The Real Middle Britain – Taxes, House Prices & Debt
Last week during a debate on tax, my regular commentator Newmania said:
This now completely disenfranchised section are often found on the internet getting angry and these are the people Duncan wishes to tax into penury .Ordinary working people , who have no right ( says Duncan) to independence or even to keep much of what they earn. People who go to Garden Centres , save for holidays , convert their lofts , worry about their children.
He was wrong. These are not the people I want to tax. And he knows that. But he does, I believe, refer to what he thinks of as ‘Middle Britain’. ‘Middle Britain’, a concept beloved of both political strategists and the media at large, has always been a somewhat imprecise term.
Middle Britain has become shorthand for the conservative, well-todo
citizen. Subtly and gradually, it is this different Middle Britain that has come to dominate cultural and political debate. But the original and real middle is still with us and they will still play a crucial role in the next election as a group of swing voters who will determine whether the Labour or Conservative Party forms the next government.
They define ‘Middle Britain’ in a very precise manner:
Throughout this pamphlet we assume ‘middle Britain’ to be synonymous with the group clustered around the median income in the UK. To distinguish the group from its more common use we refer to middle Britain as ‘Middle Income Britain’. To some extent the actual size of this group is arbitrary. For the purpose of this pamphlet – and to enable comparisons with other groups – we have taken ‘Middle Income Britain’ to be equivalent to the middle fifth of the population.
I can’t think of a fairer, more objective definition. Tom notes some characterisitics of this group:
*Much less likely to have had a university education
*More likely to have experienced unemployment
*Much less likely to enjoy a final salary pension scheme
*Much less likely to hold shares and have significant levels of savings
As the TUC note they tend to be:
concentrated amongst white-collar and skilled manual jobs, including; customer service administrators, dispatch clerks, retail managers, IT workers, landscape gardeners, site maintenance engineers, teaching assistants, librarians, receptionists and shop assistants.
This then is our working definition.
Two things leap out from the report.
First, how has this group faired since 1997?
They enjoyed annual rises in real take-home pay of just 1.6 per cent, well below the annual rate of economic growth over the period. This compares with 2.1 per cent for those on mean incomes and 3.9 per cent for the top one per cent. This means that over the 18- year period of Conservative governments, the real incomes of the top one per cent doubled while the incomes of households on mean incomes rose by 45 per cent and those on median incomes rose by a third. In effect, successive Conservative governments neglected the very constituency that had put them into power.
No surprises there.
Under Labour, Middle Income Britain has fared better in relation to higher income groups than under the Conservatives. Over the decade from 1996/7 to 2006/7, real median household income grew by 20 per cent while real mean household incomes grew by 23 per cent. These correspond to annual rates of 1.9 and 2.1 per cent respectively.
There is an important exception to this more even pattern of growth across incomes. Since 1997, the richest one per cent has continued the upward rise that began in the early 1980s. Over the three decades from 1979, the richest households outstripped all other groups, while households on mean incomes moved ahead of those on median incomes.
Better under Labour then, but still more to be done.
Second, what do these people think? I.e. what does actual ‘Middle Britain’ think, rather than the mythical ‘Middle Britain’ so often discussed?
They, in common with ever other quintile of income group (except the top, and then only narrowly against), support a more progressive taxation system.
To me, this is key. The TUC’s ‘Middle Britain’ and Oxfam’s Freds (roughly the bottom quintile) together with quintile inbetween represent 60% of Britain. The quintile above too support progressive taxation policies. That’s 80% of the country that can be mobilised on this basis. This is crucial in light of the important debate on how we pay for the debt we are incurring in fighting the recession, the question is ‘who pays?’
There is too the broader point of why has ‘Middle Britain’ been left behind? The answer to this is unquestionably related to the buildup in consumer debt over the past decades. As the report notes:
Despite the deceleration in the rate of income growth from 2002, households, on average, maintained rising living standards at least until the end of 2007. From 2000 to 2007, consumer spending by individuals grew by £55 billion more than their income. Over the same period, the Government’s index of retail sales by volume grew by no less than 35 per cent in constant prices, more than three times as fast as disposable incomes.For a while Britons – across income groups – embarked on a mass spending spree while much of the nation appeared to drip with affluence. New shopping malls sprouted across Britain. The giant Westfield Centre in West London is the biggest urban, indoor retail outlet in western Europe, boasting no fewer than 50 restaurants and 255 shops, including flagship stores for leading designers including Dior and Tiffany. Yet in a telling symbol of the consumer bubble that was bursting across Britain, it opened its doors in November 2008, a few days after the Government announced the first quarterly downturn for 16 years.
So how was it possible to maintain spending when rises in purchasing power were slowing? The answer is by a sharp and unprecedented rise in debt.
I am increasingly thinking that there is something in Graham Turner’s argument about the power of capital and the buildup in debt. Footloose global capital and the outsourcing of jobs to lower cost countries has had the effect of driving down wages in the West.
The price of goods may have fallen as result but, as the data clearly shows, real (i.e. adjusted for lower inflation) wages have not risen as much as many expected. Capital, with ever increasing production, needed consumers to buy its goods. Workers, with lower wages, needed to maintain their consumption and way of life. The answer to both problems was simply to borrow.
One manifestation of this borrowing can be found in the rapid rise in house prices of the past decade. As I have argued before, higher house prices do not benefit society. ‘Middle Britain’ (despite being 77% home owners) would be better served by lower house prices, as would the Freds. They could borrow less to buy homes, they would be more competitive internationally, inequality would be lower, social mobility would be higher.
For all of these reasons I would offer a ringing endorsement to the conclusions of the report.
• The Government should restate a commitment to the principle of
progressive taxation – that tax should be related to ability to pay, with
the rich paying a higher proportion of tax than the poor and the middle.
This would mean reducing the share paid by the lowest earners, a war
on tax havens and loopholes, ending higher-rate tax on pensions and a
reform of council tax.
• To reduce the excessive concentration of wealth, a higher proportion of tax revenue should come from capital taxation with a reform of inheritance tax and the realignment of income tax and capital gains tax rates.
In recent times, British society has become increasingly aspirational, with individuals aiming for improved living standards and opportunities for themselves and their children. Yet many, if not most, of those on low and middle incomes have been denied the opportunity to fulfill these extended ambitions – in housing, education and work. For many, relative opportunities in these areas have declined.
Successive governments have set out to fuel aspirations without willing the means. Now is the time to set out a new agenda that closes the gap between rising aspirations and the means to fulfilling them.
The Government is moving the right direction here, the 50p rate signals that. The Government has succeeded in raising aspirations, now we need to help meet these raised aspirations.