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.