Why worry about inequality? Instead, should we focus on reforming the dysfunctional welfare system to reduce poverty?
Is poverty a problem? Does inequality matter? Time for welfare reform?
Hi. I’m Leon Hawthorne. Poverty and inequality are not the same thing.
Poverty relates to the absolute amount of money you have, whereas inequality is the difference between you and other people.
Objectively, we Britons have never had it so good, in terms of average disposable income per household or Gross Domestic Product per person.
But it’s different depending on where you sit in the income hierarchy.
To understand inequality, we need to split households into five groups. Ranging from those earning the least to those earning the most.
This is the income for each group in 2016. The top group earns 12 times as much as the bottom group.
But if you add all the benefits and deduct all direct taxation, you get this picture of net disposable income.
The multiple drops to 5.
So, taxes and benefits have the effect of closing the inequality gap.
Economists measure inequality using something called the Gini Index.
Here it is over the past 40 years. The lower the line, the smaller the gap between the highest earners and the lowest earners. Income inequality rose during the 1980s, but we’ve become gradually more equal ever since.
Here’s the Gini Index for some major economies. Britain and America stand out as the most unequal, whilst Scandinavian countries are among the most equal.
Some claim the more equal the society, the happier and healthier the people, measured by incidence of mental illness, murder rates, mortality rates, prison population and so on.
But this research is flawed. Scandinavian countries are very homogeneous. Most people are members of the same race, religion and social group. Whilst the US and UK are much more heterogeneous. This impacts on health outcomes and social cohesion. Also, take a look at high levels of alcoholism and suicide in Scandinavia.
All I’m saying is: it’s very difficult to compare one country with another. And measuring happiness is impossible.
That said, I do accept there are some psychological and social consequences to inequality. But there are also consequences for any antidote.
Take a look at that graph of the Gini Index, again. Now, let’s superimpose Britain’s economic growth rate.
There’s a correlation between the two. Growth rates tend to be low when society gets more equal.
I am not touting inequality as an ideal system. I am saying inequality is a natural consequence of economic growth, motivating people to work harder because they want to do better than their peers. If you work twice as hard as your colleague, but only get 5% extra money, why bother?
I think poverty is more important than inequality. If we redistribute money to the poor, this can reduce inequality. But my target is poverty.
Our society has a de facto safety net for all citizens, but it’s administered through a massively bureaucratic and dysfunctional welfare system.
We have tax credits, universal benefit, job seekers allowance, housing benefit, council tax benefit, child benefit, state pensions and many more.
Each requiring people to fill-in forms, stand in line, disclose intimate details about their health and personal relationships.
Instead, we should introduce a Universal Basic Income… what the Green Party calls a Citizens Income.
This is where the state pays every adult citizen a tax-free, amount of money. No means testing. You don’t have to be looking for a job.
How much? At least as much as a pensioner or an unemployed person would get today, adding up all the different benefits.
Probably around £8,000 or £9,000 a year.
Some people fear this would discourage the unemployed from seeking work. I doubt it. You’d hardly be living a life of luxury.
It just means all the basics are covered without an inefficient bureaucratic and degrading welfare system.
Children could get a fraction of the Basic Income, payable to a parent, replacing child benefit and child tax credits.
We should also scrap the Personal Allowance that you earn before paying income tax. Overall, the combined rate of tax and National Insurance would need to increase from 31% to around 40% to achieve this.
But it would be revenue neutral for the average employed person.
The political left should like this because it can reduce both poverty and inequality. The political right can be persuaded to like it because it reduces government bureaucracy. The arguments will be over the exact amount of the Basic Income and the consequent tax rate needed to pay for it.
I’m Leon Hawthorne. Thanks for watching.