Recession narrows the gap between wealthy and poor

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The Independent Online
THE RECESSION has reduced the inequality with which incomes are distributed between Britain's rich and poor for two successive years, for the first time since the Conservatives came to power in 1979.

The incomes people receive after paying taxes and receiving social security benefits are distributed more unequally than at any time during the 1980s, but inequality eased slightly in 1991 and 1992, according to an analysis in the Central Statistical Office's Economic Trends.

There has been a trend towards greater inequality in Britain since 1979. In part this is because pre-tax wages have become more widely spread as workers are paid a premium for better education, trade- union mark-ups fall, part-timers replace full-timers and machines replace unskilled workers.

But the independent Institute for Fiscal Studies has argued that Government changes to the tax and benefit regime were the main reason for growing inequality in the 1980s. At least temporarily, the recession is reversing this process.

After taxes and benefits, the lowest-earning fifth of the population received 6.5 per cent of total household incomes in 1992, while the richest fifth took 44 per cent. In 1977 the poorest fifth received 9.4 per cent of household incomes, while the richest took 37 per cent.

The average disposable income before taxes and benefits of the poorest fifth of households is pounds 1,210 a year, against pounds 40,320 for the richest fifth. Social security benefits make up 70 per cent of the disposable income of the poorest fifth.

The Gini coefficient measure of inequality - which ranges from zero when all households receive the same income to 100 when all income is received by a single household - has risen from 29 in the late 1970s to 40 in 1990, since when it has dropped back to 38. The coefficient also fell in 1984 and 1989, but on each occasion the drop was more than reversed in the following year.

Andrew Dilnot, director of the Institute for Fiscal Studies, said the recent decline in inequality probably reflected a collapse in very high incomes during the recession. Recipients of benefits linked to headline inflation would also have benefited because the retail price index was boosted as high interest rates pushed up mortgage payments.

Figures from Eurostat, the European statistics agency, show that Britain's national income is below the European average in terms of the goods and services it could buy. Britain ranks only above Spain, Ireland, Portugal and Greece.

The monthly purchasing managers' index from the Chartered Institute of Purchasing and Supply also pointed to a weak performance in manufacturing industry last month, with overall activity falling. But the CIPS put this down to seasonal factors.

(Graph omitted)

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