Summary

Summary

Fairness and wealth

We are focusing on wealth rather than income, because wealth inequality is both more important and more extreme than income inequality in the UK. Wealth includes housing wealth and investments, and is itself a source of (unearned) income for some people, as well as earned income from employment or other work. Wealth has a huge bearing on life chances and standard of living. For example, whether a young person can afford to buy a house is more linked to their (or their parents’) wealth than to their level of income.

Wealth inequality

We cannot achieve a fair society, based on genuine equality of opportunity for everyone regardless of their background and characteristics, without reducing wealth inequality. Unequal outcomes in one generation lead to unequal opportunities in the next, because wealthy parents can pass on their advantages to their children in a variety of ways, including through inherited wealth as well as access to a better education. High levels of economic inequality also undermine social mobility.

A fair society therefore needs to reduce excessive levels of wealth inequality, recognising that much of it results from unfair inequalities of opportunity and that allowing it to continue will prevent the achievement of genuine equality of opportunity, while accepting that some level of wealth inequality is fair insofar as it reflects differences in talent and effort. A lower level of wealth inequality will also help to create a society in which everyone enjoys a broader ‘equality of condition’ in which their social status and standing as a citizen is not dictated by their wealth.

When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.

Benefits of more equal societies

Fairer and more equal societies benefit everyone, not just those at the bottom. We know that social outcomes are significantly worse in more unequal countries than in less unequal countries. The UK, with its higher-than-average level of economic inequality compared to most other rich countries, has corresponding worse social outcomes. If the UK was to reduce its level of economic inequality to that of Sweden, it would perform much better on a range of issues such as life expectancy, imprisonment, mental illness and social mobility.

Trends in economic inequality

Income inequality in the UK remains high, while wealth inequality has been growing in recent years and is approaching levels last seen in the early 1900s. Child poverty has also risen back to the levels of 20 years ago. A combination of factors including low wages and insecure work, inadequate benefits, high costs of living and the pressures of the COVID pandemic have pulled increasing numbers of people into poverty in recent years. People in certain groups, including single parents, many women, members of some ethnic minorities and disabled people, have been affected especially strongly.

What needs to change

Tackling wealth inequality – and income inequality, and poverty – depends on making changes in a wide range of areas where the status quo is making a bad situation worse, including welfare, education, housing, health and work. Many people living in poverty suffer from ‘compound unfairness’ in which their life chances are undermined by a lack of opportunities in every area and at every stage of their lives, from their early childhood onwards. The government has both the means and the moral responsibility to ensure that people have decent life chances and to intervene to address hunger and extreme poverty, but there is also a compelling economic and social case for action. A fairer and less unequal society will benefit everyone by making us happier, healthier and safer. Wealth inequality can also be partially tackled by taxing unearned income (from capital growth) at the same rates as earned income (from work), rather than at much lower rates as is the case at the moment; most wealthy people would pay more tax on their unearned income if required to do so.

Because the causes of wealth inequality (and income equality, and poverty) are numerous and span multiple sectors, the solutions are the same. The changes that are needed are therefore either covered under our other focus issues, such as work, social security, taxation, housing and education, or they cover broader economic reforms (such as the promotion of open markets and of inclusive growth).

To illustrate this point, here are some examples of the recommendations of reports on economic inequality and/or poverty over recent years:

  • Joseph Rowntree Foundation (UK Poverty 2020/21): more people in good jobs, better earnings for low-income working families, strengthened benefits system, more low-cost housing
  • Child Poverty Action Group (Solutions to Poverty): benefits must reflect need and be better administered, action to reduce costs of housing and childcare, end the growing impermanence of paid work
  • Institute for Public Policy Research (Prosperity and Justice): give workers greater bargaining power, tax wealth more fairly, widen ownership of capital, promote open markets, rebalance the economy away from over-dependence on the finance sector…
  • Social Mobility Commission (State of the nation report 2021): remove the two-child limit in Universal Credit, extend early years childcare, more funds for schoolchildren in long-term poverty, a premium for 16-19-year-old disadvantaged students, greater digital access, three million more social houses
  • Women’s Budget Group (Commission on a Gender-Equal Economy): transform paid and unpaid work, invest in social and physical infrastructure, investing in a caring social security system based on dignity and autonomy, transform the tax system…
  • Institute for Health Equity (Marmot Review 10 Years On): ensure everyone has a minimum income for healthy living through increases to the National Living Wage
  • Health Foundation (Unequal pandemic, fairer recovery): address the root causes of poor health and invest in people and their communities (their jobs, housing, education and communities)
  • Compass (Secure and Free): an increased national minimum wage, a major state-supported housebuilding programme, a bigger role for the social sector, provide universal early childhood education and care, provide social security for all rather than welfare for some
  • Institute for Fiscal Studies (Why do wealthy parents have wealthy children): improve educational progression and labour market outcomes for those with low-education and low-income parents, [reform inheritance tax]
  • OECD (Inheritance Taxation in OECD Countries): Replace estate-based inheritance tax with a recipient-based inheritance tax, based on lifetime wealth transfers rather than taxing each wealth transfer separately and with an exemption for low-value inheritances

Where there is a case for discrete action on economic inequality is to recommit to ending poverty as a national priority, in particular child poverty. The EHRC has recommended that, in order to achieve Sustainable Development Goal 1.2 (to reduce at least by half the proportion of men, women and children of all ages living in poverty by 2030), the UK Government should restore the binding targets from the Child Poverty Act 2010 to eradicate child poverty for England, and develop a strategy for achieving them. There is also a case for pressing the government to recognise more fully the extent and negative consequences of wealth inequality, and the need for action to address it.

There are also a few specific policy interventions that could be pursued to address economic inequality and/or poverty, which do not fall under other issues as outlined above. For example:

  • The government could reintroduce child trust funds (set up by the Labour government in 2005), which had strong cross-party support but somehow didn't resonate with the public, and were abandoned by the coalition government in the name of austerity with no public outcry
  • The government could incentivise and/or legislate for the redesign of particular products and services in areas such as loans, insurance and energy so that they do not impose additional costs on poor consumers, as outlined by Fair by Design

The holding of wealth itself, whether it arises from inheritance or from the owner’s own effort and savings, can confer on the owner benefits of security, independence, influence and power, quite apart from any expenditure which the income from it may finance.

Institute of Fiscal Studies, The Structure and Reform of Direct Taxation, 1978