The Equality Trust was promoting the evidence of a new book, The Spirit Level, about the effects of income inequality on society. According to the speakers, its main insight is that income inequality is closely linked to social well-being as measured by health, crime and various other statistics, with the surprise being that the correlation is just as strong among the rich as the poor.
For today's budget, Capital Ravings has put aside its alcopops and spam cartons to work with the Equality Trust's political wing, campaign group OneSociety, in assessing what the budget means for inequality. Here's the summary:
Alistair Darling’s proposal for a global bank levy is a welcome step in combating income inequality in the UK, but he has left much for the next government still to do.
Since the financial crisis bail-out, most political parties agree that it is unacceptable for banks to overgear and make speculative trades at public risk. Darling’s proposed levy on risky bank activities falls on banks rather than individuals, but it will lean against the growth of income inequality by reducing the possibilities for banks to offer high pay for activities underwritten by the state.
The levy would reduce systemic risk and contribute to other bank reforms, such as higher capital and liquidity requirements. It should increase discipline among banks that face little competitive constraint, help to de-risk the sector, raise significant tax revenues and curb excessive financial remuneration. It would be best if adopted internationally but the UK should be willing to act unilaterally, given its special vulnerability to banking. Given the US and other G20 countries’ support for the idea, the UK would probably not be alone for long.
However, the bank levy is only a first step. Excessive financial pay imposes many costs on society, from wasted investment to under-performing pensions and billion-pound bail-outs. It also feeds social problems by driving income inequality to extremes, to the disadvantage of everyone in society, at the top and the bottom.
Disappointingly, the Chancellor chose not to re-impose his one-off bonus tax, despite its success and popularity outside the City. He should therefore hurry to fix the root causes of excessive financial and executive pay, wherever there is evidence that it causes harm.
The first step is for the government to demand a full competition review of investment banking, whose fees were recently described by the Association of British Insurers as a “deadweight cost” on the country’s savers. Office of Fair Trade chairman Philip Collins said last week that his department would take an initial look at the industry; we would like to see this become a formal review as soon as possible. The second step is for financial regulators and politicians to include income equality among their criteria for assessing the many financial reform ideas now under investigation.
The budget sent a strong signal to offshore tax evaders but missed the big prize of bringing non-doms further into the tax net. It also missed the chance to address executive pay, which has soared across all industry sectors. The main culprits for this are well known: overly “clubby” remuneration committees, headhunters who ratchet pay ever upwards, and institutional shareholders who are reluctant to tackle boardroom pay (perhaps because many are themselves handsomely remunerated). The Chancellor did say he would look for ways to help shareholders tackle executive pay, but only in financial services. Whatever he finds should be extended to all sectors. Meanwhile, are some corporate governance ideas we would like to see given more weight by the next government:
- more employees on remuneration committees
- ban on reciprocal memberships of different remuneration committees
- limits on the gap between highest and lowest paid employees (or pay ratio)
- alternatives to short-term executive incentives
- create a High Pay Commission to support shareholders wanting to challenge pay
The Chancellor’s focus on small and medium sized enterprises, through changes to business rates and the allocation of government contracts, will assist many middle income individuals and businesses.
At the lower end of the inequality spectrum, the Chancellor’s proposals for universal bank accounts could bring the benefits of payment systems and credit histories to many excluded people. However, implementation by the banks must be closely watched to ensure that vulnerable customers do not face higher exposure to predatory lending as a result.