Graphs at a glance: OECD report shows greater inequality is bad for growth. So why are the Tories pushing up inequality by cutting back the welfare state?

J.P.Morgan, in his time a successful banker, said:

“A man always has two reasons for doing anything. The good reason, and the real reason”.

“Doing”: The Tory led government is squeezing benefits by freezing, cutting and capping them.

They claim “the good reason” is to push the feckless unemployed off their dependency on benefits into jobs. Make them economically productive, thereby boosting their own incomes as well as our national GDP.

Now we at Ripped-Off Britons like to think the best of people. It is just about plausible that Tory policy makers actually don’t realise that benefits go mainly to the low paid not the unemployed. Benefits are far more a subsidy to low paying employers than a subsidy to the unemployed. But for this post let’s not go there – we go there in other posts.

For now we take a closer look at whether cutting benefits actually does improve the prospects of the poor and boost Britain's GDP. The Organisation of Economic Cooperation and Development (OECD) published a report in December 2014 which provides a helpful insight.

Benefits are paid by taxes. It is a transfer of money from the richer to the poorer, and therefore reduces the income inequality gap. Office for National Statistics (ONS) figures show UK inequality is reduced by these transfers from a Gini of over 50 (like Brazil, Bolivia, Botswana) to under 35.

This leaves us less unequal than the US, but more so than France and Germany:

The OECD report shows far from boosting economic growth, high levels of inequality have a significant negative impact:

"Drawing on harmonised data covering the OECD countries over the past 30 years, the econometric analysis suggests that income inequality has a negative and statistically significant impact on subsequent growth."

Interestingly enough, the report shows that it is precisely the people the "Good Reason" claims to be good for that are hurt most. Their graph below shows the impact of inequality on numeracy for three categories of people, based on Parental Educational Background (PEB):

• Low PEB: Neither parent has attained upper secondary education (beyond GCSEs). The report states this constitutes about 5% of the population in the UK.
• Medium PEB: At least one parent has gone beyond GCSE, but not continued beyond secondary school.
• High PEB: At least one parent has attained qualifications beyond secondary school, e.g. a degree.

Greater inequality has no impact on the Numeracy Score for people of High PEB, and a modest negative impact on Medium PEB. But has a strong negative impact on people of Low PEB.


In terms of attaining Tertiary (post secondary school) qualifications, the effect is even more startling. Higher inequality actually improves the attainment of those of Medium PEB, has no impact on those of High PEB, but is a disaster for those of Low PEB:

The OECD report states:

"The estimated coefficients imply that lowering bottom inequality by half of a standard deviation (which is the same as changing bottom inequality in the UK to be like that in France, or that of the US to become like that of Japan, or Australia) would increase average annual growth by nearly 0.3 percentage points over the subsequent 25-year period, with a cumulated gain in GDP at the end of the period in excess of 7 per cent."

Evidently trying to starve the poor into being rich doesn't work, neither for the poor nor for the British economy. 

So if the "Good Reason" is in fact b****s. What is the "Real Reason"?