The inequality distraction

Wednesday December 14, 2011

Eamonn Butler argues that the key to reducing poverty is for government to get off people’s backs

There have been a lot of stories around on inequality. First came some OECD figures suggesting that the rich-poor gap in the UK was both wide and widening. Then a British Social Attitudes survey which revealed that people in the UK were increasingly reluctant to pay higher taxes to provide benefits for the poor, whom they increasingly see as lazy and feckless.

If you listened to many commentators, you might well think that inequality or the pay gap was responsible for everything from riots to drugs and even girlfriend trouble. It’s actually poverty that’s the problem, not inequality. Actually, the rich/poor statistics have been pretty well flatlining for the last 25 years. A minor change, particularly in these difficult economic times, doesn’t imply a long-term trend. Remember too that take-home pay is only the half of it – in the UK we have a generous welfare state, free education and healthcare, and much else – which greatly equalises the lifestyle we enjoy. And the facts simply don’t prove that ‘unequal’ societies have worse health, longer working hours, more teen pregnancies and so on. ‘Equal’ Scandinavia suffers high rates of divorce, crime, alcoholism and mental illness, while ‘unequal’ Singapore and Hong Kong perform better on almost every such measure. There are complex cultural reasons for these differences, and you can’t just blame ‘inequality’.

A remarkable finding in the British Social Attitudes survey was that, while people recognised the UK’s income inequality, two-thirds of respondents didn’t think the government should try to do anything about it – far more than said that a decade ago. Perhaps they figure that times are bad enough and they don’t fancy the inevitable redistributive tax grab on their pay packets. But of course, they are right. You don’t make the poor rich by making the rich poor. You do it by unleashing enterprise, job-creation and creativity. Most people in the Sunday Times Richlist are there because they have built up their own business (creating jobs and prosperity for others on the way), not because they have inherited their wealth. We need more people like that, not fewer.

Government is in fact the problem, not the solution. For a start, employers are scared stiff of hiring new people, particularly inexperienced people, and particularly when times are so uncertain. Hire the wrong person and it can cost you tens of thousands of pounds, and a great deal of worry, to part company with them. Then there is all the tax paperwork, and the national insurance you have to pay on every employee. Plus all the workplace regulations that – especially if you are a small company, as most are – radically reduce your ability to manage your workforce effectively. Then there is the minimum wage, which explains much of our youth unemployment. In these difficult times, employers simply won’t take on kids with no experience of the habits and culture of work, or skills for the job, preferring instead older workers who come with all those things. Meanwhile, we trap people in sink estates where youngsters grow up never actually knowing anyone who has ever had a job.

So the Great British Public is right. Higher taxes will only drive jobs from the UK, and thwart enterprise and job-creation. The best anti-poverty programme is a paying job, not a welfare benefit. Government needs to stand out of the way – take the poorest out of tax entirely, and reduce the taxes and regulations on small businesses. I’m certain that politicians would be astonished, if we did that, how quickly the UK economy would revive.

Dr Eamonn Butler is Director of the Adam Smith Institute