Economic inequality and recovery

DOI: https://doi.org/10.58248/HS34

Overview of change

Over the past decade there has been stagnation in productivity – how much is produced for every hour worked.¹ This has raised serious concern for future economic growth, wage prospects and living standards.^2–4 UK income inequality – where income is unevenly divided across households – is high by international standards, measured by the Gini coefficient, having risen steeply during the 1980s.⁵ However, it has remained at a roughly similar level since the early 1990s.^6,7 The wealth of a society and the distribution of wealth within that society both strongly influence population health.⁸ For example, Gross Domestic Product (GDP) influences life expectancy and infant mortality.⁹ Income inequality is associated with reduced life expectancy, increased infant mortality and obesity, and higher levels of violent crime and murder.⁸ Many experts are concerned that the COVID-19 outbreak will widen economic inequalities in the long-term and interact with many pre-existing inequalities, including gender, ethnicity, age and geography.^5,10 The UK Government has set out plans to drive long-term productivity growth to ‘Build Back Better’.¹¹ Many stakeholders have called for policies to restart the economy to also support an equitable recovery that addresses economic, social and environmental inequality.¹²

Challenges and opportunities

The COVID-19 pandemic has resulted in a severe recession and UK GDP fell by 9.9% in 2020.¹³ In total, the Office for Budget Responsibility (OBR) estimates that UK Government spending on support measures associated with the pandemic, including support to workers and businesses, will cost £344 billion over 2020/21 and 2021/22.¹⁴ There are divergent views over how quickly the economy will recover once restrictions are eased, but the average forecast among economists is for GDP growth of 4.3% in 2021.¹³ Many households have been protected from the economic impact of the pandemic by government support, including the Coronavirus Job Retention Scheme (CJRS, ‘furlough’), Self Employment Income Support Scheme (SEISS) and increases to Universal Credit (UC) and Working Tax Credits (WTC). Some analysis suggests that income inequality narrowed slightly in the early stages of the pandemic, in large part because of these policies.^15,16 However, incomes have generally fallen since the start of the pandemic and, while the proportional drops in incomes across different households may be relatively even to date, the consequences of those reductions are being felt much more acutely by lower income households. This is because lower income households are more likely to have spent savings or borrowed money to cover everyday costs such as housing and food, whereas higher income households are more likely to have added to their savings through reduced opportunities for eating out, holidaying and other leisure activities.^15,16 Some groups may be more at-risk of worsening circumstances, such as single parents, households where children are in receipt of free school meals, people from some ethnic minority backgrounds and those living in economically deprived areas.^10,17 The pandemic has also had unequal impacts across generations.¹⁸

The OBR forecasts that, following the closure of the CJRS and SEISS, unemployment will rise by 500,000 to a peak of 6.5% at the end of 2021.¹⁹ Research by the Institute for Fiscal Studies suggests that workers whose livelihoods look most at-risk already tended to have relatively low incomes, and were relatively likely to be in poverty, prior to the onset of the pandemic.²⁰ Combined with the withdrawal of the uplift to UC and WTC (initially due to end in April 2021, now extended to October 2021 for UC), some analysis suggests that pandemic-induced living standard downturns for households will peak in 2021–22, especially for those on lower incomes.^15,21 Experts suggest that some UK regions may experience greater deprivation, including a higher loss of public facilities and community spaces.²² Projected increases in income inequality are likely to compound demand pressures on public services caused by population changes, especially in geographical areas of deprivation. Unequal access to public services can compound health, social and economic inequality.²³

The UK Government has set out plans to stimulate short-term economic activity and drive long-term productivity growth to ‘Build Back Better’, through significant investment in infrastructure, skills and innovation.¹¹ Many stakeholders have called for policies to stimulate economic activity while supporting a more sustainable and equitable recovery. They argue this will enhance the resilience of economies and societies, and tackle social, environmental and economic inequality.^{12,15,24–30} There has been increased debate about how to improve the conditions of people’s lives, as well as to tackle inequality. This includes reforms to the social security system.^31,32 Some experts have called for changes to the taxation of inheritance, capital gains and intergenerational gifts to prevent advantage gaps accumulating.^33,34  There has also been increased debate about the pros and cons of Universal Basic Income and Universal Basic Services.^32,35–38 Some experts have questioned the reliance on growth in GDP as the most important determinant of political and economic success and called for a shift towards a well-being economy, in which pursuit of well-being takes precedence over pursuit of growth in GDP.^29,39–41 This could include alternative measures of the health and progress of economy and society that capture well-being and regional, community and household inequality.^{39,40,42–44}

Key unknowns

Raising productivity levels across the UK is a concern for many businesses and policy makers, but tackling it is a complex ‘wicked’ problem with no easy solutions.45 Experts have raised questions about how the UK will fund COVID-19 stimulus packages in the long-term.22 Assumptions underlying projections of income inequality will be shaped by future changes in policy and global trends.

Key questions for Parliament

• How has the COVID-19 pandemic affected economic inequalities and what impact is it likely to have over the next 5–10 years?
• Which households, communities and regions are likely to experience the most disadvantage? What policy actions could be taken in the immediate and medium-term to mitigate disadvantage in an economically sustainable manner?
• How can we better understand, measure and enable improvements in productivity across the whole of the UK, to improve living standards and well-being? What opportunities does the pandemic present to improve productivity, for example, through more flexible working arrangements and skills and training provision?
• How can private and public investment increase resilience?
• Can/should we rebuild more equitably? What policy pathways are likely to bring about more equitable and sustainable results in the long term? What policy experiments and data are there to guide us?
• What are the limitations of using GDP to assess economic and social progress? What can alternative measures tell us about the health of economy and society?

Likelihood and impact

High impact and high likelihood with some impacts being felt now but others over a 5 to 10 year timescale.