Introduction

One of the legacies of the Thatcher years was the marked shift towards greater inequality. While average incomes grew rapidly during the 1980s, the benefits were spread very unevenly. Between 1979 and 1996/97, the median income of the richest 10% increased by over 60% in real terms, but that of the poorest 10% rose by just 11% (or fell by 13% if incomes are measured after housing costs). Although inequality did stop rising during the recession of the early 1990s, it started to rise again in the mid-1990s. When Labour came to power in 1997, the distribution of incomes in Britain was more unequal than at any time in recent history. The increase in inequality over the preceding twenty years was also exceptional in international terms.

Previous research suggests a number of factors contributed to rising inequality (Hills, 2004a, ch 4):

• • a dramatic rise in the dispersion of earnings between low- and high-skilled workers, which is widely attributed to technological changes favouring those with greater skills;

• • a large increase in the proportion of workless households, even after individual employment rates returned to the levels they were at in the late 1970s;

• • the increasing importance of other sources of income, such as occupational pensions and income from savings and self-employment, which are even more unequally distributed than earnings; and

• • tax and benefits policies that did not dampen the rising inequality in market incomes: uprating benefits in line with prices, rather than earnings, meant that a growing minority fell gradually further behind the rest of the population, while discretionary changes in taxes during the 1980s favoured the rich.

This chapter assesses New Labour's approach to income inequality:

• • What has New Labour said on this subject prior to being elected and since coming into power?

• • How has the level of inequality changed since 1997?

• • What policies have they introduced that may have had an impact on the distribution of incomes, including policies designed to address the long-term drivers of inequality, as well as more conventional redistribution through the tax and benefit system and spending on public services?

• • Have these policies been successful in halting and reversing the trend rise in inequality?