THE GUARDIAN

COMMENT

Inequality in Britain is escalating towards American dimensions. The government can and should take action now

Michael Meacher
Tuesday July 15, 2003
The Guardian

Two stories of Britain 2003. Mrs Taylor (not her real name) is 36 and the mother of two teenage sons. She suffers from systemic lupus with lung intolerance, Renaud's syndrome, progressive fibrosis of both lungs and polymyositis (muscle-wasting). She is mostly bedridden. Her husband has had to give up work to care for her.

The Taylors have a weekly income of £228, made up of income support, child benefit, family premium and disability living allowance. Part of their roof is leaking, but they cannot get a renovation grant from the council because the roof is not bad enough for the "serious disrepair" category.

Jean-Pierre Garnier (his real name), chief executive of GlaxoSmithKline, recently received a pay package that the company said was worth about £11m. The small print, however, indicates that it is worth more like £16m.

Two different worlds in one country. When Labour came to power in 1997, it was expected to change this. It has not happened. And the latest government figures tell a sobering tale. According to the Effects of Taxes and Benefits on Household Income, under Mrs Thatcher, 1979-90, the fifth of the population with the lowest incomes had their share of post-tax national income cut from 10% to just 6%. Over the same period, the richest fifth increased their share of post-tax national income from 37% to 45%. Under Major, 1990-97, this huge increase in inequality under his predecessor was marginally reduced. The share of the bottom fifth rose slightly to 7%, while the share of the top fifth fell back slightly to 43%.

Under Labour to 2001-02, the latest year for which figures are available, the trend to inequality has again revived. The share of the bottom fifth has slipped back to 6%, while the share of the top fifth has moved up to 46%. Therefore, the rich now have a bigger share of the nation's post-tax income than at any time under Mrs Thatcher.

From 1997 to 2002, the post-tax income of the bottom tenth (nearly 2.5m) of households fell 2% to an average £3,339 per household. For the top tenth, it rose 39% to an average £54,514 per household. However, when benefits in kind are taken into account, benefiting mainly those on the lowest incomes, the picture improves for this latter group. The bottom tenth are 13% better off, though the top tenth remain 39% better off.

So is poverty now increasing in Britain? Though there is no final authoritative definition of poverty, perhaps the best measure is the number whose incomes are less than half the national average or mean. In 1995-96, 17% of individuals were in that situation. In 2001-02 it was 19%.

That is before housing costs are taken into account. If housing costs/benefits are included, 24% of individuals were living at below half the national average income in 1995-96, and by 2001-02 that had marginally fallen to 23%. That means that 14 million people are still living at this low level of subsistence.

At the other end of the spectrum, fringe benefits and share options have been gathering pace. According to Inland Revenue statistics for 2001-02, 150,000 highly paid directors and others with earnings over £50,000 a year enjoyed additional fringe benefits of £1.6bn, worth an average £10,880 each. The company car benefit, and fuel for personal use, accounts for over two-thirds of all these (so-called) fringe benefits. It amounts to £7,800 a director on average, nearly twice what a pensioner has to live on for a year.

However, it is within the top 1%, and even more within the top 0.1% (about 18,500 households), that the most dramatic explosion of pay has occurred. It is not just top salaries that have soared for chief executives but, more significantly, bonuses and share options. Lord Browne of BP, for example, had a salary last year of £1.19m, or £23,000 a week, but also bonuses of £1.7m and share options of £2.5m. Altogether, at least 123 directors are now paid more than £1m a year, with a further 364 paid between £500,000 and £1m.

Several factors are now accelerating the dynamic towards an inequality in Britain greater than at any time since the 1930s. One is the differential rate of increase in pay between the highest paid and the average. While the average-paid have had increases of 3-4% in recent years, Britain's highest paid executives had salary increases of 21% in 2000, 19% in 2001, and 16% in 2002. Second, these much higher rates of increase for directors are built on a much higher existing base, thus widening the actual pay gap dramatically. Third, there has been a veritable explosion in recent years of share options, which are focused almost entirely on the highest paid.

Britain is beginning to move in the direction of the US, where inequality has escalated dramatically in the past 30 years. Is this all inevitable? It is not. Nor is it necessary to breach New Labour's current taboo. The 2001 manifesto stated: "We will not raise the basic or top rates of income tax in the next parliament." This only applies until the next election, but other alternatives are available that could be put into effect now.

One is to implement the government's programme to force companies to disclose pay and put remuneration policies to a shareholder vote. Contrary to the government's proposal, however, this vote should be binding on the company, otherwise it will simply be ignored.

Second, the monetary value of all benefits in kind - whether fringe benefits, bonuses or share offers - could be calculated and made subject to current income tax rates. Third, the more flagrant tax avoidance devices, such as the super-rich lobby's non-domicile loophole, should be closed. The Association for Accountancy and Business Affairs recently concluded that the government could raise £85bn in extra taxation by blocking the shifting of funds to tax havens. These options would begin to reverse the current slide towards a polarising of inequality that on any grounds is indefensible.

· Michael Meacher MP was environment minister until last month.

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