Back in 1999, Peter Mandelson infamously said he was intensely relaxed about people getting filthy rich. Coming from a grandee of the nominally socialist Labour Party, it raised eyebrows but further emphatic election victories in 2001 and 2005 showed the public was equally sanguine.
Political stability coincided with a continuation of the trend of rising income inequality begun under Margaret Thatcher’s government, with the UK’s Gini coefficient for disposable income surpassing 0.35 (the peak hit in 1990 under the Conservatives) by 2002. It dropped back slightly for a couple of years but from 2006 accelerated, reaching its all-time high of 0.39 by 2008, at the most dangerous phase of the global financial crisis.
Since then, Britain’s slump in trend growth and productivity is well documented, but income inequality has settled at a lower level. The 0.33 figure for 2024 sits at the bottom part of the range seen since the late 1980s.
Income is of course only part of the story, with overall wealth inequality figures painting the starkest picture. According to the World Inequality Report 2026, which is part co-ordinated by French economist Thomas Piketty, the top one per cent of the UK’s earners have a 13 per cent share of income. Switch the focus to wealth, however, and more than a fifth is held by the richest one per cent.
The divergence between weightings lower down the respective wealth and income distributions is revealing. In the case of the latter, when you widen to the top 10 per cent of earners, they have 36 per cent of income, with the middle 40 per cent taking home 43 per cent.
Wealth is far more skewed to those in the upper part of its distribution. The top 10 per cent holds 57 per cent of all wealth, whereas the middle 40 per cent have 38 per cent.
The bottom half of the wealth distribution has less than five per cent, whereas the bottom half of the income distribution receives over a fifth of that total.
Policy misses subtleties of the problem
Britain’s income gap between the top 10 per cent and the bottom 50 per cent actually narrowed in the decade between 2014 and 2024, but that has coincided with the rise of new political movements which threaten the Conservative-Labour duopoly that has held sway for the last century. Interestingly, the political patterns are totally different to what happened during the 1980s, when income inequality grew at the fastest rate.
Although there was a brief spell earlier on that decade when the Social Democratic Party (SDP) emerged, it was actually a centrist movement that arose in dissent to Labour’s shift leftward under Michael Foot and the shock treatment economic policies of Thatcherism. Today’s alternatives are oriented to the left and the right of the political spectrum (admittedly these classifications are stale).
Perhaps this tells us that income inequality isn’t the thing to obsess over: it is most important to grow the wealth pie and remove impediments to gains accruing widely. Unfortunately, some of the tax policies by the current Labour government may hamper wealth creation in the long run.
One of the most important aspects of chancellor Rachel Reeves’ budget was the fiscal drag, which at the current rate of wage growth would see almost half of people teetering on the threshold of higher rate income tax by 2031, as this entertaining video by YouTuber and entrepreneur Sasha Yanshin explains. Some claims are sensational, and we should note wage growth ought to slow as the rate of inflation settles lower, but there is some truth the big public sector pay settlement (some of it thoroughly deserved in the case of nurses, police etc) is being paid for by stealth as a consequence of its inflationary effect tripping more people into higher tax bands.
Perhaps more seriously, the rise in minimum wage for inexperienced and therefore less productive workers is an anti-employment measure. At the same time as the tax and regulation burden on small and medium enterprises is rising (according to government figures they account for 60 per cent of employment), it’s a reason not to employ young people, especially in clerical roles as AI becomes ever more reliable.
Redistributive policies and rising welfare compress the bottom half of the income distribution, killing incentives to work harder and get a promotion. This is hardly a recipe for increasing productivity and therefore wealth.
For those young people locked out of crucial starter roles, the trade-off with AI is that it will give them tools to make it easier to strike out on their own. Rising corporation tax and income tax on dividends combine to lessen the reward for taking risks, however.
The answer for many of the best and brightest is simply to up sticks and leave the UK, a loss of talent which hampers the nation’s potential.
Arguably, wage compression is damaging, and some degree of income inequality is a social good if it motivates people to strive. The counter is civilised societies shouldn’t allow people to sink into poverty, but then absolute and relative poverty are two different things.
There is a link where income inequality leads to greater wealth inequality. Leaning on work by Piketty and other academics, the Institute for Fiscal Studies published a major review in 2021, with trends showing that the greatest fall in UK wealth inequality occurred from 1920 and accelerated after 1945.
We could put the top 10 and especially the top 1 per cent’s relative decline down to the welfare state, but Britain fought two world wars and lost an empire. The portion of national wealth most diminished was from overseas, which would have accrued most to the elites.
Importantly, after the second world war, when wealth inequality fell, the gains were mostly to the middle 40 per cent. It’s also notable (from the chart on page two of the IFS review) that the tick up in the one per cent’s share of national wealth coincides with the post-1990 order. More evidence that, like the British empire before, globalisation most benefited the very richest.