We should all be concerned about inequality

Whatever your view on how unequal a society should be, the current levels of inequality in Britain are a cause for concern.

Britain’s top one per cent accumulated a quarter of all new wealth over the previous 15 years, according to Credit Suisse figures published last year.

Whatever your view on how unequal a society should be, the current levels of inequality in Britain are a cause for concern. They’re at the base of the rising levels of private debt that put the economy in a dangerous position.

Private debt levels are now at a record high, which is arguably a bigger and more immediate threat to the economy than public debt.

The wealth inequality gap appears to be widening and this in turn has an adverse impact on household indebtedness.

Today let’s dig a little deeper into the reasons why inequality is growing and how it causes private debt to rise.

Gains are going one way: upwards

While those at the very top have been topping up their incomes, it’s a different story for those further down the ladder.

Just compare the 205 per cent gain the FTSE 100 has made since its post-crisis low to the fact that real wages shrunk more than ten per cent between 2007 and 2015.

On top of this, four out of five low-paid workers are unable to escape low pay after ten years, according to a Joseph Rowntree Foundation report published last September.

Stagnating wages are a problem, particularly if everything else is getting more expensive.

If people’s incomes fall relative to what they need, it doesn’t mean demand goes down; it means demand is increasingly funded with debt.

Take the property market. When the richest invest their money in the feverish housing market and blow up house prices, it requires people who aren’t flushed to take on more debt to own these assets.

“Increasingly, people have come to rely on property as their main ‘safe asset’,” Frances Coppola writes on open Democracy.

“But property is not a ‘safe asset’. A house is first and foremost a place to live. It should not be a primary store of value. But that is what it has become.”

Clearly this puts young people at a disadvantage because they now have to take out higher mortgages – or indeed might not be able to afford their own home at all.

To counter the trend of houses being used by the rich to park their wealth, property prices need to come down.

Coppola suggests that Britain’s class divisions play a big part in perpetuating inequality as well.

“The asset-less have no assets to pass on. Their children inherit nothing, and in turn pass on nothing.

“In contrast, the children of the asset-rich inherit wealth they have not earned, and in turn pass that on to their children.

“The divide between those who have wealth and those who do not is set at birth and remains for life.”

Government policy over the last decade doesn’t seem to have helped close the gap. If anything, it probably made things worse.

Austerity policies have driven people towards borrowing greater amounts. Cuts to social security simply shift the burden from the state to the individual.

Since the richest groups can opt-out of public services to get, for example, private healthcare, it’s the poorest that are disproportionately affected. Either they cannot afford healthcare or they have to incur debt to pay for it.

“Household debt is directly promoted as replacement for welfare provision – the debt safety-net – where debt is downloaded onto households with the stated aim of reducing public debt,” writes Johnna Montgomerie of the University of London.

“Austerity policies mean households take on ever more debt to replace the lack of government services and provisions for households. Debt is now the main safety-net for households to cope with unexpected events or emergency.”

Then there’s the exponential rise in low-wage, insecure jobs.

The rise of the gig economy – the trend that employment is increasingly based on short-term contracts or freelance work just like musicians live from gig to gig – is having an effect on people’s livelihoods.

“It bids down wages. It makes working lives episodic. It displaces risk on to ordinary people, a source of growing stress and mental ill health,” Will Hutton argues in the Guardian.

“Gig work does not come with pensions, sick pay, holiday entitlement and parental leave. Mortgage companies are wary about lending to people with insecure work.”

Let me sum that up: no stable income, fewer perks, higher mortgages (or no mortgage at all and renting forever).

It’s enough of a challenge for this group of people to make ends meet, never mind save money for a rainy day.

It doesn’t allow them to build up any form of wealth. Not in the present in the form of savings, nor in the future in the form of pensions.

So when the chips are down, if their incomes fall or can’t keep pace with higher rent and food prices, borrowing may become their only resort.

There’s therefore an unmistakable link between inequality and private debt.

On Radio 4’s Today programme, economist Amartya Sen admitted that there’s no ‘one magic bullet’ to overcome inequality. Maybe so, but governments would do well to work towards closing the inequality gap.

Even if they’re unwilling to do so out of moral principles, they should at least pursue this goal out of economic pragmatism, for the private debt that inequality bolsters will ultimately put the entire economy at risk.

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