Is the UK becoming more unequal?
When New Labour came to power, the party promised a fairer and more equal society. But this week it was revealed that in the time the party has been in office, chief executives have seen their pay stretch to almost 100 times that of the average employee, “a gap unprecedented since the rise of modern taxation”, says Simon Jenkins in The Sunday Times. The news came hot on the heels of a National Audit Office report, which revealed that almost a third of the UK’s 700 biggest businesses paid no corporation tax to the Government last year. It’s all grist to the mill for trade unions who are becoming increasingly strident amid attempts by the Government to keep public-sector pay rises to around 2%, barely keeping up with inflation.
What’s driving this inequality?
Partly the financial services boom. This has seen income balloon in the sector, particularly at the top of the tree. According to the Office for National Statistics, bonuses increased 24% last year overall to $14bn, double last year’s rise (see page 30 for the ten best-paid directors). As Tessa Thorniley in The Independent on Sunday points out, with a large chunk of those bonuses ploughed into London property, many of the capital’s homeowners have become millionaires several times over, outstripping gains in other areas, notably the North. Wealth inequality in Britain is now almost twice as high as income inequality – largely due to this disparity in house prices.
Are these huge bonuses justified?
Questioning top executives’ pay is a sticky issue, not least because Britain now relies on financial services for a third of its income and nobody wants to scare off the geese that lay the golden eggs. If British firms didn’t pay top executives so royally, argues Richard Lambert in The Sunday Telegraph, then they wouldn’t attract the talent and London’s status as a financial capital would be in jeopardy. Then there’s the argument that the spoils of the City will “trickle down” into the rest of the community once it’s spent in restaurants, car dealerships and tailors. But even so, the process by which pay decisions are made is deeply flawed. The consultants who decide what an executive is paid have just as much of a vested interest in inflating incomes as any headhunter or senior manager. Just four accountancy firms control large-scale audits in the City, says Jenkins – “everyone scratches everyone’s back”. Despite the rise in shareholder activism over the last 20 years, there is still a serious leakage of money from businesses into directors’ pockets, as Jenkins puts it.
So should the tax system be changed?
Not so fast. Executive pay is ultimately an issue for shareholders. And to be fair, the Government has presided over a relatively progressive tax system, says Lambert. The income of the richest fifth of the population is around 16 times the poorest 20%, but that falls to 5.5 times once income is taxed. Meanwhile, the fact that a third of firms avoided corporation tax can be accounted for by the fact that many earn profits abroad and so pay corporation tax in foreign countries. They also earn significant tax credits for putting cash into pension funds. But there are other areas of the tax system that do promote inequality and should be addressed.
What areas are these then?
Very lenient non-domicile rules effectively mean that foreign nationals in the UK can avoid tax on most of their earnings. This has lead to the country becoming a tax haven for foreign multi-billionaires. In fact, the International Monetary Fund classed the UK alongside notorious havens such as Bermuda and the Cayman Isles in a recent survey. Thus the high end of the British property market has been flooded with petrodollars and the spoils of Russian oligarchs – putting the top houses out of reach of even City workers. Estate agent Knight Frank reckons that 50% to 60% of homes costing more than £3m are bought by foreign nationals, who are also able to avoid the hefty 4% stamp duty on such purchases via tax loopholes. Labour has presided over a 74% jump in those escaping tax by claiming ‘non-dom’ status between 2002 and 2005, with some of the City’s top earners also avoiding tax this way. Private-equity executives have also taken advantage of lower tax bands designed to help entrepreneurs, with one executive admitting that he pays less tax than his cleaning lady. If Labour remains soft on tax avoidance while asking workers to shoulder the fight against inflation, says Jenkins, they will be playing a high-stakes political game.
Could the income gap lead to social unrest?
Could the wealth gap lead to rioting in the streets, as suggested by Sir Ronald Cohen, founder of private-equity group Apax? Well, we’re probably not on the cusp of a Marxist revolution just yet. But when public-sector workers in Ireland became disgruntled with stagnant pay in the late nineties – the public sector had agreed to accept wage freezes under social partnership agreements in the 1980s but felt frozen out of the economy once it boomed – it set off a spiral of labour disputes and caused major disruptions to the economy. The nurses’ strike in 1999 brought Dublin to a standstill. And this was followed later that year by teachers, bus drivers, and train drivers, eventually leading to a standoff between unions and the electricity supply board. With prison officers and tube drivers striking this week, Labour would do well to take note. After all, says Simon Jenkins, few want to go back to the bitter divisions of the 1970s.