Across a range of indicators from child poverty to business investment, the UK ranks below other countries in Europe. Felix FitzRoy and Michael Nolan present an overview of the current state of affairs and argue that a change of direction is long overdue.
Nominally progressive income tax is the single biggest source of government revenue in the UK, and together with “national insurance contributions”, also an income tax under another name, yielded £336.4 billion revenue in chiefly pre-pandemic 2019/20 (about 40 per cent of public sector receipts). However, regressive indirect taxes – VAT, Council Tax, and business rates – raised £200 billion, with their relatively largest effects being on lower income groups. Numerous allowances, reliefs and thresholds – amounting to £425 billion – mainly benefit high income households, and thus undermine progressivity.
The March 2023 Budget proposal to abolish the £1.073 million lifetime allowance – which currently serves as an upper limit for tax-free pension contribution – is a further illustration of the apparent prioritisation of the interests of a small rich minority. ONS data show that the ratio of all taxes to total income (including cash transfers and benefits in kind) was about 31 per cent for both the lowest (first) and the ninth equivalised household income deciles, because the highly regressive impact of indirect taxes and allowances balanced the effect of declining marginal income tax rates.
The most vulnerable are hit hardest
One consequence for the UK is relative child poverty that is the highest in western Europe by most measures, and that has increased substantially compared to the late 1970s (see Figure 2.10 in Francis-Devine and Orme (2023)). In England, no less than 25 per cent of adults and 31 per cent of children were officially below the poverty line of 60 per cent of median income after a decade of austerity, and before the impact of the pandemic and energy price inflation.
Child poverty has long-lasting negative effects on wellbeing over the whole life course, and the UK has the second-lowest ranking for child welfare among rich countries, after the US. Child benefits offer only about £1,885 per year for two children and – as Lansley notes, the poorest 20 per cent of Britons are between a fifth and a third poorer than their counterparts in several European countries, including Germany and France. Most recent World Bank data show the income share of the bottom 10 per cent as 2.6 per cent in the UK, 1.8 per cent in the US, but 3.8 per cent in Denmark.
Worryingly, the poorest 5 per cent have suffered the most, via a 15 per cent decline in income (after housing costs) for 2012-19. Income of the bottom 5 per cent in the UK was only about two thirds of the developed country average in 2020 but was nearly twice the UK figure in egalitarian Norway; meanwhile, the 5th to 50th income percentiles in the UK also lag behind peer countries, while top incomes are similar and have grown faster since 2007/8. Looking more broadly, on England’s deprivation for the recent period 2018-20, there is a chasm of roughly 19 years in healthy life expectancy, for both men and for women, between the most prosperous and most deprived areas (by decile).
As the most unequal nation in western Europe, it is perhaps unsurprising that the UK is only 17th in the World Happiness Report 2022, tucked in behind Germany, Canada, and the US – although the UK is three places ahead of France. Meanwhile, five of the top eight places in the World Happiness league table are occupied by Nordic countries – with Finland just ahead of Norway at the top. It is also interesting to note that Finland has a top rate of personal income tax of 56.95 per cent. Denmark and Sweden also have top rates above 50 per cent, whilst Norway’s seemingly anomalously low 38.2 per cent is probably a reflection of the impact of its oil revenues. All of these countries rank ahead of the UK on the purchasing power of their GDP per capita.
How a lack of investment takes its toll
Having been at or above mid-table amongst G7 countries for business investment (as a percentage of GDP) across 1995-2005, the UK has spent almost all of the post-2008 period rooted in last place. Against traditional expectations, most of these years have been a time of Conservative-led UK governments – and it will be interesting to see the net impact of the March 2023 Budget’s corporation tax rise (from 19 per cent to 25 per cent) and the new (initially for 3 years) “full expensing” facility to write off certain capital equipment costs against taxable profits.
As Elliott has noted, the current UK crisis has many dimensions – such as cost of living, energy and housing – but lack of investment typically lies at the roots. He also mentions a view of efficiency that has led to the cutting of capacity, and bitter practical experience indicates that such an approach was short-sighted. The data on international comparisons of hospital beds per head of population offer a pointed topical illustration.
For seven out of 11 health and healthcare indicators, the UK does worse than any other G7 country except the US, and the UK is next to last or last for two more of those 11 indicators. These problems were further highlighted by the recent COVID-19 pandemic. Evidence to date on its impact indicates a higher rate of excess deaths for the UK, and also a more sustained negative impact on the size of the economy, compared to other advanced countries.
The pandemic also showed up difficulties caused by low sick pay in the UK – the serious consequences of which have impacts on employment, health, and society. Despite some variation in the figures calculated for the “replacement rate” percentage of average earnings which UK Statutory Sick Pay (SSP) provides, there is a clear message that UK SSP is not generous – for example, compared to many other advanced economies or OECD countries. As well as only providing 20-25 per cent of average gross weekly earnings, UK SSP has traditionally not been payable for the first three days of a sickness absence – which was a particular problem during the COVID-19 pandemic). Moreover, those that earn the lowest average weekly wages (less than £123 in 2022/23) do not qualify for it at all – this lower earnings limit is especially likely to impinge on part-time workers.
Wealth inequality is even greater than income inequality, with 43 per cent of total national wealth held by the top 10 per cent of GB households, and nearly 49 per cent when deciles are constructed based on individuals. By contrast, the bottom 50 per cent of households held just 9 per cent of all wealth. Billionaire wealth increased by more than ten times, from £53.9 billion in 1990 to £653.1 billion in 2022. Over a similar period, the trend described by Corlett and Leslie involves GB household wealth having risen more than twice as quickly as national income. The single largest contributory factor has been capital gains for home owners (just from their main residence) – and this at least raises the issue of whether capital gains on main residences should be taxed, and also when (perhaps not just upon sale, or at the asset owner’s death).
All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science.
Image credit: photo by Dean Chahim, Attribution-NonCommercial-ShareAlike 2.0 Generic (CC BY-NC-SA 2.0)
