The income gap between rich and poor has widened to its highest level since Margaret Thatcher was in office, official figures show.
The findings are bound to cause embarrassment to the Government, which announced plans yesterday to alleviate poverty among Britain's poorest communities.
The figures from the Office of National Statistics (ONS) revealed that in the 1998-99 financial year, Britain's highest earners enjoyed their biggest share of the national-income cake since inequality peaked in 1988. The recent increase in inequality followed several years in the 1990s in which the earnings gap narrowed.
The figures fuelled the growing criticism by Labour MPs of the Government's record in relieving poverty in the party's traditional heartlands.
The ONS report overshadowed the launch of a 10-year drive by John Prescott to revitalise Britain's run-down inner city areas. Promising a "war on poverty", the Deputy Prime Minister said: "We need now to move from communities defined by reliance on benefits to communities characterised by employment and enterprise."
Until now, the Government has cited income figures which ended in 1997 when the Tories lost power. Privately, ministers are nervous that other damaging poverty figures will be published before the general election, and that it will take time for the impact of their anti-poverty measures to show up in the statistics.
According to the ONS, the top fifth of earners in 1998-99 took a 45-per-cent share of the money people have to spend after paying taxes and receiving benefits. This was up from a low of 43 per cent in 1995-96.
In contrast, 6 per cent of disposable incomes went to the poorest fifth of earners in 1998-99 - down from 7 per cent in 1995-96, and 10 per cent in 1978.
After a large increase in inequality during the 1980s, the earnings gap narrowed slightly in the first half of the 1990s. The ONS said the main explanation for the subsequent widening is likely to be rapid increases in wages for high earners rather than any effects of government policy.
Downing Street sought to play down the ONS report, insisting it did not show that the "poor were getting poorer" but that all incomes were rising in a growing economy. "Our aim is to reduce inequality in our society. We are not saying you have to hammer people who are relatively well off to do this," said Mr Blair's official spokesman.
A Treasury spokesman said the ONS figures were out of date. "They do not show the impact of the working families' tax credit, the national minimum wage, the new 10p starting rate of tax and the cut in the basic rate of income tax, all of which are evidence of Labour working hard for hard-working families,"he said.
Frank Field, the former minister for welfare reform, said the report showed Labour needed to drop its 1997 commitment not to raise tax rates from its manifesto for the next general election and called for a 50p top rate of tax on incomes of over £100,000.
" If we are going to have a fairer distribution of income, then we have to be more radical on tax for those at the very top," he said.
Louise Ellman, the Labour MP for Liverpool Riverside, called for more redistribution of wealth and intervention in the economy, but Tony Blair sidestepped her demand during Prime Minister's Questions.
Matthew Taylor, the Treasury spokesman for the Liberal Democrats, said the figures showed that Labour's decision to raise indirect or "stealth" taxes while cutting the basic rate of income tax hit the poor and helped the rich. "Gordon Brown poses as Robin Hood but this shows he has acted like the Sheriff of Nottingham," he said.
The ONS report confirmed that the tax and benefits system remains redistributive. In the latest year, before-tax-and-benefit income averaged nearly £65,500 a year for the top tenth of households, or about 31 times the £2,100 average for the bottom tenth.
After tax and benefits the ratio is reduced to closer to six to one, or an average income of £44,800 compared to just under £8,000.Reuse content