Fabian Policy Report

FABIAN POLICY REPORT

INEQUALITY 2030

Britain’s choice for living standards and poverty, by Andrew Harrop and Howard Reed

ACKNOWLEDGEMENTS CONTENTS

First, thank you to all the partners who made this project Acknowledgements ii possible: Child Poverty Action Group; the Dartmouth Street Trust; Oxfam GB; and the TUC. Their material and Summary 2 intellectual support are hugely appreciated. We are also Introduction 4 indebted to a large number of people who contributed at 1 Inequality 2030 7 various stages of this project, including the attendees of two seminars we held during the project: Vidhya Alakeson, Kate 2 Can ‘predistribution’ reduce inequality? 13 Bell, David Coats, Declan Gaffney, Alison Garnham, Chris 3 A lost decade? 19 Goulden, Kate Green, Andrew Hood, Ruth Jackson, Robert Joyce, Lindsay Judge, Stewart Lansley, Neil Lee, Ruth Lister, 4 Recommendations 22 Duncan Melville, Rachael Orr, Minesh Patel, John Philpott, Endnotes 24 Rachel Reeves, Sam Royston, Dave Simmonds, Paul Sis- sons, Holly Sutherland and Nicola Smith. A particular thanks to three people who made special contributions to the project: Fran Bennett, Graham Stark and Rob Tinker. And finally, thank you to the incredible staff team at the Fabian Society, especially Anya Pearson, Richard Speight and Ed Wallis.

ABOUT THE AUTHORS

Andrew Harrop is general secretary of the Fabian Society. He leads the society’s Next State and Next Economy pro- grammes and was secretary to the Fabian Commission on Future Spending Choices.

Howard Reed is director of the economic research con- sultancy Landman Economics. He was previously chief economist at the Institute for Public Policy Research.

Cover illustration: © Leonie / Designed by Soapbox, Flikr.com www.soapbox.co.uk

[email protected] Like all publications of the Fabian www.fabians.org.uk Society, this report represents not General Secretary, the collective views of the Society, Andrew Harrop but only the views of the individual Deputy General Secretary, writers. The responsibility of the Marcus Roberts Society is limited to approving its fabian society Editorial Director, Ed Wallis publications as worthy of consider- 61 Petty France Assistant Editor, ation within the labour movement. London SW1H 9EU Anya Pearson 020 7227 4900 (main) First published in February 2015 020 7976 7153 (fax) Report Authors Andrew Harrop and Howard Reed

Inequality 2030 Britain’s choice for living standards and poverty

by Andrew Harrop and Howard Reed

1 / Inequality 2030 low and middle income households. If, by 2030, the UK were to match the highest SUMMARY levels of employment in the developed world today, then poverty and inequality would still rise, but by less than we oth- erwise project. This rise in employment could only be achieved by significantly Inequality 2030 just 2 per cent (GDP per capita will rise improving support and opportunities his report takes a long view of living by 32 per cent over the period). for parents, carers, disabled people and Tstandards and economic inequality, people in their 60s. With very high levels looking over a timeframe of 15 years. Its • The incomes of high income house- of employment, we project: focus is on the incomes of low and middle holds will rise 11 times faster than the income households, which means looking incomes of low income households. • Household incomes would rise slightly fast- at both poverty and at inequality (including er over the next 15 years. Real median net the gap between the middle and the top). • High earnings will rise twice as fast as incomes would rise by 14 per cent, rather It reports on new quantitative modelling, low earnings. than 9 per cent as previously projected. based on official projections, first examin- ing the prospects for inequality and poverty These projections could even be opti- • Poverty would rise by a little less, but in under current policies; and then assessing mistic: they are based on Office for Budget 15 years’ time there would still be 3.1 the extent to which market reforms could Responsibility (OBR) assumptions for the million more people in poverty than deliver better outcomes. economy, which may be too positive; and today, including 970,000 extra children. The research shows that in 2030 living they also ignore the possibility of further standards and the extent of inequality will social security cuts or tax changes in the Action to tackle low pay and reduce be determined by political choices rather 2015 parliament. wage differentials would have a significant than by unstoppable economic forces. The There are two main causes of this rising impact on earnings inequality, which is report presents a plausible and affordable poverty and income inequality – social important for its own sake. But it would strategy for significantly improving living security policies and growing earnings have a surprisingly small effect on living standards and reducing poverty. So this disparities. The first is more important with standards, income inequality and poverty, study restores hope. respect to the gap between the middle and when measured in terms of net household the bottom (and therefore the incidence incomes. With a radical package of reforms Economic inequality will be higher in of poverty); the second is more important including a high minimum wage and 2030 than today, unless we act with respect to the gap between the middle widespread uptake of the living wage: Unless the next government takes dra- and the top. Both are amenable to govern- matic action, the UK will be much less ment intervention. • Earnings for low paid workers would rise equal in 2030 than it is today: the living over the next 15 years by 49 per cent (in standards of low income families will Some labour market reforms can real terms) compared with 16 per cent stagnate; middle income families will not directly slow the pace of rising without any intervention; median earn- share in rising prosperity; and inequality inequality ings would rise by 34 per cent instead of and poverty will grow worse. Our projec- ‘Predistribution’ is a new word for an old 26 per cent. The proportion of workers tion is that: idea – that inequality and poverty should with low pay would be flat over the next first be tackled by reforming markets (for the 15 years, rather than rising. • Between 2015 and 2030 an extra 3.6 purpose of this report, we mean the labour million people will fall into poverty, market, as our modelling does not consider • Household incomes for a median income including 1.2 million children. the cost and quality of housing, goods and household would rise by 13 per cent services). over the next 15 years. • The real disposable income of middle One change to the labour market income households will rise by 9 per – achieving very high levels of employ- • Poverty would be unchanged, compared cent over the next 15 years; for low ment – would have a noticeable impact to taking no action (since median as income households the figure will be on inequality and the living standards of well as low incomes would be higher).

2 / Fabian Policy Report But the main benefit of we examined the consequences of weak 2030 and acts to improve employment predistribution is that it can growth in productivity and employment. opportunities, support and incentives pay for redistribution We found that weak employment growth for mothers, disabled people and Successful predistribution interventions would be bad for both living standards people in their 60s. will generate significant resources for the and inequality. In contrast, weak earnings exchequer. If this money is recycled to growth would be bad for living standards 5. Raises the national minimum wage to low and middle income households, the – there would be virtually no improve- 60 per cent of median earnings, ideally proceeds of predistribution could have a ment in real median incomes by 2030 – by 2020, with advice from the Low Pay much greater (indirect) effect on families but would lead to poverty and inequality Commission on implementation. than the original (direct) market effects. rising less. Ambitious but plausible reforms to bring 6. Legislates for all public sector jobs to about full employment, a high minimum Unless the next government pay the living wage; and forms a new wage and widespread take-up of the living takes dramatic action, the partnership with business with the wage would generate sufficient funds to aim of halving the number of private make huge inroads into poverty in Britain. UK will be much less equal sector jobs paid below the living wage. To illustrate this point we show that: in 2030 than it is today 7. Develops a radical cross-government • The proceeds of the minimum wage Political action can still make a big dif- strategy on pay and productivity, and living wage policies (£8bn com- ference. Even under pessimistic economic focusing on the middle of the labour bined) would cover most of the costs scenarios it will be possible to significantly market. of doubling the real value of child ben- increase living standards, reduce inequality efit by 2030, lifting 900,000 people out and tackle poverty by introducing predis- 8. Rejects major cuts to benefits that of poverty. tribution interventions and then recycling would reduce the living standards of the proceeds into social security. low and middle income households, • The proceeds of very high levels of following the 2015 election. employment (£30bn) would almost pay Recommendations for benefits to be uprated by earnings Although this report takes a 15-year 9. Institutes a ‘Prosperity Fund’ to re- not inflation, lifting 3.2 million people outlook, action is essential in the next distribute to low and middle income out of poverty. parliament in order to prevent inequality households the proceeds arising each from rising. We recommend that the next year from predistribution. The Office If combined these interventions would government: for Budget Responsibility and the lead to median household incomes rising proposed National Prosperity Com- more than twice as much as under our 1. Recommits to the existing statutory mission should inform the fund’s main projection; and there would be 2 mil- child poverty targets, but extends the work. lion fewer people living in poverty in 2030. deadline for meeting them to 2030 – or The incidence of child poverty would fall earlier if possible. 10. Considers using the resources ear- to 11 per cent, which is only just above the marked to the Prosperity Fund to pay statutory target for 2020. This indicates that 2. Adopts a (non-statutory) set of goals for: (1) more generous uprating of all the child poverty target remains achievable and measures for monitoring the benefits and tax credits; (2) significant and affordable, if the deadline for reaching pursuit of sustainable prosperity and real increases to child benefit. it is extended. rising living standards. If successfully implemented, these rec- If the economy underperforms 3. Establishes a National Prosperity ommendations will stop income inequality the prospects for living standards Commission to advise on strategies for from rising and take the UK a long way are gloomy achieving these goals for sustainable towards achieving existing aspirations for Many people fear that over the next 15 prosperity. the eradication of child poverty. After the years Britain’s economy will not perform general election the Fabian Society will as well as in the past (official projections 4. Aims for at least 80 per cent of adults publish research showing how to go even assume past trends will continue). So below pension age to be in work by further.

3 / Inequality 2030 families has a far greater indirect effect on household incomes than the direct effects INTRODUCTION of predistribution on market outcomes. In- deed our projections suggest that plausible improvements to employment and to low earnings could generate sufficient sums to make huge strides towards the eradication he uk has faced almost 10 years of the extent of inequality in 2030. We know of child poverty. Tfalling living standards. Projections say there will be more years of very difficult fis- Our modelling also reveals the price of poverty and inequality are on the rise.1 And cal decisions for whoever is elected in May inaction by demonstrating how unchanged there is still a huge hole in the public fi- 2015. But in this study we have raised our policy is not neutral in its effect. For with- nances which limits, for now, the scope for eyes to the horizon and asked what could out a change of course, inequality will rise. public spending to bring solutions. So it is be achieved over 15 years, from the start of If this happens the living standards of easy to be gloomy. But too often politicians the 2015–2020 parliament. Small purpose- people in the bottom half of the income sound as if they no longer believe that ful steps, year after year, can transform distribution will stagnate, while in the top government can rise to these challenges. the prospects for low and middle income half they will increase. So government ac- This report shows there is hope. It pre- families. So politicians must make the fight tion is needed just to prevent the gap from sents the findings of a quantitative assess- against inequality a priority from the very widening, let alone to reduce poverty and ment of the prospects for living standards start of the new parliament. inequality. and inequality over the coming years, using Worse still, the next parliament could new modelling based on projections from Our projections suggest bring policies that accelerate the rise of the Office for Budget Responsibility (OBR) that plausible improvements inequality. For example, the Conservative and the Office for National Statistics (ONS). party has proposed £7bn in tax cuts (tar- The research shows that plausible and af- to employment and to low geted overwhelmingly at the top half of the fordable government intervention can make earnings could generate income distribution) and £12bn of social a massive difference to the living standards sufficient sums to make security cuts (which will mainly affect the of typical households and to future levels of huge strides towards the bottom half of the distribution). The Lib- poverty. But it also reveals that inaction will eral Democrats have proposed cutting £4bn lead to stagnant living standards and a huge eradication of child poverty from social security and Labour have not rise in poverty and inequality. ruled cuts out. In our modelling we have The implications of 15 years of flat The report presents a strategy for boost- not considered any of the changes pro- incomes for low income families are hard ing living standards, preventing inequality posed after 2015 – our projection is based to contemplate. Stagnant incomes would from rising and making significant inroads on policy as it now stands. But if inaction mean there would be no chance of reduc- into the incidence poverty. The strategy be- is bad, a new package of regressive policy ing the number of families who are really gins with ‘predistribution’ interventions to interventions would be a whole lot worse. struggling to make ends meet. Emergency improve market outcomes. These include food banks would move from being a tem- measures to significantly increase employ- Our approach porary phenomenon of the economic crisis ment, tackle low pay and reduce wage The project’s first aim was to ‘umpire’ to an entrenched feature of British life. And differentials. Our modelling shows that an ongoing debate regarding the desir- people in rented accommodation would these reforms are important but they are able balance between market interventions see their living standards fall the most, as not enough: they slow the pace at which (‘predistribution’) and redistribution an ever higher slice of their incomes would inequality will grow, but no more. through tax and spending. In recent years have to go towards housing costs before The second stage of our strategy is to many commentators have questioned why any other bills were paid. Although this recycle the considerable fiscal gains aris- poverty pay should be subsidised by tax report focuses on statistical analysis, no one ing from predistribution back to low and credits and have argued that better pay should be under any illusions of the human mid income families. Higher employment should be a higher priority than better consequences of our projections. and better pay equates to increased tax social security. But political choices rather than un- receipts and reduced benefit payments. We This new emphasis on market outcomes stoppable economic forces will determine found that recycling these gains back to is welcome: it is striking how little attention

4 / Fabian Policy Report was paid to low pay in the New Labour era thresholds. In future, more fundamental unless we prevent inequality from rising: a (even in Fabian Society reports). But there reform of the tax system could have a role growing economic pie is not enough, if low is an empirical question regarding how to play in raising living standards, but a and middle income families are receiving a effective market interventions might be structural change to personal taxation shrinking slice. (especially as there will always be signifi- would require many years of analysis, We chose a 15 year timeframe for the cant numbers who are not in a position to debate, planning and implementation. We project to vividly expose the harm of inac- work because of caring responsibilities or will return to this topic in a future Fabian tion. By looking more than a decade into disability). Society paper. the future, we illustrate what will happen Our hypothesis was that market The research focused on poverty but if current policies and trends are allowed to reforms were necessary but not suf- also on inequality from top to bottom and continue over time. In particular we show ficient. The projections from our model the living standards of typical households. how current indexation policies and labour confirmed this, showing that action on We wanted to understand how policies market trends will lead not to stability but low pay has surprisingly weak effects on might: (1) improve the living standards of widening inequality, even after the final living standards and poverty – and that low and middle income families; (2) tackle effects of the economic crisis are past. very high employment is helpful but not rising inequality and (3) contribute to the But this long-term perspective also ex- transformative. More positively we found eradication of poverty. This broad focus poses the potential for government action, that the revenue generated by predistribu- meant we examined policy options that because it reveals how, over time, small tion is very significant and, if this income would help people in the middle of the incremental changes can make a decisive were to be recycled back to low and middle income or earnings distribution, as well difference. In the current fiscal context income families, it would give a large boost as policies to prevent poverty (understood ambitious goals like the statutory child to living standards. as an inability to meet essential needs and poverty targets cannot be met by 2020: In our work we tested the impact of re- participate in modern life). but we show they could be achieved over forms to both personal taxation and social Our modelling proved that it is not a longer period, instead of being diluted or security. In principle we were open minded possible to improve the lot of low and abandoned. about using either to improve disposable middle income households without also The projections for 2030 were calculated incomes. However, our modelling showed taking an interest in the gap between the using a micro-simulation model developed that, when it comes to raising the living middle and the top. The data shows that by Landman Economics and the Institute standards of low and middle income fami- even if we have 15 years of good economic for Public Policy Research, based on lies, benefit and tax credit reform is much growth, we won’t significantly improve the data from the Family Resources Survey more effective than changing tax rates and living standards of middle income families 2011/12. The model uses OBR and ONS assumptions and projections. In addition to the OBR’s macroeconomic projections, BOX 1: POVERTY the model takes account of long-term People face poverty when they are unable and EU). Other approaches are also avail- trends regarding demographic change, to meet minimum needs and participate in able, for example a threshold can be set by employment, occupation structure, earn- society due to a lack of material resources. calculating the minimum income required ings differentials, and part-time and self- What is taken to be poverty therefore to afford the goods and services which employed work. varies with time and place, because mini- citizens in a society deem essential.2 The An accompanying technical report pro- mum needs and the ability to participate precise measure does not always matter, vides a full description of the assumptions are both dependent on a society’s current as the direction of travel is often the same and data sources used. norms: to be in poverty is to lack the for different methods. resources for a modest standard of living Inequality matters according to contemporary norms. To In this report poverty is reported using the Over the 15 year timescale of this report, reflect this idea of ‘distance’ from what is most common UK measure: individuals liv- prospects for living standards are funda- normal in each society, a poverty line is ing in households with incomes below 60 per mentally linked to equality. The research often set with respect to typical contem- cent of the contemporary median disposable shows that rising inequality will de-couple porary incomes (a threshold of 60 per cent income, before housing costs, after making an projected increases in GDP from increases of median income is standard in the UK adjustment for family size. in living standards. With rising inequality, typical living standards will only increase

5 / Inequality 2030 © The Eyes Have It! / Flickr

BOX 2: SCOPE OF THE ANALYSIS The Family Resources Survey dataset that of rising inequality, since levels of net the household level, although this the model uses provides a snapshot of wealth have diverged by more than is only one prism through which to household finances and dwells mainly on levels of income in recent decades. view inequality. This means that we income rather than expenditure, assets or It also means that the model cannot do not look at the balance of money debt. It also has limited coverage of very shed light on the important issue of and power between men and women high income households. As a result there intergenerational equity.3 within households; nor do we reflect are methodological limitations to the on inequalities arising at the level of scope of the research: • The ‘top one per cent’: Household extended families or geographic com- surveys do not provide accurate data munities. • Expenditure: we do not consider the on very high income households. Our opportunities for improving living findings could beoptimistic as we may • A view over time: The data provides standards by addressing the price or underestimate the extent to which the a snapshot of the distribution of quality of housing, goods or services. top ‘one per cent’ might continue to pull economic resources, which is essential Nor do we examine the possibility of away from everyone else. This would to understanding the overall structure different types of household experienc- reduce the proportion of economic of the economy. However, from the ing different rates of inflation (except in output available to share between the perspective of individuals, a longitudi- the case of housing costs); or the impli- other 99 per cent (for example, we use nal view is also important. A rounded cations of reforming consumption taxes. OBR projections which assume that assessment of people’s economic total wages will rise at the same rate as prospects should take account of their • Assets and debt: although our interest GDP, leaving the ratio between wages opportunities for social mobility and is in economic inequality, we are only and profits unchanged).4 the potential impacts of life events such able to report on disposable incomes, as separation, disability, becoming a not assets and debt. This probably • Alternatives to household measure- carer or retiring. means that we under-report the scale ment: Our analysis is focused on

substantially if economic growth reaches families prosper. For this reason in 2014 a beyond those considered in this report, very high levels that are unlikely to be Fabian Society report proposed that the stopping further rises would be an important sustainable. primary measure of national economic suc- success. And we show that greater progress So tackling inequality is the only cess should be median household incomes is possible with respect to low incomes. The plausible way to raise the living standard and not GDP.5 research shows that poverty is much more of British families on low and middling in- But all is not gloom. Our modelling shows amenable to policy interventions than overall comes. Without intervention, the disposable that policy action can stop inequality getting economic inequality. A far-reaching reduc- incomes of most households will hardly any worse. Although a significant reduction tion in poverty is within the UK’s grasp over rise, even if the economy grows and richer in overall inequality would require measures the next 15 years.

6 / Fabian Policy Report then low incomes. But this is forecast to be a temporary hiatus, caused by a difference 1. INEQUALITY 2030 in timing of the effects of the crisis: low income households were initially protected by indexation rules and discretionary policy choices; this pattern was then reversed by the government’s austerity measures t is well known that Britain is more median incomes have increased by 1.4 and the weak and unbalanced economic Iunequal today than 40 years ago. The per cent per year since the 1960s, while recovery. A paper for the Institute for Fiscal Fabian Society’s 2014 report Measure for GDP per capita increased by 2.2 per Studies projects that by 2015 inequality will Measure described the main trends:6 cent. Today, median incomes are at the have returned to the levels seen in the late same level as in the early 2000s. 2000s, with benefits and median pay both • The top ‘one per cent’ have pulled away having lost value against inflation, while from everyone else, in terms of earnings, • Poverty increased rapidly from the late profits and high net incomes grew.7 incomes and wealth. Average household 1970s to the mid 1990s and then de- This report picks up the story from incomes at the 99th percentile of the increased gradually from the mid 1990s: there and asks whether the UK will keep come distribution have risen from being in 1979, 13 per cent of children were in growing more unequal. Our focus is not on three times the median in the 1970s to poverty, the figure peaked in the 1990s the immediate aftermath of the economic more than five times the median today. at 29 per cent and has now fallen to 17 crisis, but on what will happen over the per cent. longer term. We look at the next 15 years, • Median household incomes have been looking at the trend, not the effects of rising more slowly than GDP per capita During the early stages of the economic economic cycles. for decades; and they almost ground crisis, inequality and the incidence of Over this period our modelling projects to a halt in the 2000s, even before the poverty fell: top incomes declined the that inequality and poverty will rise notice- economic crisis. On one measure, real most, followed by middle incomes, and ably, as the living standards of low and

BOX 3: MODELLING THE CONTINUATION OF LONG-TERM TRENDS All the projections in this report share a consequences of the financial crisis are women will reflect long-term trends. number of assumptions in common re- still far from clear. There are however a This will result in proportionately more garding demographics and the evolution number of ongoing trends, which the crisis mothers and people in their 60s being of the labour market. does not appear to have interrupted. Our in work, for example. Demographic change: all our scenarios assumption is that these will continue: adopt the demographic projections used by • Self-employment and part-time the OBR both for the sake of simplicity and • Occupational structure: Our model work: In line with trends, we assume because this enables us to apply OBR eco- assumes that the economy will con- there will be fewer women and more nomic projections to our model. In reality tinue to create more high-skilled, white men in part time work; and a gradual the pace of population growth and of ageing collar jobs alongside some growth in rise in levels of self-employment. is subject to a degree of uncertainty as a con- low-skilled work in service sectors, sequence of alternative scenarios for fertility, with few new mid skill manual and • Wage differentials: We assume that mortality and net migration. Fortunately, office-based jobs.9 This leads to a mod- the long-term trend towards widening uncertainty regarding demographics does est rise in earnings inequality. pay differentials will continue, over not have significant implications for labour and above the effects of the previous market projections looking 15 years ahead.8 • Patterns of employment: Although three factors (which together lead to Labour market change: Making pre- we examine a variety of cases for over- a moderate increase in weekly earn- dictions about the development of the all employment levels, we assume that ings inequality). This assumption has labour market over 15 years is a fraught changes in the relative performance of a much greater impact on earnings 10 task, especially today, when the long-term different age groups and of men and inequality than the others combined.

7 / Inequality 2030 middle income families fail to keep up with rising prosperity at the top. This is a BOX 4: UNCHANGED POLICY consequence of both public policy choices In this chapter we assume that govern- 2030 results, is based on policies in place and economic and demographic trends. ment policy remains unchanged with in April 2015. Our main projection uses OBR as- respect to pay, social security and tax, We assume that most tax and social se- sumptions for earnings and employment before considering the implications of curity thresholds and entitlements and the growth, which roll forward long term variations to policy in chapter 2. How- national minimum wage are indexed to trends. We apply similar assumptions with ever, deciding what constitutes current CPI inflation. For taxes and benefits this is respect to the changing structure of the la- policy involves judgement, especially the established default position (although bour market and earnings inequality, using when major reforms are already in train. in practice there is considerable variation, other data sources (see box 3). Under these Our principle has been to assume that driven by policy choices). The major ex- assumptions, our modelling projects that: all announced coalition reforms will ception is the state pension, to which we be fully implemented.12 This means we apply the ‘triple lock’ (the higher of growth • The living standards of low income have assumed that reforms which will in average earnings, CPI inflation or 2.5 families will stagnate (growing by just 2 be incomplete by May 2015 will be im- per cent).14 Our assumption with respect per cent over 15 years). plemented eventually (notably Univer- to the national minimum wage reflects the sal Credit and Personal Independence trend of the last decade, even though the • Middle income families will not share Payment) and that scheduled pension minimum wage is set on an annual basis in rising prosperity, with median reforms will take place.13 The 2015 on the recommendation of the Low Pay household incomes rising by 9 per cent, baseline, against which we compare our Commission. compared to a 32 per cent rise in GDP.

• Poverty and inequality will grow worse, implemented, but it does not take account Indeed, with such benign macroeco- with 3.6 million more people in poverty of proposals by political parties for the next nomic assumptions, our bleak projections by 2030. parliament. The impact of further cuts, for family incomes are even more striking. such as the £12bn of social security savings In chapter 3, we consider the implications • Incomes will rise 11 times as fast for high promised by the Conservatives, would sig- of more negative scenarios for the economy income households (at the 90th percentile nificantly worsen the situation we report. and show that the prospects for family liv- of the income distribution) as for low in- ing standards would be even worse. come households (at the 10th percentile). With such a benign The projections are also fairly optimistic macroeconomic outlook, with respect to employment growth. We • Top earnings will rise twice as fast as low project a long-term rise in the employment earnings (at the 90th and 10th percen- our bleak projections for rate for people under pension age, from tiles of the weekly earnings distribution). family incomes are even 74 per cent to 76 per cent. This is because more striking the model assumes that long-term trends About the projections in the employment of men and women at These are projections, based on sensible The projection’s most important and different ages will continues into the fu- assumptions, which describe one plausible uncertain assumption is with respect to ture. This is a sensible central assumption, future. We know they are unlikely to be the overall health of the economy: we but it won’t come to pass without policy an accurate forecast, because long-range followed the OBR in assuming that growth interventions to ensure there is appropri- projections almost always fail to predict in productivity will return to its long-term ate support, opportunities and incentives future economic paths. But it would require trend. The OBR expects this to result in real for mothers, carers, disabled people and a major deviation, in terms of policy and/or GDP rising by 2.2 per cent per year (from people in their 60s. economic and demographic developments, the final years of this decade) and average for the broad pattern we report to change. real earnings for each worker rising by 1.8 2030 living standards Moreover, these projections could be op- per cent per year. This is a very significant The main measure of living standards we timistic.11 In particular the analysis assumes improvement on the last ten years – and use is real disposable household income. that all policies announced or legislated many believe these assumptions are too This comprises all of a family’s earnings during the current parliament would be optimistic. plus other sources of income (social

8 / Fabian Policy Report security, private pensions, investment and savings income), after personal taxa- FIGURE 1 tion has been paid, and taking account Change in household net annual income (2014 prices) 15 of inflation. The Fabian Society’s 2014 £80,000 report Measure for Measure proposed £70,600 £70,000 that median income, measured on this £57,600 basis, should replace GDP as the main £60,000 headline indicator of the UK’s economic £50,000 x 6.1 x 5.1 performance. £40,000 On the basis of this yardstick the out- £27,200 £30,000 £24,900 look for the next 15 years is very poor, with a projected rise in median incomes of just £20,000 9 per cent between 2015 and 2030. This £10,000 £11,400 equates to anaemic growth of 0.6 per cent £11,600 £0 per year. 2015 2020 2025 2030 Over the period high incomes are projected to rise 11 times faster than low 10th percentile Median 90th percentile incomes, with a 22 per cent increase for households at the 90th percentile, com- to inflation. Rising earnings brings twice the state pension. Meanwhile, a forecast pared to just a 2 per cent for those at the the benefit to families at the 90th per- rise in employment offers a modest boost; 10th percentile. As a result, a household at centile of the income distribution as it is but the rise in the share of retired people the 90th percentile of the income distribu- does to those at the 10th percentile, with has a negative influence on income growth. tion is projected to gain £12,900 per year, median households half-way between. The overall effect is a modest increase while one at the 10th percentile would gain in the living standards of middle income just £230 per year (see figure 1). • The evolution of the labour market is an households. But in the case of the lowest There are several factors explaining the additional driver of inequality, especially income group, the downward pressure of changes in living standards: between middle and top. Rising earn- demographic change almost completely ings inequality will push up household offsets all the upward pull of increases • The ageing of the population (and the incomes at the top and have little effect in earnings, employment and the state associated increase of the pension age) on low and mid incomes. pension – hence the prognosis of almost has a negative impact on household flat incomes over the next 15 years. And incomes, other things being equal, as A forecast rise in all this is under a ‘good news’ scenario for more people will be retired and fewer employment offers a modest the economy, with decent average wage in work. This has a similar effect on all growth and real GDP increases of 2.2 per income groups. boost; but the rise in the cent per year. Under this scenario Britain share of retired people has will become more prosperous, with GDP • Higher projected employment has a a negative influence on per capita rising 32 per cent by 2030. But (smaller) positive effect on the incomes income growth that prosperity won’t be shared with low and of all income groups, partly as a result middle income families. of people retiring later. This effect is The implications of this projection hardly strongest for middle income groups. So we can now paint a picture of why bear thinking about. Households who have low and middle income households are the most today would see their purchasing • The increase in average earnings and in expected to do so badly. They are more power rise by around one quarter – watched the (earnings-linked) state pension is the likely to contain low-paid workers, whose by their poorer neighbours who would see largest driver of rising incomes. How- earnings are projected to rise by less than no improvements at all. The UK would be ever, this change also widens inequality, those with higher wages. More importantly, a nation of turbo-charged inequality, with because a large share of the income of a large share of the income of these families the food bank and the yacht club boom- poorer families comes from non- comes from social security, which in real ing side-by-side. Indeed, people with low pension benefits, which are only linked terms will not increase in value, except for incomes would find life even harder than

9 / Inequality 2030 BOX 5: RISING EMPLOYMENT Over the next 15 years, rising employment to 74 per cent today. This is despite the to rise from 57 per cent to 63 per cent is expected to drive improvements to the state pension age having risen to 67. The and for mothers of dependent children in public finances and to household incomes result is that between 2015 and 2030 the couples from 71 per cent to 78 per cent. (changes in living standards would be dependency ratio (which we define as However, the continuation of current even more disappointing in the absence the employment rate for all adults) will trends cannot be taken for granted but of improving employment levels). The remain unchanged at 59 per cent. This is requires persistent action by govern- employment rate is projected to rise on very welcome news from the perspective ment, employers and trade unions. It will the basis of long-term trends in the em- of GDP per capita and fiscal sustainability, depend on suitable childcare, public ser- ployment of men and women of different particularly as this period marks the retire- vices, social security entitlements, flexible ages.16 These positive factors over-ride the ment of the remainder of the baby boom employment opportunities and evolving slight negative influence of demographic cohort, which one would expect to place social attitudes. changes (which result in a higher share of strain on the dependency ratio. people in their 50s and 60s, who are less Disabled and older workers: The em- likely to be in work).17 We project that in Parents: Rising employment has a ployment rate for disabled adults below 2030, 76 per cent of adults under state particularly positive impact for parents. pension age is not projected to increase to pension age will be in work, compared Employment for lone parents is projected the same extent. This is largely a result of the rising state pension age, since a high proportion of disabled adults are in their Projected employment rates for selected groups 60s (raising the pension age has the effect Baseline 2030 Change of knocking four percentage points off the disability employment rate).18 Simi- Headline – adults below pension age^ * 74% 76% +3% larly, the percentage of non-pensioner Total employment rate (dependency ratio) 59% 59% 0% households without work increases as Men below pension age^ 76% 81% +4% the pension age rises, from 17 to 18 per Women below pension age^ 70% 72% +2% cent (though it would have risen to 21 per cent without overall employment growth). Mothers in couples with dependent children 71% 78% +7% This is a clear downside of raising the Lone parents 57% 63% +7% state pension age, to which policy makers Disabled adults below pension age^ 57% 57% +1% should turn their attention. Unless there is Pensioners^ 10% 9% 0% adequate employment support and social security protection for people without Non-pensioner households without work 17% 18% 0% work in their 60s, then further increases in Baseline data is for 2011/12 and has not been reweighted to take account of developments since then. the pension age will become increasingly ^ Pension age is 65 for men and 62½ for women in 2015; and 67 in 2030 so these are not comparisons between identical cohorts. problematic from an ethical and political * This is not the same as the standard National Statistics headline measure of employment (ie for 16 to perspective. 64 year-olds), which is not useful when comparing years with significantly different pension ages.

today. First, because they would be so far leave Britain unable to meet its commit- cent and median earnings by 26 per cent removed from the norms of consumption ments on greenhouse gas emissions (since (see figure 2). The difference between these set by the wealthy. And, second, because high incomes lead to more resource con- two figures arises because well-paid work- their rents would eat up ever more of their sumption); with a lop-sided economy ever ers are projected to do better than the incomes: flat disposable incomes would more vulnerable to financial crisis. rest: high earners are expected to see their mean falling living standards, after housing earnings rise twice as fast as low earners (a costs. Rising inequality also implies more 2030 earnings 36 per cent increase for people at the 90th status insecurity, worse mental health and Between 2015 and 2030 average (mean) percentile of the earnings distribution, the fraying of social connections. It might earnings are projected to grow by 29 per compared to a 16 per cent increase at the

10 / Fabian Policy Report 10th percentile). This is the result of our FIGURE 2 assumption that earnings inequality will Central case projection for weekly earnings (2014 prices) continue to widen. 2015 2030 Change Looking at hourly earnings, inequality is projected to rise so that pay at the 90th Weekly earnings percentile of the distribution will be worth 10th percentile £122 £141 16% 4.8 times pay at the 10th percentile – com- 25th percentile £237 £278 17% pared to 3.8 times today. There are two Median £385 £485 26% reasons for this: first, because of change to 75th percentile £615 £815 33% the occupational structure, which creates 90th percentile £921 £1,253 36% more high-paid work; second (and more importantly) because of our assumption Mean £507 £657 29% that wage differentials will continue to in- Earnings inequality (hourly pay) crease at the pace seen in recent decades.19 Low paid workers 21% 25% 4 ppnts As a result the share of workers on Earnings inequality (90/10 ratio) 3.8 4.8 1.0 low pay is projected to rise from 21 to 25 Gender pay gap 20% 22% 2 ppnts per cent (using the standard benchmark for low pay, two thirds of median hourly earnings). This will have a knock-on effect on the gender pay gap, which would grow from 20 to 22 per cent (ie the gap increases between men’s and women’s median hourly pay).

Strong and stable growth will not transform the earnings outlook at the bottom of the labour market

Pay inequalities are projected to widen, but at least pay is expected to rise noticeably in real terms for individuals near the bottom of the distribution. This contrasts with the prognosis for disposable household incomes for poorer families and also with the pay stagnation of the last decade. This is a consequence of the OBR’s assumption that growth in productivity and average earnings will return to its long-term trend. Even so, strong and stable growth will not transform the earnings outlook at the bottom of the labour market.

2030 poverty The stagnation of low incomes will drive up the proportion of people living in poverty, with the number of people in poverty

11 / Inequality 2030 FIGURE 3 Projections for poverty in 2015 and 2030

80% 70% 70%

60%

49% 50%

38% 40%

30% 29% 30% 24% 22% 24% 20% 19% 19% 19% 20% 17% 17% 15% 15% 11% 12% 10%

0% Individuals Children Pensioners Non-pensioner Non-pensioner Lone parent Couples with Non-pensioner Non-pensioner disabled adult single adult household children household working without work household Note: The definition of pensioners changes between 2015 and 2030 in response to the increase of the pension age

to 20 per cent by 2030 (see figure 3). Poverty As before, employment growth has little million in 2015 to 13.8 million in 2030, is projected to increases for children (from impact. But the relative importance of the an increase of 3.6 million. For children the 19 per cent to 24 per cent) and for non- other factors differs between poverty and increase is 1.2 million, from 2.5 million to pensioner adults (especially for households inequality. We have already seen, in the case 3.7 million.21 without someone in work).20 Our measure of poverty, that the divergence between The characteristics of poverty are also of pov-erty tracks the percentage of people earnings and most benefits is far and away expected to change over the next 15 years. with a household income below a poverty the most important cause of increases. By Children are projected to make up a higher line set at 60 per cent of the contemporary contrast, in the case of overall inequality, proportion of those in poverty (a rise from median. So this worsening picture is par- it is only slightly more important than the 25 to 27 per cent). Pensioners will continue ticularly noteworthy since we have already effect of rising earnings inequality. to represent the same share of people in seen that growth in median income (and poverty, despite their rising share of the therefore the poverty line) is expected to We have already seen, overall population. And there would also be sluggish. in the case of poverty, that be a slight shift away from in-work poverty By far the most important cause of towards poverty among households with- the worsening outlook for poverty is the the divergence between out work: today 52 per cent of households divergence between rises in average wages earnings and most in poverty below pension age contain and benefits. This completely overwhelms benefits is far and away the someone in work, but this will fall to 45 per two other causes of rising poverty – de- most important cause of cent, on the basis of the OBR’s employ- mographic change and rising earnings ment and earnings projections. inequality. Meanwhile the increase in em- increases So doing nothing would have terrible ployment we project has almost no effect consequences for Britain. But other policy on poverty since it benefits both median The increase in poverty is even more choices are available. In the next chapter and low income families. striking in numerical terms, since the we consider an affordable strategy which The cause of rising inequality (ie the gap population is also growing. The number could transform prospects for living stand- from top to bottom) is slightly different. of people in poverty will rise from 10.2 ards and poverty.

12 / Fabian Policy Report However, we also demonstrate that action on both fronts is still insufficient to prevent 2. CAN ‘PREDISTRIBUTION’ inequality and poverty rising; or to enable the living standards of low and middle in- REDUCE INEQUALITY? come groups to increase in line with GDP. By itself, as a market intervention, predistribution turns out to be an inadequate strategy even for preventing the incidence of poverty from growing worse, let alone ith more years of austerity perhaps issue that is beyond the methodology used for making progress towards poverty Wstill ahead, policymakers have in this report); (2) pursue the traditional eradication. However, we show that that been taking a keen interest in options for goal of ‘full employment’; and (3) boost predistribution offers much more promise improving living standards and reduc- low and middle earnings. if policymakers also recycle the revenue ing inequality that do not require public In this chapter, we model what would generated by predistribution back into spending or tax cuts. The idea of interven- happen if the government achieved ambi- redistributive measures. ing to affect market outcomes had been tious but plausible change over the next 15 christened ‘predistribution’ by the Yale Uni- years, looking at both full employment and Full employment versity academic, Jacob Hacker.22 There are earnings inequality. Our findings show that We first considered what would happen three potential routes to improving living taking action on employment and pay can if strong economic performance and suc- standards by changing market outcomes: have positive impacts (with full employment cessful government policies together led (1) find ways to reduce the cost of living (an being more important than improved pay). to the UK matching the best employment rates in the OECD today (ie 81 per cent of adults below state pension age in work).23

Matching the best in the OECD is conceivable, as long as it is prosecuted with a significant policy programme

This is not an implausible ambition given the country’s success in job creation over the last five years and more generally since the early 1990s: Britain’s economy is better at creating demand for jobs than most EU member states; long-term structural changes in labour market supply are likely to continue (eg the employment preferences of mothers and people in their 60s); and we have an established toolkit of policy for supporting employment growth drawn from the UK and overseas. In other words, matching the best in the OECD is conceivable, as long as it is prosecuted with a significant policy programme. For example, in the case of maternal employment, options include: (1)

13 / Inequality 2030 FIGURE 4 BOX 6: EARNINGS Employment rates for selected groups under two 2030 employment scenarios. DIFFERENTIALS Our model did not test specific policy Baseline* 2030 – trend 2030 – best in interventions to freeze wage differ- growth OECD entials but assumed that a package Headline – adults below pension age^ 74% 76% 81% of reforms successfully achieved this Total employment rate (dependency ratio) 59% 59% 63% outcome. These policies might include: Men below pension age^ 76% 81% 83% greater collective bargaining at firm and sector level; full transparency regarding Women below pension age^ 70% 72% 78% differences in pay and in pay rises be- Mothers in couples 71% 78% 84% tween executives and typical workers; Lone parents 57% 63% 72% corporate governance reform and more Disabled adults below pension age^ 57% 57% 63% employee ownership; and high quality vocational training to improve the pro- Pensioners 10% 9% 13% ductivity of low and middle earners. We Non-pensioner households without work^ 17% 18% 14% assumed that these reforms would lead * Baseline employment data is for 2011/12 and has not been reweighted to take account of developments to pay differentials being maintained since then at current levels, rather than rising. ^ based on the pension age for 2015 (65 for men; 62 ½ for women) and 2030 (67). Although a compression of earnings inequality should be the ultimate goal, sidised childcare, including wraparound This high employment scenario leads to we were not confident in assuming a care in primary schools; (2) designing more working households and more two- package of market interventions could parental leave, benefits and services to earner households, and particularly benefits achieve this result. enable women to return to good work after people with lower labour market participa- maternity; (3) and revising the tax and tion today, including mothers and disabled rises as a result of change in the occu- benefits system to give extra support to adults below pension age (see figure 4). pational structure of the labour market. families with children, compared to people without children.24 Action on earnings Taken together, these are three significant Matching the best employment rate We also modelled three pay-related inter- and politically ambitious interventions and in the OECD would have noticeable ef- ventions geared particularly to the middle they would succeed in preventing labour fects with respect to living standards and and bottom of the labour market. We market inequality growing worse during inequality. However it would not funda- considered: the next 15 years: high earners would no mentally alter the story we presented in longer pull away from those on low pay (see chapter 1: • A higher national minimum wage (NMW), figure 5). with the national minimum wage set at However, the effects on household in- • Household incomes would rise slightly 60 per cent of median earnings in 2030. comes are far smaller than on earnings (see faster over the next 15 years. Real me- Under our central case scenario, this figure 6). Our model shows that successful dian net incomes would rise by 14 per would mean a minimum wage in 2030 predistribution reforms to stop earnings cent, rather than 9 per cent as previously of £9.04 per hour (in 2014 prices).25 inequality from rising would not be enough projected; low incomes (at the 10th to prevent income inequality and poverty percentile of the income distribution) • Widespread uptake of the living wage, increasing over the next 15 years in the ab- would rise by 4 per cent, rather than 2 with the living wage (and, in London, sence of redistributive policies. With respect per cent. the London living wage) paid to all low- to family living standards, achieving full paid public sector workers and half of employment would have far more impact. • Poverty would rise by a little less, but in low-paid private sector workers. Earnings: each of the three interven- 15 years’ time there would still be 3.1 tions would result in pay at the bottom of million more people in poverty than • Action to prevent wage differentials from the earnings distribution (10th percentile) today, including 970,000 extra children. rising, so that earnings inequality only rising in line with average earnings. This

14 / Fabian Policy Report FIGURE 5 Impact of three interventions on our 2030 earnings projections

Change since 2015 No change Higher NMW Living Wage Act on wage All three widespread differentials Weekly earnings 10th percentile 16% 32% 30% 31% 49% 25th percentile 17% 28% 29% 30% 41% Median 26% 27% 27% 33% 34% 75th percentile 33% 33% 33% 32% 32% 90th percentile 36% 36% 36% 31% 31% Mean 29% 31% 31% 30% 32% 2030 Earnings inequality (hourly pay) Low-paid workers (2015 = 21%) 25% 23% 23% 23% 21% Earnings inequality (90/10) (2015 = 3.8) 4.8 4.0 4.1 3.9 3.4

is a significant achievement compared to Pay is a topic of huge political and public inequality from worsening. Even if these recent trends. Successful action on wage anxiety, so it is reassuring to see that pre- reforms are successfully implemented, the differentials would have the same effect on distribution interventions can make a dif- UK would still have very high earnings median earnings (the other two reforms ference. However, it is also striking that it inequality and one of the worst levels of have little impact on middle earners). If all takes a very significant package of reforms low pay in the OECD. The Labour party three reforms were combined, low-paid such as this, simply to prevent labour market has said its goal is to halve the number of workers would see their projected weekly earnings rise by 49 per cent over the period; and middle earners would see a 34 per FIGURE 6 cent increase. Growth in low and middle Impacts of three labour market interventions on our 2030 household projections pay would actually outstrip increases at the Higher Living Wage Act on wage All No change 90th percentile of the distribution (31 per NMW widespread differentials three cent) and GDP per capita (33 per cent). Net household income – change since 2015 These outcomes have important im- 10th percentile 2% 2% 2% 2% 3% plications for earnings inequality. Under our 2030 central projection, we saw the 25th percentile 6% 7% 7% 7% 8% proportion of workers earning below the Median 9% 11% 11% 12% 13% low pay line (two-thirds of median hourly 75th percentile 17% 18% 18% 18% 20% earnings) rise from 21 per cent to 25 per 90th percentile 22% 23% 23% 21% 22% cent. This rise can be prevented if all three Mean 16% 17% 17% 16% 17% policy reforms are combined – the inci- Inequality dence of low pay will then remain broadly Gini 0.36 0.36 0.36 0.35 0.35 stable. Looking across the whole earnings distribution, the reforms are projected 90/10 ratio 6.1 6.1 6.1 6.0 6.0 to do a bit better and actually reduce in- Poverty rate equality relative to 2015. Today high-paid Individuals 20% 20% 20% 20% 20% workers earn 3.8 times more than low-paid Children 24% 23% 24% 24% 24% workers; under our main projection, this Impact of policy on numbers in poverty would rise to 4.8 by 2030; but with all three Individuals - -90k - 30k +200k +10k interventions combined, the ratio could fall Children - -40k -20k +50k -10k to 3.4.

15 / Inequality 2030 people in low pay by 2025: this would be pay can lead to higher taxes and lower so- Poverty and inequality: Together the even harder to achieve than the results we cial security payments, leaving the net gain three reforms would have almost zero present here. 26 much lower than the gross pay rise. effect on poverty: the minimum wage and Perhaps surprisingly, reforms designed living wage policies would together lead Perhaps surprisingly, to help individuals with low pay end up to a small reduction in poverty (60,000 reforms designed to help benefiting households in the middle and fewer people in poverty); while action on upper middle of the income distribution wage differentials would increase poverty, individuals with low pay the most. With all three interventions in as median incomes would rise (an extra end up benefiting households place, over 15 years, households at the me- 200,000 people in poverty); when com- in the middle and upper dian and 75th percentile of the distribution bined the three interventions would cancel middle of the income are projected to see their incomes grow by each other out. Meanwhile the packages 13 per cent and 20 per cent respectively have a modest downward effect on income distribution the most (compared to 9 per cent and 17 per cent inequality more broadly, compared to our without the interventions). By contrast, the main 2030 projection. However, under Living standards: The effects of these poorest households would barely gain as each option (or any combination) income pay interventions are far less dramatic with they contain so few workers. Even with all inequality would remain much higher than respect to household incomes. This is be- three reforms, low-income households can today’s levels. cause earnings are only one component of expect to see their net incomes rise by just a household’s income (social security is also £2 per week on average (in 2014 prices). Recycling the proceeds of vital for low and middle income families); This is a real increase of just 3 per cent predistribution because households quite often have both over 15 years, rather than the 2 per cent we The direct benefits of predistribution low and high earners; and because more project with no policy change. interventions for family living standards

BOX 7: POVERTY PAY: THE WRONG PRIORITY? These findings are a disappointment for ards and income inequality. Labour market seen to be subsidising poverty pay, it further advocates of action on earnings inequality reforms are necessary to draw a line on the diminishes public support for the principle and low pay. But they are consistent with long-term rise in earnings inequality. With- of social security. This criticism is most our earlier finding that rising earnings out action, rising pay inequality will over well founded with regard to rates of pay inequality is not a major driver of rising time lead to less consumer demand; rising that lead to full-time workers becoming poverty in the years to 2030. However, pay insecurity, disconnection, stress and illness; a entitled to support regardless of their personal reforms still have an important part to play narrower and more vulnerable tax base; and circumstances. There will always be a case for – they are necessary, just not sufficient: the decline of public support for social secu- providing social security to some people in rity. Immediate action is needed to prevent low-paid work – because of the costs of chil- The lifecourse: Improving the earning the UK settling into a high employment, low dren, housing or disability. However, when power of low paid workers is important pay, low productivity economic paradigm. employers pay less than £7.20 per hour to a for tackling inequalities at household level Interventions on pay will help drive up pro- full-time worker, tax credits are needed, even when the whole lifecourse is considered. Many ductivity, as employers respond to upward for single adults with no extra living costs. low paid women are the second earners in wage pressures with innovation. This is families with middle or upper-middle in- even more important if the government is Work incentives: Action on pay improves comes but are vulnerable to poverty in the also seeking very high levels of employment work incentives for people receiving social event of family separation, and in old age (which will suppress earnings growth unless security, by increasing the gap between if they are not making adequate personal there is compensating action). benefits and entry-level earnings. This pension contributions. can be expected to improve labour supply. Employer responsibility: There is signifi- Alternatively, higher pay might make it The UK economic model: Tackling pay cant public disquiet regarding pay which is possible to design a more generous social inequality should be an end in itself, ir- so low that workers need social security security system without reducing people’s respective of its contribution to living stand- to top up their income. When benefits are incentives to move into work or progress.

16 / Fabian Policy Report and inequality are limited (at least when looking at a single point in time rather than the whole lifecourse). By contrast, these policies bring significant benefits to the exchequer and this money could be recycled to boost family incomes. If this money was used well, these indirect benefits of the proceeds of predistribution, would be more significant than the direct effects.

• Employment: Employment growth generates the most significant fiscal benefits. Compared to our central case for 2030, achieving best-in-OECD levels of employment would generate £30bn for the exchequer (£20bn in extra tax and £10bn in reduced social security payments).

• Action on pay: A high national minimum wage and widespread take-up of the living wage would together generate an extra £8bn per year for the exchequer, compared to our central projection for 2030 (£6bn in higher taxes and £2bn in reduced social security).27

If all of this money was returned to low- and middle-income households there could be very significant impacts on living standards and poverty. For example:

FIGURE 7 Possible impact of recycling the proceeds of predistribution on our 2030 household projections

Impact of measure Rise in median Reduction in 2030 poverty, Reduction in 2030 child poverty, incomes over compared to main projection compared to main projection 15 years (poverty rate in brackets) (poverty rate in brackets) Predestribution: Full employment and 16% -500,000 (19%) -200,000 (22%) action on low pay Redestribution: Double child benefit 11% -900,000 (19%) -500,000 (20%)

Redestribution: Index social security 16% -3.2 million (15%) -1.3 million (15%) to earnings Combined: All three measures 23% -4.2 million (14%) -1.9 million (11%)

17 / Inequality 2030 v rather than inflation for the next 15 So cumulatively the direct impacts years. This would reduce the number of predistribution interventions and the expected to be in poverty in 2030 by 3.2 indirect effects of recycling the proceeds million.28 back to low- and middle-income families could have a big impact. It would more than • £8bn could cover most of the costs of double the pace at which middle incomes doubling child benefit over the next 15 are projected to rise over the next 15 years. years (the cost is £10bn). This would re- And it would lift over 4 million people out of duce the number of children in poverty poverty, compared to our 2030 central case in 2030 by half a million. (see figure 7).29

BOX 8: OUR CHOICE OF BENEFIT REFORMS We selected these two benefit reforms tions). Politicians could also point to the because they are similar in cost to the growing disparity in protection between proceeds arising from the predistribu- retired and non-retired households. tion reforms. Both are broadly-targeted Significant increases to child ben-

reforms with the potential to have an efit: Analysis by the Institute for Fiscal © Daniel Zimmel / Flickr impact on a wide range of people and Studies has shown that tax and benefit secure public consent. reforms over the last five years have dis- The impacts on child poverty are par- Indexation of social security to tributed resources away from families ticularly noteworthy, because low income earnings: this research has revealed that with children to households without in childhood can have such debilitating future increases in poverty will mainly children.30 Raising child benefit would impact on life chances. The UK’s statutory result from earnings rising faster than redress that balance and strengthen the child poverty target is that only 10 per cent most benefits. The obvious solution is principle that government should play a of children should live below the poverty to uprate benefits in line with earnings, role in distributing resources across the line we are using. which would provide a permanent lifecycle – in this case, by giving more Figure 7 shows that, with all the inter- mechanism for ensuring low-income support to people when they are facing ventions combined, the target could come households do not fall further behind the costs of raising children. In other very close to being met, with only 11 per everyone else. Earnings indexation has words, child benefit is equivalent to a cent of children in poverty.32 This indicates been implemented with respect to the tax allowance for children (and indeed that the child poverty target remains a to- state pension: the ‘triple lock’ now has it is the successor to a child tax allow- tally achievable aspiration (albeit delayed by cross-party support and is very popular ance that existed from 1909 to 1979). 10 years, from the original deadline of 2020). with the public. By contrast, leading poli- A significant increase to child benefit The policies would have less of an ticians have not campaigned for the same is a well-targeted policy with respect impact on overall inequality – they would policy for other benefits, presumably due to raising the living standards of mid prevent income inequality from rising, but to the expense and the perceived un- income families and reducing child they would not reduce it.33 This is because popularity of working-age social security. poverty. In the version of the reform we action to prevent wage differentials from However politicians could make the case have modelled, the real value of child rising was excluded from this scenario. As for this reform by arguing that people benefit would double over 15 years – an a result, while low and middle incomes from all backgrounds should share in ris- increase of around 5 per cent per year. are both higher than under our previous ing prosperity – just as everyone has had We have given priority to making the projection, top incomes are not lower. to share the burden of the financial crisis. benefit more generous over restoring Interventions covering employment, Most of the beneficiaries are likely to its universal coverage, since the costs low pay and social security can make a vital attract the public’s sympathy (ie children, of offering child benefit to high income contribution to defeating poverty. But they working households, people of all ages households and also doubling its value are insufficient to reduce overall inequality. with disabilities and long-term condi- would be high.31 Action on wage differentials between middle and top earners is needed too.

18 / Fabian Policy Report the economy underperforms the OBR’s long-term assumptions, the outcome for 3. A LOST DECADE? living standards will be even worse.

• Real median household incomes are projected to barely change over the next 15 years (a change of between -2 and o far our results have been based on a than under our main projection. +5 per cent, under our four pessimistic Srather rosy economic outlook, drawing Living standards and inequality: In scenarios). on the central projections of the Office for chapter 1 we saw that reasonable growth Budget Responsibility. But over a 15 year in GDP per capita had a very disappoint- • The real incomes for households at the period there is huge uncertainty regarding ing impact on the living standards of 10th percentile of the income distribu- the development of the economy. low- and middle-income families. But if tion would probably fall (we project a The OBR and our own modelling both imply there will be a reasonable rise in the overall employment rate in the next 15 BOX 9: SIX SCENARIOS FOR THE 2030 LABOUR MARKET years, and this assumption is built into our In the last two chapters we looked at employment’ case, we looked at four, 2030 projection. This seems sensible given two scenarios with the same assumption more pessimistic, scenarios to examine the strong performance of the labour mar- regarding earnings growth (ie a neutral what might happen if employment and/ ket recently, but nothing can be guaranteed. and an optimistic outlook for employ- or wage growth underperform. The pes- We have also adopted the OBR’s as- ment prospects). In total our modelling simistic earnings scenario is for wages to sumption that productivity growth will re- considered six possibilities: a combination rise by only 0.8 per cent per year in real turn to its long-term trend, leading to good of three employment scenarios and two terms, rather than 1.8 per cent; and the rates of growth for earnings and GDP. These earnings scenarios. As well as our main pessimistic employment scenario assumes projections may well prove optimistic. The projection (based on the OBR’s preferred no improvement in the employment rate OBR’s forecast assumes that real earnings assumptions) and our optimistic ‘full over the next 15 years. growth returns to a long-term trend of 1.8 per cent per year. However, wage rises Economic assumptions in the model’s six scenarios could be much slower than this over the next 15 years – either because productivity Population grows and grows older (OBR central projection) growth fails to return to its pre-crisis trend Trends in flexible working continue (hours worked & self-employment) or because a declining share of output is Occupational structure shifts in line with trend passed on to workers in pay. Trends in earning inequality continue In this chapter we look at what might happen if either earnings or employment growth considerably underperforms the Employment rate Steady growth in Best employment OBR’s projection. static employment rate rate in OECD 72% 76% 81% The implications of a weak economy So what are the implications of a weak Low wage Trend wage Low wage Trend wage Low wage Trend wage economy for households, in the absence growth growth growth growth growth growth of any policy action? We found that worse 0.8%pa 1.8%pa 0.8%pa 1.8%pa 0.8%pa 1.8%pa outcomes for employment would be bad for both living standards and equality. In the case of disappointing productivity and earnings, the story is more complicated: Chapter 3 Chapter 3 Chapter 3 Chapter 1 Chapter 3 Chapter 2 weaker than expected earnings growth is bad for living standards but would result in inequality and poverty rising less quickly

19 / Inequality 2030 change of between -6 per cent and zero, under the four pessimistic scenarios).

• Income inequality would rise compared to today under all four scenarios – but the increase is slower under the cases with a pessimistic outlook on earnings growth, because the gap between rises wages and social security would be smaller.

The story for poverty is complicated because each scenario has an impact on both median incomes (which raises the poverty line) and on the incomes of low-income households themselves. Weak earnings growth harms living standards overall but reduces poverty. On the other hand, weak employment growth leads to higher levels of poverty, as a result of there being more low-income families without anyone in work (see figure 8). It is worth saying that, while these negative economic scenarios differ from the cases examined in the last two chapters, what unites all six scenarios is more important than their differences: inequality and poverty are projected to rise from today under all six cases, whether the outlook for the

If the economy underperforms, FIGURE 8 a predistribution strategy is Incidence of poverty in 2030 under six economic scenarios, compared to 2015 still possible 80% Sluggish economic growth over the next 70% 15 years is clearly bad news for low and 60% middle income households. A smaller 50% economic pie means that households can expect to receive less, whether that 40% is through earnings or social security. But 30% policy choices still have a major bearing 20% on living standards, even if the govern- 10% ment is unable to influence the pace of 0% productivity growth. Even with low GDP Individuals Children Pensioners Non-pensioner Non-pensioner households working households and productivity growth, predistribution Today without work interventions can make a big difference to Flat employment, low wage growth Flat employment, trend wage growth family incomes, so long as the proceeds are Trend employment, low wage growth Trend employment, trend wage growth recycled into social security. Very good employment, low wage growth Very good employment, trend wage growth

20 / Fabian Policy Report FIGURE 9 The impact of predistribution interventions on our 2030 household projections in a low growth economy

Higher NMW and living Very high All No change wage widespread employment three Net household income – change since 2015 10th percentile -3 -2 0 1 25th percentile 0 1 2 3 Median 1 3 5 6 75th percentile 6 7 9 10 90th percentile 11 11 13 13 Mean 6 7 9 9 Inequality Gini 0.35 0.34 0.34 0.34 90/10 ratio 5.8 5.7 5.7 5.7 Poverty rate Individuals 19 18 18 18 Children 21 21 20 20 Fiscal impact - £6bn £27bn £33bn © See-ming Lee / Flickr

Figure 9 shows that the direct effects of This time the reforms cost slightly less than wide improvements in productivity (ie an predistribution are once again relatively the sum generated by the predistribution improvement in average annual earnings modest. Achieving very high employment, reforms (£29bn of new expenditure, com- from 0.8 per cent to 1.8 per cent). In other setting the national minimum wage at 60 pared to £33bn). But they would still have words, for low and middle income groups, per cent of earnings, and securing wide very significant effects: this package of reforms would have a greater uptake of the living wage would (in com- impact than solving the nation’s productivity bination) result in median incomes rising • Household incomes: median house- challenge. Of course, in an ideal world, we by 6 per cent over 15 years (as opposed hold income are projected to rise by 11 would wish for both, but even if politicians to 1 per cent, without any intervention). per cent, compared to 1 per cent with no face a ‘lost decade’, interventions to boost Similarly incomes at the 10th percentile policy change; incomes at the 10th per- employment, tackle low pay and recycle of the distribution would rise by 1 per cent centile of the distribution are projected the proceeds will bring huge benefits. rather than -3 per cent. to rise by 6 per cent, rather than falling This strategy is of course dependent The two low pay interventions are pro- by -3 per cent on a positive outcome with respect to low jected to generate proceeds of £6bn for the pay and especially employment growth. Its exchequer; and very high levels of employ- • Poverty: the incidence of poverty success cannot therefore be guaranteed. ment would generate £27bn. Both these among the whole population would fall But the huge potential benefits should figures are a little lower than the values to 15 per cent, compared to 19 per cent give politicians steel in advancing difficult presented in chapter 2, with stronger eco- with no policy change; and child pov- market reforms. Our analysis of the ‘lost nomic growth; but nevertheless they leave erty would fall to 13 per cent, compared decade’ scenarios show that progress is ample opportunity for recycling revenue. to 21 per cent. possible even in difficult conditions and We modelled the same combination that political choices, not unstoppable of social security policies as in chapter 2: Successfully prosecuting this predistri- economic forces, are key to raising living uprating benefits by earnings not inflation; bution strategy would do more to increase standards, reducing poverty and tackling and doubling the real value of child benefit. low and middle incomes than economy- inequality.

21 / Inequality 2030 as the Social Mobility and Child Poverty Commission, the Low Pay Commission and 4. RECOMMENDATIONS the UK Commission for Employment and Skills. The Commission would support the delivery of the strategy proposed in this report, by advising on market interventions to boost prosperity; and on the most effec- his report demonstrates the heavy progress can be made towards the statutory tive ways of recycling the proceeds for these Tprice of inaction – but also presents targets, even without finding new money. interventions into tax or benefit reforms. an affordable strategy for improving living Recommendation 2: A future govern- standards, tackling poverty and preventing ment should also adopt a (non-statutory) The labour market inequality from rising. set of measures for monitoring the pursuit Recommendation 4: Ministers should Our projections show it is possible to of sustainable prosperity – including aim for at least 80 per cent of adults below make significant progress even in a fiscally indicators for poverty (covering all age- pension age to be in work by 2030 and set constrained environment – and that there groups), low pay and income inequality. challenging intermediate objectives for is a plausible route towards a UK with The pace of rising living standards should the next parliament. Early progress will be much lower levels of poverty. This gives us be the headline benchmark of success, necessary to generate any significant sums confidence to recommend the adoption of measured as change in real disposable for redistribution in the first years of the stretching ambitions and policy measures. median income.34 next parliament, when the public finances Recommendation 3: A National Pros- will be very tight. To pursue this goal, the Goals and institutions perity Commission should be established government must lead continuing action Recommendation 1: The next govern- to advise on strategies for achieving the to improve the opportunities, support and ment should recommit to the existing new goals for sustainable prosperity, and incentives for mothers, disabled people statutory child poverty targets, but extend in particular for improved living standards and people in their 60s to remain in work. the deadline for meeting them to 2030 – or for low and middle income households. They should also commission work to ex- an earlier date such as 2025 if conditions The body would steer and integrate the amine the support needs of people in their allow. This research shows how significant work of existing, more focused bodies, such 60s who are unable to work. © Barney Bishop / Flickr

22 / Fabian Policy Report Recommendation 5: The government • The Treasury and the OBR would be a very wide range of low and middle should seek to raise the national minimum asked to agree a methodology for calcu- income households. wage to 60 per cent of median earnings at lating the size of this fund each year – ie the earliest opportunity, ideally by 2020. It the gain to the exchequer arising from • Significant annual real increases to child should amend the mandate of the Low Pay (non-cyclical) improvements in em- benefit which would increase the living Commission to task it with advising on the ployment and low pay over the period. standards of mid income families and practicalities and pace of implementation. The OBR would also audit the use of reduce child poverty. Recommendation 6: The government the fund to verify that it was not being should legislate for all public sector jobs to spent on previously forecast increases in Initially, while the deficit was still being pay the living wage; and form a new part- social security spending or on cyclical reduced, the generosity of these policies nership with business to drive the take-up ‘automatic stabilisers’. could be determined by the amount of of the living wage in the private sector. money available each year through the The aim should be to halve the number Prosperity Fund (to avoid placing any of private sector jobs paid below the living If this strategy increased burden on the public finances). wage by reforming public procurement succeeds in full it will Once the public finances were in balance and corporate reporting, and by negotiat- have a major impact on other sources of funding might also being deals with large employers in sectors come available. like retail, food and hospitality. living standards and make If this strategy succeeds in full it will Recommendation 7: Ministers should great strides towards have a major impact on living standards work with business and unions to develop the eradication of and make great strides towards the eradi- a cross-government strategy on pay and child poverty cation of child poverty. It is also the only productivity, focusing on the middle of way of making a quick start in the next the labour market. The strategy should parliament, when – without an earmarked include immediate and longer-term actions • Parliament would pass legislation revenue stream – there will be no prospect to expand the number of middle earning mandating the government to return at of finding new money for enhancements jobs and prevent wage differentials from least the value of the Prosperity Fund to to social security. For example, if the widening. Measures might include: greater low and middle income households, in OBR judges there had been a structural collective bargaining at firm and sector a way ministers judge is best suited to improvement to employment during 2015, level; full transparency regarding differences increasing the disposable incomes of it could calculate the proceeds accruing to in pay and in pay rises between executives low and middle income households and the exchequer (ie the size of the Prosperity and typical workers; corporate governance to reducing poverty. Fund) in time for ministers to announce reform and more employee ownership; and new spending in the March 2016 budget. high quality vocational training and appren- • The proposed National Prosperity Depending on the performance of the ticeships. The UKCES and the proposed Commission and the Social Mobility labour market, this strategy could deliver a National Prosperity Commission should be and Child Poverty Commission would huge amount. But if it proves insufficient tasked with providing advice and evidence. advise ministers on effective strategies there are other options at the government’s for using the fund. They would also play disposal – and we will turn our attention to Social security and tax a role in educating the public about the these in a subsequent report. In particular Recommendation 8: After the election, role of social security in eradicating pov- we will examine options which could be the Treasury should reject major cuts to erty and supporting the living standards expected to significantly diminish income benefits that would reduce the living of the majority of households. inequality and eradicate poverty. standards of low and middle income These are second stage reforms, because households. This can be achieved if new Recommendation 10: As part of this they either require new money or major fiscal rules are adopted premised on a process ministers should consider the case institutional reforms – neither of which will slower pace of deficit reduction. for implementing the two social security be an option in the first few years of the Recommendation 9: The prime min- reforms modelled in this report: next parliament. By contrast, a strategy of ister should institute a ‘Prosperity Fund’ to predistribution that funds redistribution can be financed by the proceeds arising from • A more generous basis for uprating all ben- be put in place as soon as the 2015 election ‘predistribution’ reforms. efits and tax credits. This would benefit is decided.

23 / Inequality 2030 recent decades this figure has been declining; (2) they model the effects ENDNOTES of structural economic trends only, whereas it is likely that the current cyclical recovery is also increasing poverty and inequality.

1. Brewer, M., Browne, J., Hood, A., Joyce, ing top earnings, but does not assess 12. The modelling does not include an- R. and Sibieta, L., ‘The short- and the future direction of profits and asset nouncements in the 2014 Autumn medium-term impacts of the recession prices at all. Statement. The most significant change on the UK income distribution’, Fiscal was a small increase in the income tax Studies, vol. 34, pp. 179–201 (2013). 5. Harrop, A and Tinker, R. Measure for personal allowance which will exacer- Measure: Economic indicators for a fair bate the inequalities we report. 2. Davis A, Hirsch D, Padley M. A and prosperous society. Fabian Society Minimum Income Standard for the UK (2014) 13. The modelling of the implementation in 2014. Joseph Rowntree Foundation of the flat-rate state pension reforms (2014) 6. ibid. is approximate, as we have not made assumptions regarding individual 3. This report is inappropriate for consid- 7. Brewer, M, Browne, J, Hood, A, Joyce, contribution records. ering inter-generational inequality for R and Sibieta, L. ‘The short- and a number of reasons: our assumptions medium-term impacts of the recession 14. This is a different approach to the about the outlook for pensioners’ on the UK income distribution’ in Fis- OBR’s projections in the Fiscal Sustain- income over the next 15 years are cal Studies, vol. 34, pp. 179–201. (2013) ability Report, which assume there fairly crude and should be considered will be major changes to indexation indicative only; we report on dispos- 8. Fiscal Sustainability Report, Office for policies. Their approach may be an able income, not net wealth; poverty Budget Responsibility (2014) appropriate default for a 50 year time is reported on the basis of disposable horizon but is not a sensible ‘neutral’ income, before housing costs, so does 9. In our model of the 2030 labour position when looking just 15 years not distinguish between people who market we have extrapolated forward ahead. are liable for rent or mortgage pay- projections produced by the UK Com- ments and those who are not; we do mission on Employment and Skills 15. We use the Consumer Price Index not take account of the provision of until 2022. because official long-term official services in kind; we do not make an assumptions regarding CPI are pub- assessment of net contributions and 10. The only narrowing of wage differen- lished. Ideally a better measure of receipts over an entire lifetime. tials in recent decades was the result inflation should be used, that takes of the introduction of the national account of housing costs. 4. In recent decades there has been an minimum wage, an explicit policy increase in the share of GDP going choice (in chapter 2 we consider the 16. The employment projections for dif- to profits rather than to earnings, and possible impact of a higher minimum ferent demographic groups are based (within earnings) in the share going to wage and other policy interventions to on rolling forward past trends. Using the top one per cent of earners. This reduce wage differentials). this approach, our overall projection has been the topic of much discus- of the employment rate for adults sion, especially since the publication 11. As well as the possibility of the below pension age (75.8 per cent) is of Thomas Picketty’s Capital in the economy performing less well than very similar to that of the OBR, which 21st Century, which argues that both the OBR assumes, our projections uses a slightly different methodology these trends are a result of returns on could be optimistic for two reasons: (1) (76.3 per cent). We have scaled up our capital exceeding GDP growth. Our they assume the share of GDP going sub-group projections so that total modelling takes some account of ris- to wages remains constant, when in employment matches the OBR’s pro-

24 / Fabian Policy Report jection in order to achieve consistency 22. The idea of predistribution being prior 30. Browne, J and Elming, W. ‘The effect of with its GDP and earnings projections. to redistribution is contested. Distribu- the coalition’s tax and benefit changes tion through tax and public spending on household incomes and work 17. Note this is a model for the supply of (public services and secure incomes incentives’. Briefing Note. Institute for workers, rather than for employers’ for families) creates the context for Fiscal Studies (2015) demand. However, over this 15 year market outcomes, so public spending time frame economists would expect is not just a compensatory mechanism. 31. There is a good case for reviving changes in supply to be the dominant universal child benefit, both to retain explanation for changes in employ- 23. We used the average of the highest widespread commitment to social ment. In chapter 2 and 3 we consider three comparable employment rates in security; and to distribute resources more positive and negative scenarios the OECD: men (Japan, Netherlands, across the lifecourse for families for employment, based on different Australia), women (Norway, Sweden, in high income groups. However assumptions regarding economic Netherlands). restoring child benefit to high income performance. groups should logically be paid for by 24. Plunkett, J. The missing million. Resolu- increasing taxes on this group (so that 18. Results for disabled people are indica- tion Foundation (2011) it is a transfer in resources from high tive only, as we do not directly model income households without children changing patterns of disability or 25. A National Minimum Wage of 60 per to those with children). Restoring uni- employment participation by disabled cent of median earnings is likely to be versal child benefit does not strike us people (changes are an effect of vari- around the highest rate that can be set a suitable candidate for spending the ations to other parameters). Method- without a significant effect on employ- proceeds of predistribution – since this ologies taking account of these factors ment levels. policy would have no effect on poverty explicitly might produce a different or median living standards. central case projection for the employ- 26. Speech by Rt Hon Ed Miliband MP to ment rate for disabled adults in 2030; Labour Party Conference, September 32. The costs of introducing this permuta- however, this has no implications for 2014 tion of the reforms would not quite variations around the central case be covered by the proceeds of pre- resulting from different economic 27. We do not consider the fiscal proceeds distribution, under these economic scenarios or policy choices. of action on wage differentials as this assumptions. However this example is would actually be disadvantageous intended to illustrate the potential of 19. In chapter 2 we consider what impact from a purely fiscal perspective (other the strategy rather than be a definitive stabilising wage differentials would things being equal) since tax proceeds policy recommendation. Policy makers have and how this might be achieved from top income groups would be could adopt a slightly less generous lower. version of one or both reforms to en- 20. There is also a slight rise in poverty for sure the package was entirely revenue pensioners. However this is not a like- 28. The cost of the policy is £34bn before neutral. for-like comparison, since the pension taking account of the savings arising age will be higher, so a group of more from more people being in work. 33. Using the gini measure for household affluent people in their mid-60s are disposable income inequality not counted. 29. This precise combination of policies is not quite revenue neutral. In 2030 34. Harrop, A and Tinker, R. Measure for 21. The numbers are even more sober- these two social security policies Measure: Economic indicators for a fair ing when measuring poverty after would have a cost of £5bn, over and and prosperous society. Fabian Society housing costs. By 2030, 33 per cent above the proceeds of predistribution. (2014) of children will be in poverty using Similar policies could be designed to this measure (5.1 million); for all be exactly revenue neutral, with only individuals, the figure is 25 per cent slightly smaller impacts on living (16.6 million people). standards and poverty.

25 / Inequality 2030 iv / Fabian Policy Report