Problem of Income Inequality

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Income inequality is a growing concern around the world, the problem seemingly growing each year. Eurostat, the official data agency of the European Union, last year, published a list of the 10 poorest and richest areas in Northern Europe. You can see that Germany has 3 of the richest areas, but the UK has the richest overall – Central London. You may see this as a good thing, it’s good for the UK economy that the richest area in Northern Europe is in the UK. After all, Central Europe is a powerhouse for Banking, Professional Services, Insurance and a plethora of industries.

The problem arises when we take a look at the other side of the coin, the poorest places in Northern Europe. Guess how many of the 10 poorest areas in Northern Europe are in the UK? 9. Yes you heard me right 9. Some of which are Cornwall, Lincolnshire and the poorest area being West Wales. So how is it possible that the UK houses both the richest area in Northern Europe as well as 90% of the poorest areas?

Many Brits, believe that the UK is very similar to other European nations – They are all geographically close to the UK, have similar economic approaches, and many of them are or were fellow EU members. But despite this the UK, is fundamentally different from these other countries. The poorest areas of the UK aren’t just the poorest areas in the UK, they’re the poorest area in all of Northern Europe, and by some margin.

As previously discussed, the richest area in the UK is central London, where the average household disposable income is around £24,000 a year. This puts households in Central London far above the UK average of £16,000 a year. The average income in the poorest are of the UK is lower still at £13,000 a year. It’s not unusual for there to be a gap between the richest and the poorest in the economy, it’s evident in all countries, but the imbalance in the UK is significant

There are clear differences between the richest and poorest in the UK. Household in the bottom 10% of the UK population have an income of around £5,000 a year whereas the top 10% have an income which is around 22x higher at approximately £110,000 pounds per year. It’s not surprising that the richest will have more money than the poorest, that’s literally what rich and poor mean, however it becomes a little more alarming when you look at the people in-between the two extremes. You can observe that there is a sharp increase in income especially when you look at the highest earners.

Even when you compare the 9th poorest tenth to the richest 10th, you can see a disparity. The 9th poorest are only earning 57% of what the richest 10% are earning. I can hear your tears from here, ‘those poor people with a disposable income of a little over £60,000 a year, how could they cope?’ But seriously, this does demonstrates an issue. Even these objectively well off people have significantly less disposable income than the richest 10%. And the deeper you look the clearer the gap becomes. The top 10% income looks like pocket change when compared to the top 1% of earners, who have an average annual income of £253,927. Even this income seems small when you compare it to the top 0.1% income which is £919,882 a year.

With all these numbers it’s easy to loose perspective, when you bring back in the poorest 10% of British households, you can see the how big this disparity is. You can say that the top 0.1% are a very small group, ‘of course there will be a few exceptionally rich people’. However with the UK population being 66.04 million people, the top 0.1% represents 66,040 people. That’s a lot of people earning a ton more than the rest of the country.

Income isn’t the only important factor, overall wealth is important too. Income only measures the amount earned in the last period while wealth looks at all accumulated money and assets. This means that wealth takes into consideration things such as property, physical assets, what people have in the bank and what they have saved in their pension. So just how big is the wealth gap between the richest and poorest? Well it’s not a good sign for the distribution of wealth when the poorest 10% of British people have less than 0.5% of the total wealth. It’s even worse when the second poorest tenth also have less than 0.5% of the total wealth. So together the poorest 20% of Brits represents less than 1% of the total wealth. Things don’t get much better when you include the bottom 50% of households, that’s because the bottom 50% only account for 8.7% of remaining the wealth in the UK. By contrast the top 10% of households hold 45% of the wealth. With the remaining population making up the rest of the wealth of the UK economy.

In fact a study held by Credit’s West, found that the top 1% own 29% more than the poorest 20%. Wealth is really hard to measure and relies on either waiting on people to die so we can look at the value of their estate or asking them in wealth surveys. This data isn’t complete reliable but it gives a good indication but it can’t be wholly relied upon. Regardless, looking at these statistics it undeniable that there is a big gap between the richest and poorest in the UK, both when looking at wealth and income. When compared to other countries which are members of the organisation of Economic cooperation & Development, the UK is the seventh most unequal country.

So why is there so much financial inequality? Well Simon Tilford, deputy director of the Centre for European Reform, says the UK has 3 major issues which lead to income inequality. A lack of skills, issues with infrastructure and affordable housing and the centralisation of power in London. Studies show that income has a major impact on the education children receive. The social market foundation compared the results of children who received free school meals to those who didn’t. They found that 33% of those receiving free school meals achieved 5 or more A*-C grade at GCSE, whilst 61% of their more well off classmates attained 5 or more A*-C’s. The issue continues further into education with 21% of people entitled to free school meals going to university, compared to 85% of people who attended private schools. Generally children from richer areas have been shown to do much better academically which goes on to fuel the next generation of inequality.

Tilford also pointed towards issues surrounding infrastructure and housing. The housing market used to act as an escalator, to help people grow their wealth and attain more however as a result of the housing crisis in the UK more and more people aren’t able to afford to buy their own homes. The average first home in the UK requires a mortgage deposit of £35,355. 95% of renters don’t have the funds to pay a deposit that high. As such they aren’t able to get on the housing ladder and aren’t able to start accumulating wealth by investing in property.

These two factors are combined with the issues created by the centralisation of power in London. This is that a huge number of large companies primarily operate out of London and as such a lot of talent and business is drawn to the capital, pulling people away from other areas of the UK.

These 3 reasons aren’t the only factors, the UK tax code is the longest in the world with over 1,000,000 words in length. Richer people are more able and likely to employ people to find loopholes in the tax code to save them money. Similarly the UK’s complex planning laws mean that large houses aren’t built aside from large corporations. The UK income tax laws only tax certain kinds of income and largely doesn’t tax wealth earned from real estate or company growth this means that those who are already wealthy often aren’t taxed on the money that they make when their wealth grows. These are merely a small sample of reasons why the poorest in society struggle to increase their wealth, while it seems easy for those at the top to get richer.

As a response to these problems, we need to take action. To solve the issue regarding education, more funding is needed to be invested into the education sector. As of now 12% of total public service spending is invested in education, approximately £39 billion, however inflation has meant that funding per-pupil has fallen. Experts have stated that about £1.3 billion pounds more is needed to be spent on education in order to raise the funding per pupil to what it was before.

To reduce housing prices we need to build more homes. More homes means that supply increases and prices decrease. There needs to be a major drive by the government to get genuinely affordable homes of this kind built given the chronic lack of supply of such accommodation. In 2010 36,000 social rented homes were started with government subsidies. Last year just1, 000 such homes were started. The government should go back to putting direct subsidy into building social rented homes by means of grant-aiding housing associations for this specific purpose.

Regarding the centralisation of power in London, the government have already seemed to have taken action with the construction of the HS2, a high speed railway that plans to link London with areas in the North, including areas such as Birmingham, Leeds and Manchester. The HS2 plans to increase the economy of northern England as workers can commute quickly to the south to work and to the north to their homes.

The issue of income inequality is undoubtedly a severe and growing issue, however we have the ability to prevent it from becoming worse.

Cite this paper

Problem of Income Inequality. (2020, Dec 09). Retrieved from https://samploon.com/problem-of-income-inequality/

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