Reasons behind the Economic Inequality in the UK
by Asya RUSTAMLI
Abstract
This paper presents an analysis of the United Kingdom's economy during the Conservative Governance. It shows the crucial consequences of the Margaret Thatcher's legacies that were able to change the economic weather in the UK. The main thesis focuses on the relation between inequality and Thatcherite policies. The careful examination of her governance years will provide more understanding of the today's economic nature in the British society and may direct the future research about the today's unequal British society.
Reasons behind the Economic Inequality in the UK
Some people are fortunate because they are born in the rich families and have no difficulties in their life. However, other group of people is less fortunate since they are born in the low income families where parents always struggle to earn enough money. When we put these two groups of the people together, we see the reality behind the economic inequality. Nobody can show the part of the world where economic inequality does not exist. Even in the biggest and richest countries of the world, economical disparities are a deep problem for society. After the 1980s, especially in OECD1 countries, inequality became substantially visible in the economic field. One of the world's richest countries included to the OECD is the United Kingdom where economic inequality has been growing markedly. The Gini coefficient enables to see the scientific proof of increasing inequality in the UK. It measures income inequality between zero and one. Figure 1 illustrates changes in income inequality from the 1979 to 2007-08.
1 - The Organization for Economic Co-operation and Development. This organization is founded in 1961 in order to stimulate and improve the economical situation in the World.
Source: David Cameron's calculations using Family Expenditure Survey and Family Resources Survey.
As shown in the graph above, on the way to capitalism, the economic inequality become significantly visible. Especially over the 1980s, there was substantial augmentation in economic inequality. Now the UK is considered as one of the most unequal countries within the OECD countries (Poinasamy, 2013). Thus, the careful examination of the inequality is significant in order to acknowledge the underlying reasons behind the rising economic inequality in the UK. Setting the foundation for present unequal society, consequences inherited from Margaret Thatcher's governance years eclipsed the influence of globalization and intensified the augmentation of the economic inequality in the UK.
Thatcher’s understanding of how British economy works was obviously different from previous governments. The goal of the Thatcher's crusade was only prevention of the decline in UK's economy. What is needed to take into consideration is that the improvement was comparative to other countries. So-called Thatcher's success helped only to survive from the collapse. Thatcher’s political beliefs lead ordinary people of the society to the vicious cycle of poverty. Thus, the economic inequality between social groups became inevitable. Starting with the monetarist policy, Thatcherism encouraged unemployment, increased taxes, implemented privatization of nationalized industries, reduced the trade unions' authorization, and sold council houses all of which lead to acceleration of economic inequality. Thus, understanding the policies of the Conservative Government is the necessary step for revealing the causes of inequality in UK.
This article elucidates the impact of the Thatcherism on the economic inequality of the UK. The significant question addressed is: how did Thatcher’s policies affect the acceleration of the economic inequality over the country? What made her policies defective is another important question to be answered throughout the article. I explain main policies of the Thatcher administration that had significant impact on the rising income inequality in the UK. Then I represent the idea of the dualism between social groups and clarify the reason why the rich were getting richer, and the poor were getting poorer during Thatcher’s governance years. I argue survival of the country from the collapse was at the expense of the fragmented British society. This examination may be the guidance for acknowledging the current economic inequality in the UK society.
One Step at a Time
Before the election of the Conservative party, there were three main problems in the economy of Britain: high rate of inflation, low growth of productivity, and extreme unemployment. When Thatcher and her friends came into power in 1979, their first mission was to seek solution to the problems in the economic field. Thus, the government started implementing number of actions. First action was monetary and fiscal policy followed by policies that aimed to reduce the power of unions, increase the power of state, implement new taxation system, privatization and selling of council houses. In the first year of the Conservative Government, the inflation rate rose over 20 per cent, but, in upcoming years, it was followed by decrease in inflation due to the changes in the money stock (Ward, 1982). Despite the fact that inflation rate had fallen, the monetary policy was tight, and it caused significant consequences for the British economy.
The anatomy of the rising inequality in the UK is coming from the Margaret Thatcher's attempts to close the deficit and decrease inflation in the country's economy. The fundamental target was the doctrine of the monetarism which was not the trigger to a successful policy. Thatcher Government's main purpose was to increase money supply and positively affect to the overall performance of the economy. Unfortunately, monetarism could not bring benefits to the UK's economy. Unemployment and restriction of the spendings were the disadvantages of the new policy which lead to disparities between social classes. Inaccuracy of the Thatcher's monetarist policy was that she did not take the velocity of the economy into consideration. Just because the prices and the salaries need time to adjust new policies, government saw only permanent recuperation from the recession in the economy. Contrary to government's assumptions, monetarist policy did not help industrial output to increase. It was Thatcher's imperfectly implemented policy that showed great negligence towards increasing unemployment.
Due to the Thatcher's monetarism failure, the UK suffered from major changes in taxation policies. Known as the strategic tax raiser in the UK, Thatcher increased the taxes to expand the businesses and increase growth in the country. This is in turn gave the disadvantages to the well being of the certain social classes. The poor and pensioners are hit the most, and the gap between the richest people and the poorest people proliferated more than ever. Within 18 years of Conservative Rule, disparity between the income of the lowest decile and the income of the highest decile had doubled 10 times. Taxation imposed to the rich decreased. The proportion of the population living under poor conditions had doubled almost 4 times (Dean, 2013). As the consequence, the cost of the Thatcher's legacy was the deepest recession which left large portion of the society out of work.
Effects on Poor – Unemployment and Beyond
As the direct consequence of the slow output growth in the British economy, the unemployment rate was extremely rising. If, in 1956, the number of unemployed people was 250.000 in the UK, in 1981, it stood at 3 million (Ward, 1982). Considering that the numbers exclude the quantity of the discouraged people and temporarily employed people, the job erosion during the Conservative party was extremely high. Increasing number of people who were unemployed in a long term was the another reason of the unemployment crisis. Moreover, the government implemented new method of counting the unemployment rate which helped to minimize the political impact of the tight situation in British economy (Worcester, 1989).
The significant factor behind the increasing inequality was the abandonment of the full employment policy. Their policy stated that the employment was only responsibility of the employees. Consequently, not only the unemployment rate increased, but also strength of the trade unions was shaken. The fundamental changes in the policies ended with reduction of the trade unions' authorization. It means that the trade unions that were responsible for unskilled labor became unable to protect them from difficulties. Consequently, unskilled and uneducated people could no longer get increases in their wages. While hourly wages for unskilled labor did not change between 1980 and 1992, there was 25 percent rise of wages for richer or skilled people (Hart, 1996). Thus, unevenness of the income distribution strongly accelerated increase in the inequality among the social classes.
In her second governance years, Thatcher's target was reducing the debt and increasing the revenue for the government. Margaret Thatcher understood that she could facilitate these issues by increasing the competitiveness of the market. Consequently, attempts for competitive markets resulted with the new market policy. Thatcher government created new policy called privatization which later shifted the UK's economy to the harmful direction. Government tried to sell what were available for sale. Thus, Thatcher's Government could get big amounts of money by selling off public assets. The cost of the privatization was massive unemployment. Workers faced damaging consequences. Consequently, the coal privatization ended with the loss of 200000 and more jobs (Kirby, 2013). Even today, influence of the privatization during 1980s is strongly felt. High levels of employment and relatively equal income years displaced with the today's unequal society.
The UK became more unequal society when part time and full time employment increased. Young couples who have no child in their house seemed to be better off after the rising housing costs. There were more prosperity available for them to buy and most of these young couples were working adults. However, the fact that the cost of housing was very high reduced expendable income of the young families. At the same time, during Thatcherite years, no full time worker containing families increased by 8 percent (Evans, 2004, p. 139). The main reason laying behind this increase was the rising number of pensioners. Pensioners also were worse off due to their expenses on the high tax items. That they spend large portion of money on the tax imposed things made them even poorer.
Fortifying the Rich
One of the main reasons behind the relation between inequality and privatization was Thatcher's attempts to increase the richest people's wealth by easy way. That there were a little risk of selling companies guaranteed the implementation of the new policy. It was the next electorate policy that changed voters' decision to switch from supporting Labor Government to Conservative Government (Evans, 2004, p. 139). The winning side again was Thatcher while the lowest decile of the society was getting into vicious cycle of poverty.
Associated with the new ownership policies, sale of council houses gave right to tenants to asset their own properties. As people began buying their own houses, shortage of housing became inevitable. Consequently, the number of house owners, who could, in the future, inherit their prosperity to their grandchildren, increased. Alongside changes in the number of ownerships, housing costs began considerably rising. While the rich owned democracy for buying lucrative properties, the poor families were feeling hard to find place to live in. Perhaps, it was the policy that set foundation of wealth inequality in the UK. Now, in the UK, who has received property from their grandparents lease out their houses at a very high cost and get extra money. Children of poor families in the 1980s are the less fortunate members of the today's society who do not own the private house and suffer from even higher housing costs. Even today, because of Thatcher's policies, the rich are getting richer, and the poor are getting poorer.
Due to the statistical facts, it can be said that after housing costs the average income increased and well-being of the society was ameliorated. However, the explanation behind this proliferation was the richest decile of the society. During Conservative Government years, incomes of the richest people increased by 61 percent. Compared to this percentage, the decline in the income of the poorest decile was small - only 18 percent (Evans, 2004, p. 139). That the rich were better off from the fluctuations in the income was the reason why the average income increased. This, in turn, made the positive impact on the economy, but negatively affected acceleration of the inequality.
"...I think we've been through a period where too many people have been given to understand that if they have a problem, it's the government's job to cope with it. ... there is no such thing as society. There are individual men and women, and there are families. And no government can do anything except through people, and people must look to themselves first. It's our duty to look after ourselves and then, also to look after our neighbor. People have got the entitlements too much in mind, without the obligations. There's no such thing as entitlement, unless someone has first met an obligation..." (Women's Own, 1987).
“There Is No Such Thing as Society”
The culmination point of the Thatcher's dirigisme2 became apparent to the society in 1987. She reported the speech that held an idea of "there is no such thing as society". After this report published on the Women's Magazine, people understood that their fate was not interesting to the government.
2 - Dirigisme is Latin word that means "to direct". It descries capitalist economy where state has severe authority on the investment and financial affairs. The term was firstly used to describe French economy.
One of the exclusive policies of the Conservative Government targeted on the relationship between
citizens and the government. According the new characterization, people were separated into active and passive citizens (Faulks, 1998, p. 144). Citizens who failed to use their market rights were unable to become an active citizen. Consequently, they became the part of the underclass facing the difficulties in obtaining job and satisfactory income.
Thatcher's approach to citizenship in the UK was based on her attempts to expand the authority over the country. On the way to realizing her dreams, she implemented policies such as privatization, restriction of the trade unions' rights, and selling the council houses. But at the same time, increasing unemployment was the massive problem among the citizens. That the unemployment was blocking the way to earn enough money was the reason why large portion of the society could not own the properties. In this case, they became the passive citizens who had no effect on the economy of the country. In contrast, the people who were considered as the active citizens were contributing to the economy by owning their new houses. These people were just the richest proportion of the British community. Limited opportunities for the lowest decile made them unable to use their market rights. As the consequence of restrictions in citizenship rights, the dualism between the rich and the poor became more apparent.
Achievements of the Thatcherism
It is obvious that, in the UK, there always existed economic inequality between social classes even before Thatcher and her friends came in onto power. What is specific about her governance years is that, after 1980s, the social stratification became more obvious from all aspects. Taking only the acceleration of the economic inequality into consideration we cannot conclude that the policies of the Thatcher administration had no positive effect on the Britain. After the extreme recession in the first years of the Conservative Governance, implemented policies generated positive results on the economy of the UK. From 1982 to 1986, the gross domestic product (GDP) rose by 14.5 per cent. If we compare this number with the numbers in the French, Germany, Japanese and even American economy during those years, we can conclude that the British economy grew faster than other countries (Worcester, 1989). During Thatcherite years, net average earnings rose due to the increasing income of the richest decile and this, in turn, caused extreme consumer spending. Due to the sale of the council houses to the rich people, home ownership increased. All this numbers contributed to the rise of GDP in the UK. Moreover, government made considerable amounts of revenue from privatization policy. Conservative Government could succeed in increasing the competition and ownership. Thus, “popular capitalism” were spread throughout the country (Matthews and Minford, 1987, p. 57-101). As the consequence of the strongly implemented policies, the government strengthened its political scene compared to other countries. However, the simple people of the society turned into victim of these successful policies. While ordinary British people had to tighten their belts, the rich people were getting benefits from the newly implemented policies. Compared with many public sector workers and low paid people, the professionals and skilled workers were better off.
“Britain has become a three-tiered society of “haves”, “have nots”, and
“have lots” ” (Worcester, 1989).
Conclusions
Supporters of Thatcher's policies still believe that Margaret Thatcher won economic battle of improving macroeconomic situation. One of her admirers, her campaign marketing man, Maurice Saatchi justified his policies as the revolution in the UK's political history. In the words of Maurice Saatchi(2013).
"...she developed all the winning arguments of our time – free markets, low tax, small state, independence, individuality, self-determination. The result was a revolution in economic policy and three election victories in a row."
However, careful examination of the Thatcher's governance years reveals unseen side of the iceberg. Thatcherism was the composition of the policies based on only political beliefs. Her policies had positive effects only on rich people and big businesses while ordinary people were getting into vicious cycle of poverty. The supporters praise her legacy because she could somehow achieve her goal by decreasing the overall spending of the country; but suffered people were only the members of the lower decile who experienced great struggle to get good salary to provide their family with normal living standards. Lowest taxation on the rich class compared to highest tax on the poorest class lead to enormous increase in inequality.
Examination of the Thatcher's governance years revealed that the main legislations of 1980s have created almost an irreversible inequality. The point to be regarded is that the implementation of the housing policy and privatization created millions of owners whose generation are still rich. Government achieved its aims to reduce the local authority provision which indeed was the main reason of chronic shortage of affordable housing. Since families struggle to afford the house to live in, household debt rose for the members of lowest decile. Aim of increasing the authority over the country resulted with the legislation against trade unions. This, in fact, lead to reducing role of trade unions which was the reason why people working under trade unions could no longer get the increase in their income and protection of their rights. Closing her eyes to the struggle of the low income civil servants, Thatcher raised issue to increase the income of the government executives. This created even more income stratification emerging the dualism of the society into "the simple servants" and "the gentry". There have long been the links between Thatcherism and current economic inequality in the UK by different economists. Major impact of the Thatcherism reveals itself when we look at the current situation in the UK. The simple demonstration of unequal society pronounced by British mother of three children is perfect example for the current situation in the UK.
"...I felt very ashamed having to go to a food bank the first time. It was down to my son’s school liaison officer coming round to my house, because I hadn’t sent my son into school for a couple of days as I couldn’t afford a packed lunch for him and I couldn’t afford to pay for a school dinner. I couldn’t do what a mum should do for them – look after them. I couldn’t even feed them. That just makes you feel really low as a parent..." (Poinasamy, 2013).
Thus, even today the failures of the Thatcher's government affect British people. It became obvious that the aggressive promotion of the economic policies during her governance years has completely changed the economic weather in the region. Rising inequality since 1980s lead to fragmented British society where parents feel ashamed to send their children to school. Thatcher made last laugh leaving the UK with the stigma of "the most unequal country in the Western Europe".
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