Did Labour oversee the biggest gap between rich and poor "in modern times"?

Published: 9th Oct 2012

"Under Labour, income inequality, that is the gap between the incomes of the rich and poor, was the largest in modern times."

Iain Duncan Smith, Conservative Party Conference, 8 October 2012.

After Ed Miliband told the Labour Party conference last week that "I will never accept an economy where the gap between rich and poor just grows wider and wider," Conservative Work and Pensions Secretary Iain Duncan Smith hit back this week by telling his party's delegates that Labour had done just that while in Government.

According to Mr Duncan Smith, the previous Labour administration had overseen the widest gap in income inequality "in modern times". Is he right?

Analysis

It isn't clear exactly what Mr Duncan Smith means by 'modern times', however data is available from the Institute for Fiscal Studies going as far back as 1961, which is when their records began. 

By looking into their reports, we can indeed see that Labour's third term saw a sharp rise in income inequality, as well as a fall in the income of the poorest fifth of the population. 

In 2009 they reported that: "income inequality has risen (on most measures) in each of the last three years and is now at its highest level since our comparable time series began in 1961."

Moreover, under Labour, income growth at the very top and very bottom of the distribution sharply diverged, with the lowest growth in incomes occuring at the very bottom of the distribution over this period, and the fastest growth at the very top. 

To reach this conclusion, the IFS employ something called the Gini coefficient. Developed by an Italian economist, the Gini coefficient is a common measure of inequality in income and wealth and assesses the extent to which the distribution of income among households deviates from a perfectly equal distribution.

It ranges from 0 to 1: a coefficient of 0 would mean income is shared equally between all individuals, whilst a coefficient of 1 would mean one person within the population holds all the income, whilst everyone else has none.

As we can see in the chart below, in 2009 Britain's coefficient was 0.36. By comparison, according to OECD stats, the figure is 0.408 in the United States,  0.23 in Sweden, 0.283 in Germany and 0.327 in France. So Britain ranks highly among European countries, but is within the average of OECD countries. 

As Full Fact reported in December 2011, inequality can be measured in two ways. One is to take the entire population and compare the incomes of the richest and poorest on these terms. The other is to limit the sample to the working-age population, thus excluding the retired and those that have yet to enter the workforce. Both are statistically acceptable. 

The Gini coeffiecient is far from perfect, as large demographic changes - such as an increase in children below working age or retired households - could also affect income distributions.  

The Office for National Statistics report on the effects of taxes and benefits on household incomes may complete the picture for us. It uses a different measurement of inequality that takes into account the effects of tax and benefits, and found that in 2010/11 inequality for post-tax income was 9 points higher in non-retired households compared to retired households. 

So how is Britain doing now? 

Well, it looks like things may be changing. In 2010-11, the Gini coefficient fell from 0.36 to 0.34, the largest one year fall since at least 1961. This means the Gini has returned to its 1997-98 level. One of the reasons for the sharp fall in inequality is that during the recession, the falls in income were proportionately larger for richer households.

However that doesn't mean to say that the gap will continue to fall. The IFS warns:

"Future prospects for inequality are uncertain. The large fiscal tightening that is now under way includes £18 billion per year of welfare cuts by 2014—15, the direct effect of which is to reduce incomes proportionately more towards the bottom of the income distribution. But much depends upon how the labour market evolves in the years ahead, which is clearly uncertain given the current macroeconomic climate. At the top of the income distribution, ongoing changes to the taxation of very-high-income individuals will continue to influence when such individuals choose to realise their incomes until at least 2013—14. This will make it difficult to identify the 'underlying' trends in top incomes (as opposed to temporary changes driven by tax-induced incentives to realise income at different points in time)."

Flickr image courtesy of guano.


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