Inequality - as high as we think?

25 May 2017

The truth about inequality in Britain

By Tim Worstall @worstall

Outside of London, Britain is a boring middle-ranking economy. Photo: Matt Cardy / Getty Images

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•   Britain has two different economies with their own different payscales
•   Inequality, properly measured, is lower than we generally report for the UK
•   Scots have £2,800 a year less taxed out of them than spent on them

There’s good news and bad news from the Office for National Statistics. Inequality, on any sensible basis, is much lower in the UK than is generally assumed. And the economic case for Scottish independence seems to have been holed beneath the waterline.

The report in question is looking at country and regional public-sector finances. It considers how much money gets vacuumed from the wallets of the people in an area, and how much of the government’s bounty they are then showered with.

London and the SE pay substantially into the common pot, the East of England gets as much as it gives and everyone else is getting showered not vacuumed. It’s not a million miles away from what everyone thought was happening either.

It’s useful, though not 100 per cent accurate, to see the British economy as two different parts. There’s London and the environs – which are hugely productive and part of the linkage of the great global cities. Then there’s everything else – which is really just a rather boring middle-ranking Northern European economy.

That huge difference in productivity in tandem with a national taxation system is why the government gets nearly £16,000 a year in tax revenue from each Londoner and under £8,000 from each Welshman.

Even though £30,000 a year in London pays the same tax as £30,000 a year in Bridgend does, the hugely different costs of living in each place make a vast difference. Given that London wages are higher than they are elsewhere – just to get people to work there – we’ve got the interesting, if absurd, insistence that people must pay a higher rate of tax to live where they are more productive.

However, this point that we’ve really got two different economies with their own different payscales does also tell us that inequality is rather lower than when conventionally measured.

Look at how the US works. The Gini, a measure of how unequally incomes are distributed, is higher there than here. But the Gini for each individual state is about the same as that for the country as a whole. It isn’t the fact that Mississippi is poor relative to California that drives American inequality: it’s more local than that.

But here, that regional inequality (sadly, we don’t formally calculate the Ginis for the constituent parts of the UK) is a major driver of the national inequality. That Wales and Northern Ireland are poorer than London is a major reason why the UK inequality is higher than that of most other European nations. And this is because London looms larger in the national economy than the major metropolis does in any other such European nation.

So we’ve high inequality across geography. And we don’t adjust for the difference in prices across that geography. Someone on £30k in London is listed as having twice the income of someone on £15k in Barnsley, despite the first having to pay half a million for a rabbit hutch to live in, and the latter picking up a whole street for thruppence.

It really is because of these regional disparities in productivity, reflected in these public-sector accounts, that UK inequality is as high as we record it as.

And judging from these figures, the Scots have a rather larger problem than we all thought. Despite what Richard Murphy has been telling all and sundry about GERS (Government Expenditure and Revenue Scotland) and our lack of knowledge of how much revenue is raised in Alba and how much spent – we do know.

The net fiscal balance for the country –  the difference between tax raised there and tax spent – is some £2,800 per head of population. And, yes, that is accounting for the oil. Or as we should perhaps put it, Scots have £2,800 a year more spent upon them than they have taxed out of them. And that’s the fiscal gap that an independent Scotland would have to deal with. That’s the amount they’d have to reduce spending by, or increase taxes by, to finance an independent country.

They might think it’s worth it – I have certainly supported Brexit even at the possible cost of some economic loss. We might even think that it’s worth their going, given the savings we’d make. But their independence is their decision, however fun it might be for the rest of us to have a vote on whether to push them if they don’t jump.

But the major point to take from these new numbers (they’re experimental statistics) is that inequality, properly measured, is lower than we generally report for the UK. It’s much more about the different regional economic performances than it is differences in the same town or street.