18 January 2020

How much should the Government focus on inequality?

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“Should the Conservative party care about income and wealth inequality?”

The question posed this week by Tim Pitt, a former adviser to both Sajid Javid and Philip Hammond, has particular resonance with a new government promising to ‘level up’ the UK.

For Pitt, the answer is a resounding ‘yes’, and he argues there will be political, social and economic consequences if Boris Johnson fails to tackle this issue head-on, through higher taxes on wealth and more support for low-paid workers in the welfare system.

It’s a thoughtful, measured contribution to the debate, though I think there are several reasons to push back against the idea that the government should prioritise reducing inequality over promoting growth.

First, making people more economically equal is clearly not always a good thing. Cuba is a lot more equal than the US, but I know where I’d rather live. By the same token, a recession that tore chunks off the rich might reduce inequality, but the poor would gain nothing.

Nor is all inequality created equal. The writer Nassim Nicholas Taleb makes a distinction between “inequality people tolerate” – the success of entrepreneurs, or great intellectuals, say – and an altogether more intolerable form, where people get rich by rent-seeking or otherwise gaming the system.

Then there’s the thorny issue of measurement. The Gini Coefficient, which people tend to cite in these debates, relies on a single year snapshot which does not account for how people’s incomes change over time – something also omitted by ‘rock star’ economists like Thomas Piketty, incidentally. (Our colleague Jethro Elsden elegantly dissected this problem in a recent CapX piece).

Even if you accept that it is in the Government’s gift to reduce inequality, it’s hard to make a case for building public policy on such shaky statistical foundations.

It’s also worth recognising the Government already intervenes fairly heavily to even things up. We have a large, expensive welfare state, and about half of our income tax take comes from the top 5% of earners.

If we are not to raise taxes and offer ever more redistribution, what should the approach be?

Rather than striving for equality of outcome, the state should be focused equality of treatment – even-handedness instead of out-and-out egalitarianism.

That is partly the aim of the ‘levelling up’ agenda and projects like the Northern Powerhouse. It’s about improving the overall economic performance of the UK but also addressing the widespread perception that certain areas have had a bum deal from Whitehall.

As I’ve argued before, the same principle of even-handedness should apply to our tax code, which is long, complex and full of distortions which are not only inefficient but also unfair on both businesses and ordinary people. There are reforms here which would be both efficient and satisfy calls for more progressivity, including Pitt’s call for a long overdue reform of council tax bands, one of our most egregiously outdated levies.

A growth-centered approach also means worrying less about the distributional impact of individual measures – a metric beloved of certain commentators and thinktanks – and more on the overall dynamism of the economy. Does this measure encourage the unemployed into work, the unskilled to improve their skills or businesses to take on more workers and pay them well?

In short, the focus should be on making the proverbial cake as big as possible, before agonising over how best to share it out.

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John Ashmore is Editor of CapX