Jeremy Heywood was Cabinet Secretary – the UK’s most senior Civil Servant – from 2012 to 2018. He was extremely open to new ideas, and alternative perspectives. The Heywood Prize was created by the Heywood Foundation to continue that spirit of inclusivity and innovation.
This is the entry to the 2022/23 competition by Paul Bradford, which was shortlisted, but sadly did not win a prize.
Practical measures to make the UK better for the population as a whole
A Financial Times article (1) last September started with the question:
‘Where would you rather live? A society where the rich are extraordinarily rich and the poor are very poor, or one where the rich are merely very well off but even those on the lowest incomes also enjoy a decent standard of living’. The articles surmises that ‘for all but the most ardent free-market libertarians, the answer would be the latter.’
Yet the reality is that we are trending towards the former rather than the latter, as evidenced now by multiple researchers. We can all hypothesise about why this might be and how to address it, but the first step must surely be to start measuring this trend and publicising the resulting data.
This paper sets out two measures that I believe are practical, relatively easy to implement and which I believe have the potential to influence policy setting in a powerful and positive way.
So how much of a problem do we have?
The 2019 book ‘99% – Mass Impoverishment and How We Can End It’ by Mark E Thomas (2) describes how for decades after World War Two, as GDP grew most people grew richer too. Each new generation could expect to be better off than its parents. But that has changed. From 2007, despite the Global Financial Crisis, GDP continued to grow (albeit very little). Yet that did not mean that most people as a result were better off. The typical wage earner in 2019 took home less in real terms than in 2007; and it is only because there were on average five per cent more earners per household that median household income has risen. The biggest single driver of this impoverishment is rising inequality, both because of a falling share of GDP that goes to people who work for a living and because wages themselves have become much less equally distributed. A simple projection of the trend out to 2050 would result in median earnings having fallen halfway towards the 2019 poverty income!
Events since 2019 such as COVID and the cost-of-living crisis mean that it is likely that this adverse trend has continued (and perhaps worsened). This gives us a vision of a Britain much more like the former scenario posed by the Financial Times article above than the latter. Or as the book puts it, we may in time become ‘rather like South Africa today. An elite who live luxuriously, protected by intense security from the mass of the population who do not share in the wealth of the country.’
The Financial Times article explained that the top earning three per cent of British households each took home about £84,000 after tax, putting Britain’s highest earners narrowly behind the wealthiest Germans and Norwegians, and comfortably among the global elite. For Norway, the poorest five per cent are also the most prosperous five per cent in the world. It is different for Britain: while top earners rank fifth across all countries, the poorest five per cent rank fifteenth. The lowest earning bracket British households had a standard of living 20 per cent weaker than their counterparts in Slovenia.
Economists have a measure of inequality of income called the Gini coefficient. Perfect equality, i.e. everyone getting the same, would correspond to a Gini coefficient of zero, while perfect inequality, i.e. one person getting everything and the rest getting nothing, would correspond to a Gini coefficient of one. Whilst the UK is not alone in having an unequal distribution of income, its rating of 0.351 compares unfavourably with most European nations (e.g. France 0.306, Germany 0.289, Norway 0.253). However the Gini coefficient itself is not terribly helpful in informing decisions on what to do to stop rising inequality.
What are the two measures proposed?
It is a justifiable belief that before you can improve something you have to start by measuring it. I’d like to propose two metrics, consistent with recommendations in Mark E Thomas’ book. Both metrics could and should be compiled by the Office for National Statistics (ONS) and published regularly, at least annually, and ideally going back to, say, 2000.
The first metric is an ‘impoverishment ratio’, setting out the percentage of the population that is poorer in real terms than it was the year before. (Alternately one could report an ‘enrichment ratio’ which is the mirror opposite, if that term was felt to be more positive in tone).
The second is a ‘leave-behind ratio’, i.e. the percentage of the population that has seen its income grow more slowly than the economy as a whole (in other words, more slowly than per capita GDP). This should be further broken down into reporting by income centile (or at least decile).
How might these help?
I stated above that the Gini coefficient is not terribly helpful in informing decisions. The metrics I propose have three relative advantages:
- Clarity of message. If you knew that the impoverishment ratio had risen from around zero to 50%, say, that would tell you a story: everyone used to benefit from the growth in the economy, now only half of us do. The other half are getting poorer. If you knew that Gini had risen from 0.25 to 0.31, the only story is that inequality has increased – it does not necessarily mean that anyone is suffering from it or even that it is a bad thing (see next point on targeting);
- Ability to set targets. With Gini, there is no obvious ideal – a society with zero Gini is probably impossible without a hugely intrusive and controlling system; at the other end of the spectrum too high a Gini is clearly undesirable, so it is really not clear what would be an ‘ideal Gini’ to target. With the impoverishment ratio, there is an obvious target: there is no reason to aim for anything higher than zero;
- Ease of analysis. If you have an impoverishment ratio greater than zero, it is easy to analyse why: simply look at which centiles are seeing a decline in real income and explore what is driving that. With Gini, to analyse it you would have to look at which centiles were growing more strongly/weakly than the average – i.e. you would need to look at the leave-behind data to analyse it.
The metrics will inform policy makers, the media and the public as to whether the UK population is benefitting equally (or at all) from rising wealth (or conversely suffering equally from recession). Review of trend data over past years will provide insights into the impact of policy and the potential for/need for policy to change. One might reasonably expect this to lead to policy development in future that fairly spreads benefits and fairly shares pain.
The Office for Budget Responsibility as part of its Budget assessment currently sets out the likely impact of the Budget on GDP and government finances. It should in addition be asked to forecast the impact on the two measures. Such transparency will help result in decision making at Budget time that arrests the trend to increasing inequality.
In summary, I believe that introduction of these two metrics is practical, relatively easy to implement and has the potential to influence policy setting in a powerful and positive way.
Sources:
- ‘Britain and the US are poor societies with some very rich people’ by John Burn-Murdoch, published by the Financial Times on September 16, 2022
- ‘99% – Mass Impoverishment and How We Can End It’ by Mark E Thomas, published in 2019 by Head of Zeus Ltd’
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