And FT on rising inequality

Falling earnings add to ministers’ woes by Chris Giles
June 11 2008

If ministers require hard economic evidence to explain Labour’s slide in the polls, they need look no further than Tuesday’s official income distribution numbers.

The story they tell is likely to strike fear into the hearts of Labour MPs already worried about their electoral prospects. Between 2004-05 and 2006-07 incomes fell for the poorest third of households, including skilled manual workers, unskilled workers and the out-of-work poor – all once seen as the party’s natural supporters.

Even in the middle of the income distribution spectrum, income growth has been agonisingly weak since 2001. Having grown by 15 per cent more than inflation between 1996-97 and 2001-02, the income of the median household grew by only 4 per cent in the five years between 2001-02 and 2006-07, the most recent year of data.

Median disposable incomes – the income level at which half of all households have a higher disposable income and half have a lower income – were £569 ($1,111.26) a week for a couple with two children, £372 for a couple with no children and £249 for a single person with no children in 2006-07, after adjusting for family size to aid comparability.

The Institute for Fiscal Studies said the incomes of poorer households fell in 2006-07 because real pay increases were low and benefit levels – set in September 2005 – were eroded by higher-than-expected inflation, squeezing the poor hard.

With child poverty growing for the second year in a row and pensioner poverty rising sharply as the temporary pre-election support for council tax bills in 2005 was withdrawn in 2006, the IFS said: “Increases in poverty seen during 2006-07 reflect weak income growth towards the bottom of the income distribution rather than rapid income growth in the middle”.

The figures stand in stark contrast to the national accounts, which show the income of Britain Plc growing healthily at more than 2 per cent a year since 2001. By delineating the reality of stagnant or only slightly growing real incomes facing many households, Tuesday’s data underline the scale of the challenge facing Gordon Brown as he seeks to win a fourth term for Labour.
The discrepancy between the measures reflects genuine differences. Gross domestic product represents the incomes of households and companies, with a greater share going to the latter. The population has also risen, so the proportion going to households is shared between more families. Household size, meanwhile, has been declining slowly and smaller households need more money to enjoy the same living standards as bigger ones. Finally, richer households have been taking more of the cake, leaving very little for poor, relatively poor and middle-income households.

The UK is not alone. Inequality is rising in many rich countries as competition for less-skilled employment intensifies. Beverley Hughes, children’s minister, insisted she was not trying to put a good gloss on bad figures. But she said: “We are trying to run up an escalator that’s going down.’’