Magazine article Public Finance

For Richer, for Poorer

Magazine article Public Finance

For Richer, for Poorer

Article excerpt

During the 2001 election campaign, Newsnighfs Jeremy Paxman famously asked Tony Blair: do you care about the gap between rich and poor? 'I want to tackle poverty, not inequality,' was the prime minister's answer.

In reality, the Labour government did both in its second term. As we found out at the end of March, new figures on household incomes showed that the 2002 rise in national insurance and the introduction of tax credits had cut average incomes, but reduced ineguality and poverty.

Disappointingly, both the media and the political parties focused on the first half of the report, rather than the much more important shifts in inequality and child poverty.

The Times front page spoke of a 'tax assault on the middle class' and the shadow work and pensions secretary said it was a 'devastating evaluation of what Labour has done to hard-working families'. Labour responded by pointing to the fluctuating fortunes of the selfemployed and talking up long-term rises in average incomes.

So who was right? And does it matter? The Conservatives talked about average incomes falling by 0.2%, whereas Labour pointed to median income - that of the middle household in Britain - rising by 0.5%.

But looking at a single indicator is often misleading. What actually happened was that 80% of the population were a bit better off, but the richest 20% were a bit worse off.

Because average income is more sensitive to changes at the higher end of the income distribution - the 30% of households that earn more than £22,800 a year - this meant that although average incomes fell, most people's incomes rose, including those of the electorally crucial 'middle' household.

Yet growth was slow compared with that of the wider economy and previous years, largely due to the rise in national insurance in 2002. So the key question is: would we have been better off without the tax rise?

The answer is a simple 'no'. The money raised from national insurance changes has been spent on improving public services. Slightly lower income growth is a price worth paying for longer and healthier lives, better schools, lower crime and a fairer society. The guality of people's lives depends on far more than the amount of cash in their pockets, and a myopic focus on people's incomes misses this crucial point.

The second glaring omission from the debate was that inequality in Britain has fallen for the third year running. …

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