This article was originally published in The Times. Read the original article.
For me perhaps the most fascinating moment from Jeremy Paxman’s grilling of Messrs Cameron and Miliband last week came when he asked what regrets Mr Miliband had over the last Labour government’s record. “We were too relaxed about inequality; I think the gap got bigger” came the response.
It was an egregious failure of the interviewer not to follow up on that. It is important to know what the Labour leader had in mind, in what way he thinks too little was done to reduce inequality, and what actually he would like to do about it if he won on May 7.
It was also a rather surprising mea culpa. The previous Labour government was strongly redistributive. It introduced a minimum wage. It hugely increased the generosity of the benefits system, especially for low-income families with children and low-income pensioners. Spending on child tax credits rose by more than £25 billion.
Across most of the distribution, income inequality actually fell. Labour policy certainly reduced income inequality below what it otherwise would have been. Those concerned with redistribution would also be harsh to fault much of what happened with public service provision. For example, the Labour government significantly increased redistribution in the school system, which the current government has extended with its pupil premium. Schools with poorer intakes receive about £1.50 in funding per pupil for every £1 received by schools with more affluent pupils.
Given this, my guess is that what was at the forefront of Mr Miliband’s mind was a concern about the way in which the very richest pulled further away from the rest of us over that period. That was the main sense in which inequality rose between 1997 and 2010. The incomes of the top 1 or 2 per cent, and in particular of the top 0.1 or 0.2 per cent raced away from the rest, driven in large part by growing rewards for those working in financial services, notably in the City of London. There is no doubt that “the rich” have been taking a larger and larger share of the national cake.
Tony Blair was pretty clear about where he stood on this. In an interview, also with Jeremy Paxman, he said “justice for me is concentrated on lifting incomes of those who don’t have a decent income. It’s not a burning ambition for me to make sure that David Beckham earns less money”. That is consistent with the actions of his government which did little to rein in the incomes of the richest.
Perhaps more surprisingly it implemented at least one policy which served actively to increase the incomes of the very rich – the reduction in capital gains tax to 10 per cent for most assets. This allowed hedge fund millionaires to point out that they paid a lower rate of tax than their cleaners. CGT rates were raised by Alistair Darling and then again by Mr Osborne. In another odd piece of political cross-dressing we also saw the Labour government implementing a big cut in inheritance tax while a Conservative-led coalition has increased it – albeit rather furtively – through a failure to index the threshold at which the tax becomes payable.
So what of the future? We have already seen a mixed bag of policy announcements from Labour. The re-introduction of the 50 per cent rate of income tax for those with incomes over £150,000 is the most obvious statement of intent. It is best understood as an instrument for reducing inequality, for hitting the very rich. As an instrument for deficit reduction it is of (at best) extremely uncertain effectiveness.
Other policies already announced which would hit the better off include the “mansion tax” on properties worth more than £2 million, and further substantial reductions in the value of pension tax relief. But which rich does Mr Miliband really want to redistribute away from, if indeed that is his aspiration? Is it the three-quarters of a million or so with pre-tax incomes over £100,000 a year? Perhaps it’s just the 350,000 with incomes over £150,000. Or the 40-50,000 incredibly fortunate individuals with pre-tax incomes in excess of half a million pounds a year.
It matters which. Many of the policies implemented in Mr Darling’s last budget, and indeed by this government, have hit those in the £100-£150,000 range proportionately the hardest – the introduction of a 60 per cent income tax rate on incomes between £100,000 and £120,000 and the latest restrictions on pension tax relief, for example.
In principle returning the top rate of income tax to 50 per cent would hit those with the very highest incomes the hardest. But they may have more opportunities to avoid its effects than those on salaries at the lower end of the range.
Of course, tackling inequality is about much more than the tax and welfare system. Mr Miliband has talked about “pre-distribution”, in other words doing more to ensure that pre-tax earnings are more equal. In the long run that would probably be the surest route to a more equal society. But it is easier to tweak the tax and benefit system than to impact on what people earn.
There does appear to be a significant difference between the two main parties in their philosophies and policies with respect to inequality. We know that Labour want to reduce it, and a little about how. We have much less sense of the extent to which the Conservatives think there is an issue to be addressed, let alone how they might go about doing it.
Let’s quiz them on these issues, try to elicit some real information. Then I for one might actually be able to sit through an entire interview.