Introduction

Our analysis of the current state of wealth and income inequality in the UK, and the choices that any future government will face in grappling with these challenges

However you cut it, there are high levels of wealth and income inequality in the UK.

If we compare ourselves to the G7 – countries that we usually consider to be our peers in terms of living standards and economic opportunity – we have the highest level of income inequality apart from the United States. At the same time, our absolute wealth gap – the gap in average wealth between our richest 10% and the poorest 40% – is the second widest in the OECD, with only the USA's (again) being greater.

Source: OECD (2023), Income inequality (indicator). doi: 10.1787/459aa7f1-en (Accessed on 18 August 2023)

From this zoomed-out perspective, it doesn't look good. And the picture doesn't get any better when you zoom in. Income and wealth are distributed highly unevenly between both demographic groups and places within the UK. Median incomes – and especially household wealth – vary throughout the country, in ways that seem remarkably persistent over time. And, the richest are very rich: the top 1% of income earners take home nearly 13% of the UK's total national income.

Added to which, households headed by a person from most minoritised ethnic groups (with some limited exceptions) have substantially less wealth on average than the white British majority.

These facts make for uncomfortable reading. We know that disparities in income and wealth have real and material impacts on people's lives, affecting their ability to save, own a home or afford rent, access basic goods and services and pass on opportunities to their children.

All major parties heading into the UK general election have focused on economic growth. The challenge posed here is huge, as our analysis has found. But arguably as vital as whether that growth is achieved or not, is the question of who should gain from that growth. More broadly, we should also ask ourselves whether high levels of inequality are desirable or inevitable, and whether it's fair that people's chances are determined by their parents' circumstances. Addressing high levels of inequality isn't easy but it will be necessary, becoming more urgent as we look to 2040.

To understand the choices that any future government will face, we, together with the Resolution Foundation, did three things. First, we took a hard look at the fundamentals of wealth and income inequality. Then we conducted a Delphi exercise (see Annex 2 for more detail), where we surveyed people deeply engaged in thinking about wealth and income inequality, as well as its impact on people's lives. Finally, we convened a group of experts to talk through the big choices.

Inequality is, of course, much broader than the issues of income and wealth. Here we focus on income and wealth as core facets of economic inequalities, but inequalities are emerging as a key theme interwoven throughout all our UK 2040 Options workstreams, whether they're in our healthcare system, our schools, or our transition to net zero. As we think about the changes that lie before us, a core question for our work is: what policies could help make the UK a fairer place to live in 2040?

What we learnt

Symptoms or cause? Our experts say both, please

The responses to the Delphi exercise (see Annex 2 for a full explanation of this process) from those who are deeply engaged in thinking about economic inequality show the breadth of the challenge ahead for Government.

The full list of 38 issues includes different facets of high inequality (such as excessive top pay, or high levels of poverty and deprivation), structural drivers of inequality (such as unequal access to educational opportunity, or the lack of worker representation on company boards) and undesirable consequences of high inequality (such as growing health inequalities, a lack of social mobility, or political polarisation). Participants also highlighted areas of policy that either contribute to high inequality (such as the UK's system of wealth taxation, overly restrictive family and child benefits, or the insufficient support for households with disabled members) or make the impact of inequality more damaging (such as poor transport infrastructure, or the limited availability of free childcare). It shows that this is not an easy challenge to define.

Many we spoke to highlighted that there needs to be as much of a policy focus on reducing inequality as there is on mitigating the impacts of that inequality on people's lives. In fact, reducing the gap between the richest and the poorest was ranked seventh as an issue to address in its own right (when participants were asked about the impact of inequality on outcomes).

Of the top three issues that emerged, two could be defined as both symptom and cause. The first is the issue of low pay and insecure work, and the second is the lack of affordable, quality housing. The former instinctively feels like a cause, but is also a symptom, with those stuck in this kind of work often lacking the power or resource to do otherwise. The latter feels like a symptom, but is also a cause, with poor, unaffordable housing exacerbating an individual's circumstances. The final of the trio is insufficient and overly restrictive unemployment and income benefits a driver directly amenable to policy change.

Participants in our workshop agreed that although there would always be some level of income and wealth inequality, they considered the scale in the UK to be excessive. A choice for the next government will be how much it attempts to shift the focus from the visible consequences of inequality to tackling the gaps themselves.

Tax is key and ripe for reform

In the UK, wealth has grown at a rate that has eclipsed GDP growth. National wealth – a mix of financial, property and state assets – at last measure stood at seven times the size of the economy, over double what it was in 1991. This is not a result of households actively saving. Instead, much of this wealth is 'unearned'. It results from, for example, passive capital gains at a time when productivity growth has been stagnant. This has widened the wealth gap: total wealth for the richest 10% (shown in the graph below) has grown by nearly 25 times more than wealth grew for the bottom 30% between 2006-2020.

A major concern in this conversation is the growth in wealth and the inequalities that come with it. One of the major choices the UK Government will face is the extent to which policy addresses this. This challenge is not straightforward politically or in terms of policy options. Wealth was repeatedly raised as the core issue, but our experts more readily had income-related solutions to suggest, and the debate about a wealth tax isn't easy (which might help to explain why the Labour party has recently ruled it out.)

However, what was clear was the need for the Westminster government (and devolved governments, when it comes to the taxation of housing) to take a good look at the tax powers it has at its disposal: our experts felt the benefits would be plentiful if it were better set up to tackle these inequalities. Better, more effective and fairer taxation was considered the most impactful tool in this space. As one participant pointed out, the Delphi contained so many suggestions on tax and redistribution because "that is what can make a real difference".

As we have heard throughout our UK 2040 Options work, many parts of the tax system are unfair or ineffective. At the same time, there is evidence that public attitudes towards wealth taxes are shifting, with more people supporting tax rises than one might expect, possibly because they can see the extent of the problem.

Despite the difficulties of reforming the tax system, there are choices. A reformed capital gains tax, for example, was described by one participant as a “no-brainer". The experts we spoke to raised equalising the tax treatment of earned and unearned income (or income whatever the source), as some of the most impactful policies that the next Westminster government could do early to reduce wealth and income inequality.

It feels tricky, but recent history shows us that change is possible

Although measures of income inequality have shown little change since the early 1990s, that does not mean that the relative fortunes of different groups have stayed the same. While politically difficult, change is possible, and it's happened before. In the early 2000s there was a clear policy focus on reducing the number of pensioners in poverty. This was in response to a widespread concern that the state pensions did not keep track of our country's growing affluence through the 1980s and 1990s. This focus built cross-party support for, among other measures, pensions to be linked to earnings, and helped to shift the dial on poverty within this demographic. Other factors, such as increased pension saving among baby boomers also contributed to the trends shown in the graph below: falling rates of relative poverty among pensioners in recent decades.

Source: Institute for Fiscal Studies - Living Standards, Inequality and Poverty Spreadsheet

Similarly, the national minimum wage, once thought by some to be unimplementable, is now considered to be one of the UK's modern policy successes. It has made a big difference to wage inequality, and a huge difference to the fraction of the workforce on low pay.

One of the biggest questions therefore is: what should the next policy focus be, and where can we build a consensus-driven approach for meaningful reform?

Our experts had a number of suggestions. One concern was that the large falls in pensioner poverty look to be under threat, as newly retired workers become less likely to hold the generous defined benefit pension schemes. To counter this, they said that enhancing auto-enrolment, where employers are required to enrol their employees in a workplace pension scheme, was a clear winner, as well as extending it through to groups that are not already covered. It will become even more critical that employers share in helping people save for retirement as our population ages, with the number of people of pension age projected to rise by 30% to 15.5 million by 2040.

They also discussed the need to shift the policy limelight and focus on working age benefits. The rising trend of the 'working poor' was identified as a concern. As one expert put it, “we made the case a number of generations ago that pensioners should share in the nation's prosperity, now we need to make the case for working age populations”. Here, our experts discussed the fact that current benefit levels are inadequate, and have been set without robust consideration for what a household needs. The evidence backs this up: the current basic rate of Universal Credit is at the lowest-ever level as a proportion of average earnings. This, of course, impacts children as well as adults, with the rate of children in relative poverty continuing to remain persistently high.

The world is changing, bringing new challenges for inequality: policy must keep up

As one of our experts put it, “the problems and the solutions can sit there as a list of bullet points, but the context that they sit in is a rapidly moving and quite frightening one". Changes in the structure and size of the economy, technological advances and demographic changes have all had an impact on inequality in the past, and will in the future, too.

For now, one key theme that emerged was changes in the labour market. Access to decent work, with consistent hours and fair pay, is now a requirement for sharing prosperity and tackling wealth and income inequality.

Insecure work and low pay was ranked as the number one issue by participants in our survey. One of our participants called out low pay and insecure work as “the devil" stating that “the knock-on effect of low pay [on people's living standards] is phenomenal”.

The UK's labour market has low unemployment and a high national minimum wage: two elements that stand in its favour. But at the same time, it has some tricky and long standing structural issues. Wages have been stagnant in real terms since 2009, which is contributing to widening inequality between the middle and the top of the pay distribution. Insecure work is now rife, with employment arrangements that can exacerbate this problem, such as zero-hour contracts, now widely used. And, at the same time, there are exploitative or unlawful employment practices in some sectors.

Source: ONS Data

But while it was the top issue raised in our Delphi, very few of the interventions proposed addressed how the Government should tackle insecure work and low pay. As one participant pointed out, this could be because “there isn't really a clear idea of the things that we can do". The blight of insecure work also had not, until very recently, featured high on the political agenda. Here, one participant hypothesised that this could be because "it's not simple, and the structural drivers of these parts of the labour market are complex".

Given the competitive advantage employment arrangements that exacerbate low pay and insecure work can grant employers, it is highly unlikely that this is a problem that the market itself will fix. The Government will have choices: experts discussed focusing on labour market institutions, such as implementing sectoral agreements covering fair pay and other conditions, and looking again at union relationships. Beefing up employment regulation and enforcement to better protect workers could also have an impact.

Another issue that has recently risen to the top is the UK's transition to net zero, with one participant stating that “even if inequality isn't on the agenda of politicians, considering the impact that these policies will have on different groups will be critical for politicians who seek to implement them”. We know that the transition will impact groups very differently: it was on the radar of all in the room that the inequity in the transition will be at the forefront of the debate around net zero.

The political discourse on wealth and incomes is challenging, but Covid-19 has shown us that collective action is possible

Regardless of the solutions our experts were advocating for individually, there was agreement that the political barriers to meaningful change are plenty and will take work to overcome.

There are different dimensions to this. Participants spoke about how they felt that there had been a shift in recent decades from a collective mindset to a more individualistic culture – and that this impacts on policy. One clear exception to this was the Covid-19 pandemic, which made the country feel that we were in this together, and during which time the Government was able to carry out much bigger and more radical interventions (such as furlough) without significant opposition. But, despite predictions made at the time, this spirit of collectivism does not seem to have persisted. Part of the challenge for the Westminster Government in making meaningful change is re-capturing this, in order to get public consensus for more radical policy. Some argued that public deliberation techniques are under-used in this space in the UK and could (if used effectively) make a real difference.

A more concerning discussion was whether our social and political institutions, including the media and our rules of democracy, act to lower political engagement and the representation in discourse of those in poverty or suffering from disadvantage. The very wealthy, by contrast, find that financial resources can lead to political power.

There may be a case for seeking structural or institutional changes to help equalise the power imbalances that can come with economic inequalities. Suggestions included reforming our political structures (such as moving away from first past the post) through to implementing Future Generations Acts. Legislation that actively considers the future could help tackle the short termism that is often baked into Government decision-making, and also help to reduce income and wealth inequality by focusing on the long term.

Conclusion: sharing the UK's prosperity

Achieving a more evenly distributed standard of living across the UK will require difficult decisions and face political challenge. As we identified, these choices cover complex relationships between the most challenging aspects of our policy landscape, including between our political structures, labour market and tax system.

This work also surfaced the positive – there is no inevitability to the current state of income and wealth inequality in the UK. In the recent past there are examples of policy choices that make the UK more equal: the next government could make similar strides, should it choose to tackle the problem head on.

The UK 2040 Options project will be tackling some of these choices and debates, through considering policy options in more depth, in the next phases of our work.

Roundtable participants

We sincerely thank our workshop participants for their time and contributions. Please note that not all participants will have agreed with all the discussion points above.

• Alex Beer - Nuffield Foundation
• Alfie Stirling - JRF
• Ashwin Kumar - Manchester Metropolitan University
• Baroness Louise Casey
• Carys Roberts – IPPR
• David Halpern – the Behavioural Insights Team
• Karen Rowlingson – University of York
• Michael Vaughan – the London School of Economics and Political Science
• Mike Brewer – Resolution Foundation [Chair]
• Mubin Haq - Abrdn Financial Fairness
• Professor Kate Pickett – University of York
• Will Snell - Fairness Foundation

Particular thanks goes to Mike Brewer for his comments and input on this report, and assistance throughout, as well as Esiri Bukata and William Barlow (Resolution Foundation).

Annex 1: Fundamental facts

Wealth and income inequality: the fundamentals

Annex 2: Delphi detail

What is a Delphi exercise and how have we run them?

Delphi exercises allow us to get collective deliberation from a group of people – in this case it is the most important issues and impactful interventions in wealth and income inequality in the UK.

A Delphi exercise involves asking for expert input or opinion, feeding back what other respondents said, and then allowing respondents to revise their judgements or opinions.

Opinions are kept anonymous throughout.

For this roundtable, our Delphi exercise included two rounds. In round 1, we asked respondents about the issues and interventions that could impact wealth and income inequality, and asked how important each of them are. In round 2, we fed these issues and interventions back to the respondents alongside their average importance score before asking the panel for their final judgement.

Our final results are the average scores given by experts in round 2.

This process can be seen in the below diagram.

Below is the full list of questions asked in the Delphi exercise.

For more on the Delphi method, see information from Rand and the British Medical Journal.

Delphi questions asked

Round 1

1 What are the issues that need tackling when it comes to the impact of wealth and income inequality on people's outcomes in the UK? (free text box) 2 Of the issues you have identified, how important is each for the next government to address in order for it to improve outcomes for people in the UK? (1 - 10 scale) 3 What are the interventions addressing wealth and income inequality that would improve people's outcomes in the UK? (free text box) 4 Of these interventions that you identified, how impactful do you think they could be? (1 - 10 scale)

Round 2

1 Taking into account both your thoughts as well as the average ranking of other experts, please rank the importance of the issues that have been identified below in tackling the impact of wealth and income inequality on people's outcomes in the UK. 2 Below is a list of potential interventions identified by respondents in the first stage that would address wealth and income inequality and improve people's outcomes in the UK. We have provided this list in a random order. Please rank the likely impact you think each of these inventions could have on a scale of 1-5.

The issues raised in the Delphi exercise

Ranked from most important to least important

1 Low pay and insecure work 2 Insufficient and overly restrictive unemployment and income benefits 3 Lack of affordable and/or quality housing 4 Lack of access to quality public services 5 Insufficient wealth taxation including inheritances 6 Unequal access to educational opportunity 7 Too much focus on tackling the effects of inequalities rather than focusing on reducing the inequalities themselves 8 Level of poverty and deprivation 9 Insufficient and overly restrictive family and child benefits 10 Lack of a sufficiently progressive tax system 11 The prioritisation of, and overreliance on, markets in the economy 12 Erosion of democratic structures 13 Insufficient taxation (of multinational companies and the very rich) 14 Need for more free childcare provision 15 Poor transport infrastructure 16 The effects of intersectional inequalities such as ethnicity/gender/disability 17 Excessive pay 18 Health inequalities 19 Distributional impacts of net zero 20 Insufficient worker representation in decision-making 21 The lack of social mobility 22 Insufficient support for households with disabled members 23 Underinvestment in skills/training 24 Lack of consensus on the unit of measure of inequality 25 Too much focus on the short term 26 Divided public sentiment towards the reduction of inequality 27 Racial inequalities 28 The cost of living crisis 29 Current system of housing taxation 30 The impact of the very rich 31 The impact of inequality on the environment 32 Intergenerational inequalities 33 Spatial concentration of individuals on low incomes 34 The complex needs of those on low incomes 35 High crime and low levels of social cohesion 36 Growing political polarisation 37 Low economic resilience in low income households 38 Lack of access to capital for entrepreneurship

The interventions raised in the Delphi exercise

Ranked from most important to least important

1 Income redistribution 2 Reforming the tax system so that the very rich and multinational companies pay more tax 3 Increasing minimum benefit levels to ensure everyone has a decent standard of living 4 Higher taxes on wealth (as opposed to income) 5 Major investment in social housing to reduce burden of housing costs for lower income households 6 A more generous social security system 7 Abolishing the two child limit benefit cap 8 Taxing unearned income the same as earned income 9 A more progressive consumption and income taxes 10 A double lock for ordinary families' benefits linked to inflation and earnings 11 Investing more in public services 12 Increasing the real level of all benefits 13 Increasing the minimum income floor 14 More efficiently taxing property 15 Building mass housing 16 Raising the living wage level 17 Introducing a guaranteed minimum income 18 Ensuring universal access to high quality services, particularly primary care 19 Abolishing the benefit cap 20 A higher minimum wage 21 Increasing the value of means tested benefits 22 Provision of high-quality early years support across the country 23 Removing the punitive aspects of the social security system 24 Increased rights for workers 25 Extension of free school meals ideally to all school children, but at very least to all on universal credit 26 Introduction of Universal Basic Services 27 Moving to a position where at least a third of national wealth is socially owned, for example through a citizen's wealth fund and more co operative enterprises 28 Index linking child benefits and restoring its real value 29 Reforming inheritance tax 30 Legislating on insecure/gig work 31 Repealing the anti trade union laws 32 Introducing a maximum pay ratio for companies 33 Secure tenancies for renters 34 Decommodifying and reversing privatisation of basic services including water, electricity, communication 35 More funding to local authorities 36 Corporate governance reform to curb executive pay packets 37 Reform council tax to make it fairer 38 A simple, clearer, more universal benefit system (such as a people's dividend) 39 Set maximum pay gap between highest and lowest paid 40 Investment in the care system and in kids from low income backgrounds 41 Introducing a land tax (such as Taxe Foncière in France or the equivalent in Germany) 42 Support for child development (see Sure Start) 43 Introducing asset policies to give assets to low wealth people 44 Reform of corporate and financial sectors to be more democratic and abolish shareholder primacy 45 Abolishing private schools and selection at age 11 46 Supporting families at risk of falling into homelessness 47 Decommodifying social care 48 Use of environmental taxes to reduce the impact of the wealthy on the environment 49 Activate and implement the socio economic duty in the Equality Act 2010 50 Better representation and diversity in decision-making 51 Introducing proportional representation in elections 52 Government moving beyond old fashioned, out of date economic thinking to embrace a wellbeing economy approach 53 Gathering better data on those on very high incomes or high wealth 54 Paid carers' leave 55 Investing more in HMRC 56 Provide services via schools e.g. school meals, school nursing, free music education 57 Compulsory purchase of land for public purposes 58 Introduction of a Universal Basic Income 59 Targeting support to families at risk of destitution 60 Reforming local authority welfare support 61 Green New Deal policies 62 Climate change policies that rebalance the cost burden, for example, frequent flyers to pay extra to cover costs of using sustainable aviation fuel in a way that drives market development 63 A GI Bill style (£bns) investment in adult skills/technology skills 64 Providing wraparound support to help people with mental health problems into work 65 Reforming parental leave to encourage fathers to play more of a role in care of children 66 Universal provision of assets for those transitioning from education to provide support with further learning, training, moving or launching a business 67 Mandatory gender, race and disability pay gap reporting 68 Abolition of right to buy 69 Increasing the skill level of low wage workers 70 Enacting a Future Generations Act 71 More devolution of funding and powers 72 Housing cooperatives supported with financing options 73 Cross-sector (public, private and social) strategic investment in the infrastructure supporting UK charities and social enterprises 74 Increasing the productivity of low wage workers 75 Efforts to boost investment in support of future growth, therefore improving income growth for more 76 Holding a national debate on the merits of a universal basic income 77 More effective limits on charging for school uniforms 78 A new emphasis on promoting (and celebrating) philanthropy as a means of encouraging more high net worth individuals to give more back

UK Options 2040 supports policymakers as they make choices about what to prioritise and how to deliver: setting out alternative policy options and pathways for the future, creating space for honest debate about the trade offs and testing and interrogating ideas that take us beyond immediate crises.

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