Peter Jones: Battle of ideas to beat inequality

The perception of the rich getting richer while the poor suffer has led to protests in Greece. Picture: Getty Images

IF THE state of Scotland’s economy, the jobs and incomes that depend on it, and the taxes they raise to pay for public services are voters’ most pressing concerns, which politician is most likely to be trusted to deliver what people are looking for – the SNP’s Nicola Sturgeon or Labour’s Jim Murphy? On the policy evidence so far, Ms Sturgeon looks to be some way ahead of Mr Murphy.

Yesterday, at Edinburgh’s Dynamic Earth, Mr Murphy set out what was billed as his “vision for making Scotland the fairest nation on earth in 2015”. He was aiming to deal with the widespread concerns that exist about inequality, the gap between rich and poor, which emerged during the referendum campaign as a big issue troubling the electorate.

Inequality is not just a question of fairness; it is also an economic issue. Some degree of income inequality is always going to exist; indeed it is necessary, because if it was impossible to earn more to improve standards of living, then very few would strive to work harder, to achieve more or to climb a career ladder.

But there seems to be a level at which this socially beneficial incentive stops working. People who regard themselves as poor, and believe that the odds are stacked against them becoming less poor, lose belief in their ability to do better.

One of the factors which creates that cycle of despair is the perception that there are rich people and companies who appear to keep on getting steadily richer while the bulk of society is not.

That despairing perception can turn into anger if a belief also takes root that these rich people and companies are paying little in tax, and comparatively less in the percentage of their income that gets taken away by the state from people with relatively modest earnings.

While that can have severe political repercussions – see, for example, the upheavals in Greek politics where there is an electorate completely fed up with the austerity imposed on them by the richer countries of the EU – it also has more subtle and ultimately more damaging economic effects.

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There is a growing number of economic studies, carried out by organisations as august as the OECD and the IMF, and which Ms Sturgeon has been reading, which suggest that countries with relatively high degrees of wealth and income inequality have lower levels of economic growth.

This is where the financial crisis has been so damaging for Britain. It is not simply that it caused a dreadful recession, unemployment and depressed incomes. It is also that the people who caused all this – namely the bankers – seem to have hardly been affected at all.

Every surge of news about the latest round of six- and seven-figure bankers’ bonuses gets interpreted by people on average incomes as being that there is one rule for the rich – they get richer; and another rule for the poor – they get poorer and suffer worse public services which the rich don’t need.

It may be unfair to the vast majority of bank workers in branches and call centres earning a modest wage and getting a modest bonus, but it is nonetheless the perception that people have. It contributes to a depressing disillusionment, not just with the politicians who are failing to either understand or tackle this, but also with the value of work. The worth of aspiration, the key to an economically successful society, is being devalued.

So what is Mr Murphy’s vision for ridding Scotland of the economic handicap of this unfairness? He has pledged that Scottish Labour in Scottish government will get  £250 million of the £1.2 billion the party hopes to raise from a mansion tax on homes worth more than £2m and use it to pay for 1,000 extra nurses.

This implies that a fifth of the money, 95 per cent of which Mr Murphy says will be raised in south-east England, will somehow be allocated to Scotland, by-passing the usual Barnett mechanism for allocating Scottish spending. Apart from doubting that the tax will raise as much as Labour is claiming it will, I am sceptical that this tax hypothecation, or dedication to a particular purpose, will actually work.

Mr Murphy also says that when the handover to Scotland of income tax as proposed by the Smith Commission comes into effect, he will re-impose the 50p tax rate on income above £150,000 which was reduced to 45p by the Tories. This, he says, will be levied on 16,000 Scottish high earners.

Well, if the experience of what happened when Gordon Brown’s government introduced the 50p rate in 2009 is anything to go by, Scotland will find that many, if not most, of those 16,000 high earners will have left the country or found some way to avoid paying the tax.

This is crowd-pleasing, gesture politics, not serious economics. The measures may win some votes, but they are liable to win little tax income and may end up costing a slice of the economy.

Mr Murphy did have some sensible stuff to say about the need to improve access to college and university education, especially for children of poorer families. He is right – in the long term, that will help to reduce inequality, but it is very long term.

On the other side of the political divide, Ms Sturgeon has put forward some rather more sophisticated measures aimed at getting more firms to pay the living wage and to employ more women with the same career opportunities as men. The overall aim is to improve productivity, as relatively low levels of output value per worker have been a historic curse of Scotland’s economy.

A business pledge, she has said, will be to get employers, trade unions and government working in partnership, arrangements which are strongly reminiscent of practices in Germany, Europe’s most successful large economy. Firms which implement what she wants will be first in the queue for government help with expansion.

Labour’s UK leader, Ed Miliband, is also said to be an admirer of Germany’s brand of capitalism, which does lead to less inequality. Unfortunately for him and for Mr Murphy, Ms Sturgeon has got there before them, and it seems improbable that Mr Murphy’s crowd-pleasers will do much to close the gap.

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