of City bonuses are toasted long into the night.

A short drive away, on the Ocean Estate in east London, the poorest families are living crammed 10 to a flat in council housing. Sarah Hussein shares a two-bedroom box with her husband and four growing kids. "My sons share one room, and me and my husband have our two daughters sleeping in with us," she told me. "I've had to start taking sleeping pills because it's impossible to crash out with three other people in the bed. It's bad enough now, but how can we carry on like this when the kids get older? The council told us we will have to wait seven years to be rehoused, but the girls will be women by then. Where will they sleep?" Her kids are wheezing with asthma because the damp is so bad. Shelter has discovered that in this country, in 2007, 268,000 children share a bedroom with their parents, while 98,000 British children sleep in kitchens and even bathrooms.

As the year drew to an end, it was proven that the difference between ending up in Movida or trapped on the Ocean Estate is not based on your intellect or ability or morality. It is based on the wealth of the womb you emerged from. A study conducted by the London School of Economics for the Sutton Trust found that a thick child from a rich family overtakes a clever child from a poor family by the time they are seven years old. The poor child never catches up again, in educational attainment or income. Social mobility your odds of moving up based on talent has stalled ever since Britain began to abandon social democracy for a low-tax, low-spend economy in 1970. It is now one of the worst rates in the Western world. So here, today, class is still destiny.

You could tell that something had shifted in the public consciousness this year when even right-wing newspapers began to splash on their front pages with stories fuming at the super-rich. The rise of an international, untaxed overclass in the South-east has had effects that cascade down to every other group. Even the wealthier middle classes are enduring paroxysms of status anxiety as they find themselves priced out of London's better restaurants, car showrooms and schools. No, it's not even vaguely akin to raising your kids in a damp flat but it is politically consequential, as we shall see in a moment.

The run on Northern Rock and the hints that property prices are about to lose their surreal sheen have increased this middle-class anxiety. This is why the stories that obsessed middlebrow Britain this year were tales of brittle class tensions. They ranged from the turgid film adaptation of Ian McEwan's Atonement with a ludicrous aristo-accent from Keira Knightley to the BBC's glorious chocolate-box adaptation of Elizabeth Gaskell's Cranford.

This chasm of inequality is beginning to warp British attitudes in ugly ways. Everywhere in the world, societies with vast income gaps and no mobility have a psychological need to demonise the people at the bottom, to ease their unconscious guilt. In South America or South Africa, the rich elites will tell you that the poor masses are stupid and ugly and they smell. As we become more like them, snobbery has become mainstream again, with wealthy comedians suggesting on prime-time BBC1 that the residents of council estates should be sterilised, and books ridiculing the clothing and speech patterns of "chavs" becoming bestsellers. The abuse directed at Gerry and Kate McCann was vile enough, but can you imagine how much worse it would have been if a single parent, rather than middle-class doctors, had left her child alone on holiday?

The year began with a strange self-congratulatory burst of this snobbery when Celebrity Big Brother descended into an "international incident". The Bollywood star Shilpa Shetty was placed into the reality-show compound with (among others) a handful of white working-class girls, including BB's own creation, Jade Goody, and the "beauty queen" Danielle Lloyd. There was a culture clash: the working-class girls bonded by talking about when they lost their virginity, but Shilpa who asks her father's permission when she goes on a date interpreted their questions as an attack. The row got nastier and nastier until Jade and Danielle made racist comments Lloyd was reluctant to eat Shilpa's food because "you don't know where their hands have been". Rioters across India burned effigies of the girls in response.

The British public reacted, rightly, by punishing racism and voting Shilpa the winner. But many justified this in the ugliest terms, saying how much they preferred immigrants such as Shilpa to the "stupid" and "repulsive" poor represented by Goody and Lloyd. The girls were presented as typical of their kind lazy and thick, compared with the hard-working and polite Shilpa. the Daily Express headline said it all: "Class vs Trash".

But the facts were ignored: actually, working-class white women are statistically far more likely to actually have sex with ethnic minorities and have babies with them than any other group. Some racists.

Occasionally, poor Britain blasted forth too close to rich Britain for its comfort. The year has seen a spate of slow-mo massacres of young black men by other young black men, with 26 stabbed or shot at the time I write this in London alone. Their average age? Just 16. The wealth gap is not matched by a geographical gap: these deaths happened in the pockets of poverty that circle and criss-cross rich areas. A few years ago, Ali G made us laugh with imagined gangs called "The Staines Massive". Now Britain really is riven with gangs calling themselves "The Brick Lane Posse", "The Paki Panthers", and more. The competing explanations for this by politicians reveal how the political debate about inequality is going to play out.

Some critics blamed hip-hop and blood-soaked music. But hip-hop sales and downloads have been tanking even as gang violence ramps up: So Solid Crew are so 2005.

The Conservatives primarily blamed the moral failings of the poor. David Cameron said that the shootings and gang violence were the result of the high level of single parenthood in these areas, and that the solution was to punish single parents financially by creating tax subsidies for the married. He pledged to introduce US-style plans to force single mothers to leave their children at home and go out to work, and to pressurise them to marry. This was part of a wider intellectual project, spurred by a series of reports issued by the former Tory boss Iain Duncan Smith, saying that the "underclass" now make up "a broken society", due to their unmarried or divorced status.

But was this true? Under Gordon Brown, Labour opposed the Tory proposals, but seemed cautious and underconfident about offering a different explanation for what was happening in British society. His pro-poor policies, such as Family Credit, continued on the quiet, and without them, inequality would be even worse; but in public, his ministers even hinted at times that they would adopt the Tory proposals themselves. This lumbering response meant that nobody in Westminster pointed out the gaping holes in the Tory argument. If single parenthood causes gang violence, how come the country with the highest rate of single parenthood in Europe, Denmark, has almost no indigenous problem with gangs at all? The real explanation that low-tax, low-investment economies, such as that of the US, always have high inequality and very poor social mobility was not uttered.

And both political parties were reluctant to probe into the real reason for this gang violence eating away at Britain. It is the predictable and predicted consequence of the "war on drugs". Where the supply of drugs is handed over to criminals by drugs prohibition, a niche and a need for armed criminal gangs is created. Under this system, the kids who join gangs will always be the swankiest and most enviable on their estates and they will shoot each other to seize control of a particular patch and retain their prestige and income. That is what almost all of these shootings were about. For example, at the start of this year, a number of the biggest drug dealers in south London were arrested. Warring posses of young men stepped in to take over their extremely profitable drug-patch and one of them was the 15-year-old weed-dealer Billy Cox. He was shot by a rival dealer who wanted to establish his control of the area.

It seems bleakly appropriate that, in this year of higher and hardened inequality, an Old Etonian child of extreme privilege has consistently made the national political weather. In September, Cameron proposed the near-abolition of inheritance tax, which was paid by only the richest 6 per cent of Brits. Rather than fight back, the Labour Government caved in and copied the plans.

True, Cameron reacted to middle-class anxieties about the super-rich by proposing an annual payment of 25,000 from the non-domiciled mega-rich such as Roman Abramovich. (They had been paying nothing at all, meaning that Britain was officially classified as a tax haven by the International Monetary Fund.) The Government followed again but this is a preposterously small contribution to ask from the super-rich. Besides, the plans may well breach rules set by the Organisation for Economic Co-operation and Development, because they stipulate that you cannot pay a flat-fee in tax to escape having your tax affairs investigated. They insist that you are either in the tax system like the rest of us, in which case you should pay taxes like the rest of us, or you aren't. But in an age of soaring inequality, asking billionaires for a fraction of a fraction of 1 per cent of their incomes in tax suddenly seemed radical.

Two statistics summarise the chasm between the two Britains that creaked a little wider in 2007. A coalition of charities, including Save the Children and Barnardo's, calculated that it would have cost 3.7bn of pro-poor spending this year to keep on track with the Government's goal to end child poverty by 2020. The money was not forthcoming. Instead, British people spent more than twice as much 11bn on champagne.