First 100 Days - Tackling Inequality
Stewart is a visiting fellow at the University of Bristol and the co-author with Joanna Mack of Breadline Britain: The Rise of Mass Poverty.
Achieving a more equal society – by raising the floor and lowering the ceiling – should be a top priority for the next government. This requires a multiple strategy, some measures to be implemented in the first 100 days and some changes set in place to take shape over a longer time span.
The first action in raising the floor is to boost wages. The minimum wage – currently £6.50 per hour – should be increased in two stages to reach £8.00 by October 2016. Such a rise would lead to some modest loss of jobs, but would, with a lag, boost employment overall by raising demand in the economy. A progressive government should commit to the minimum wage being linked automatically to median earnings at a level determined by the independent Low Pay Commission (LPC). The current ratio of around 52% is low in comparison with other countries. Alongside this, the next government should set a date from which all new public sector contracts would only be issued to living wage employers, thereby boosting the numbers receiving this higher wage. Extending the remit of the LPC to advise on how to tackle Britain’s endemic low pay problem, especially by finding ways of ensuring pay progression in lower paid sectors, would have a range of long-term benefits¹. Not only would these measures raise standards for individual workers, they would also contribute to raising the share of National Income going to wages, a ratio that has been in decline since the early 1980s and a key factor in rising inequality since then. Together these moves would encourage employers to seek ways of increasing productivity, a crucial requirement for boosting wages and growth in the long-term².
While boosting wages at the lower end is important in tackling inequality, so too is improving the amount and quality of work.
A progressive government should make full employment a cornerstone of macro-economic policy, setting a clear goal for reducing the level of involuntary unemployment, backed by the use of public employment programmes for the long-term unemployed. By improving labour’s bargaining power, tighter labour markets would also help raise wages across the economy while simultaneously helping the public finances by boosting tax receipts and cutting the overall benefits bill. The growing problem of persistent poverty is increasingly the consequence of precarious and insecure work. New regulations are needed to tackle this growing insecurity and deteriorating conditions at work for many, for example, through much tighter restrictions on some employment practices including the growing use of zero-hour contracts.
In Britain inequality has been driven by the high concentration of privately owned capital – one of the highest concentrations of business ownership amongst rich nations – and the imbalance of power between boardrooms and employees, consumers and small businesses.
These twin, embedded problems will be harder to turnaround but in the short-term measures must be put in place that tackle them further down the line. Three key measures would begin to spread the ownership of capital more widely, promote new forms of countervailing power and raise the rights of ordinary citizens over the multitude of corporate decisions that affect their lives and opportunities. Firstly, by encouraging alternative business models, from co-operatives and mutuals to partnerships, the extent of private ownership in the economy would be reduced. Secondly, through establishing collectively-owned social wealth funds, some of the gains from the high returns on capital could be captured for wider social use³. For example, the proceeds of the sales of all public assets – from council house sales to publicly-owned companies – could be paid into a Public Investment Fund to be used to pay for socially useful investments including a significant boost to the supply of social housing. Such Funds would also raise the value of publicly-owned assets, which have declined sharply in recent times, and act as a counter to the level of the national debt. Thirdly, boosting the role of collective bargaining and reversing the long decline in trade union membership, especially amongst the low paid, would begin to challenge unequal power relations in the economy. A plan for improving the legal rights of employees over pay and conditions in the first 100 days is fundamental to challenging inequality.
While raising the floor is vital, a plan for tackling inequality must address how the ceiling can be lowered. Much tougher action against the persistent culture of entitlement and runaway executive and City pay – increasingly unlinked to corporate performance – is an essential element of a serious anti-inequality strategy. A number of measures would, over time, help cap top pay which has grown from 60 times that of the average UK worker in the late 1990s to over 160 times today. If workers were represented on company boards and the ‘remuneration committees’ that set executive pay, the role of labour as partners in running the economy would be recognised⁴. Ultimately taming executive excess depends on shifting business goals away from the dominance of chasing ‘shareholder value`. Pay packages tied to the short-term share price have greatly boosted executive rewards, but only by creating perverse incentives that have reduced investment, productivity and long-term profitability, thereby weakening the economy and wider society⁵.
To promote investment and improve productivity, firms need to implement pay structures that reward productivity increases and long-term performance.
Since the mid-1980s, Britain’s tax system has been regressive, biting more heavily on lower incomes than higher and thus widening the inequality gap. A new government should commit to a progressive system related to ability to pay and the fundamental principle of fair taxation. Measures should aim to shift the tax-take towards wealth, capital gains and higher incomes. Capital gains should be treated as income and taxed at the same rate, with an adjustment so that windfall gains are taxed more heavily than entrepreneurial success. This will prevent the super-rich disguising income as capital gains. Inheritance tax should be converted into a progressive lifetime capital receipts tax on beneficiaries⁶. Council tax should be reformed to make it proportional to property values through revaluation and the introduction of several new bands for higher valued properties⁷. The non-domiciliary rule should be abolished⁸ and a minimum tax rate introduced on corporations while attempts should be made to secure much tougher, global steps to rein in tax avoidance.
Some of these policies can be implemented in the first 100 days. While most will take longer, the new government should signal its intention to act, moving beyond talk to embrace a much more pro-active attack on inequality. Such a signal would itself help to build the more progressive social norms that would make it more difficult for a small financial elite to continue to use their corporate muscle to colonise an increasing share of the economic cake.
1 G Bain and C D’Arcy, ’Making more of the Minimum Wage’ in G Kelly and C D’Arcy, Securing a Pay Rise, Resolution Foundation, 2015.
3 S Lansley, Tackling the power of capital: the role of social wealth funds, Compass, forthcoming.
4 High Pay Centre, Reform Agenda, How to make top pay fairer, 2014.
5 The rising profit share since the 1980s has been associated with falling investment; see S Lansley and H Reed, How to boost the wage share, TUC Touchstone Pamphlet, 2012, fig 4.
6 R Prabhakar, K Rowlingson and S White, How To Defend Inheritance Tax, Fabian Society, 2008.
7 As recommended by the Mirrlees Review of taxation: J Mirless et al, Tax by Design, OUP, 2011.