Reducing Inequality Policy

Reducing Inequality Policy

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Reducing Inequality Policy

In the UK income inequality is higher than in most countries in Europe and it is predicted to increase in the future.  The disparity affects everyone in society regardless of their income. Income inequality can lead to adverse impacts on an individual in various ways including one’s self-esteem, physical and mental health, happiness as well as civic participation.  Income inequality in society leads to less social mobility in unequal societies since people are unable to reach their full potential which is a significant contributor to high crime rates in deprived neighborhoods (Stiglitz, 2012. P12). Wealth and income inequality are attributed to disparities in the growth of income of various social groping, employment changes as well as government policies and taxation.

The bottom 10% of households of the population have a net income of £9,644 which is inclusive of wages and cash benefits while the top 10% have a net income of £83,875 which is almost nine times that of the deprived population (Bell & Van, 2013 p.53).  The rising inequality in the United Kingdom according to a report by the Institute for Public Policy Research (IPPR) commission the financial health of the country is divided along the lines of geography, income, ethnicity, gender as well as age. The commission ranks the UK as the fifth most unequal nation in Europe. Approximately more than a fifth of the population in the country lives on incomes below the poverty level after the cost of housing is put into account (Brewer, 2007 p.24).  United Kingdom income and wealth inequality are even worse as 44% of the UKS wealth is owned by just 10% of the total population which is five times the overall wealth owned by the deprived people.

According to IPPR income inequality between the wealthy 1% and the rest of the nation is on the rise which is worsened by the increase in the cost of living as well as weak wages (Cingano, 2014 p.18. However, the report also outlines that inequality has declined slightly in the past few years especially since the financial crises cut the incomes of the highest-earning workers in Britain attributed to the implosion of the banking system while the increasing minimum wage has also contributed. The Gini coefficient of Great Britain is approximately 0.34. The index reached a peak of 0.362 between the years 200-2001 (Cingano, 2014 p.23). The economic crises have only a little effect on income inequality. The upper fifth continues to take approximately 40 percent of the overall income while the bottom fifth population has only eight percent of the total revenue.

Inequality between regions is also evident an average home in the southeast of Britain has approximately twice the amount of wealth of an average household in Scotland.  Extreme inequality is a barrier to poverty eradication, undermines economic growth as well as threatens society as it triggers social problems in general. Inequality affects not only the bank balances of the UK residents but also the general well-being as well. 

            To solve income inequality and other social problems that contribute to income inequality in the UK government should reduce the power of the banks to generate money as debt and give this power to a different, transparent as well as and accountable institution working in the public interest.  The move will aid in impeding the banks from artificially raising the house prices. With new money being generated from debt instead of when people going deep into debt, the overall debt in the economy will start to reduce which will stop the redistribution of earnings from everyone in the country including the wealthiest 10% (Iacoviello, M., 2008 p.43)

            One of the significant factors that drive income and wealth inequality is the money used. It is assumed most of the money in use is created by the government or the Bank of England; however, it is created by the highest street banks electronically when the banks give loans. Every new loan created creates new money and consequently a new debt (Iacoviello, M., 2008 p 34). The new money leads to inequality because much of the money created by the street banks leads to hikes in house prices. Individuals who own property or have a significant income that is enough to qualify for a mortgage end up becoming wealthier as house prices are inflated artificially by the banks. The cost of housing is also seen to rise out of reach, and most income is used in the payment of mortgages of the buy-to-let landlord.

Since approximately 97%of money used in the UK is created by the banks when a person borrows this will consequently be paid in interest on nearly every pound in existence (Foundation & Schmuecker, 2014, p.4). 90 % of the deprived population pays the bank the borrowed money with accumulated benefits to the banks than they ever get from them, which means that wealth and income are redistributed to the wealthiest households.

The more the money created and in use, in the economy the higher their rise in prices of commodities prices hikes where the new money has been generated. By the time the new currency has trickled down to every worker prices may have already hiked but wages will be constant.  The asset owners or individuals who operate in the institutions that benefit from the newly created cash, the financial industry as well as the London market will be the beneficiaries. This means that those in the upper class will still be the beneficiaries.

The proposed policy will reduce wealth and income inequality; however, the policy will have of negative influence on the street banks as they will not gain from the interest that they benefit from when they lend money (Steele, 2015.p.35). Wealthy individuals will also be on the losing end as they will not get the advantage of the hiked housing prices and rents. The low-income earners will be the main beneficiaries since with stable wages and constant rates of commodities the individuals from the lower class will be able to afford them without the need to take a loan from financing institutions.

The policy has been used in countries like Kenya where bank lending and deposit rates have been limited. Based on the legislation that was introduced by the president signed in 2016, banks in the states were required to lower the cost of credit and make sure that the customers also benefit from the loans (Mwega, 2016, p.96). The banks are given a lending rate of not more than four percentage points above the central bank rate. The citizens in the country were able to access easy-to-service loans which have promoted equality however at a minimal rate. However, in other countries, such laws have been lifted after their implementation to promote inclusion.

In conclusion, income and wealth inequality is a significant issue that requires a variety of solutions. With increased borrowing in the economy, more money is created which contributes to a hike in commodity prices which affects the lower class as their income is constant and does not increase with the increase in prices of items. Therefore the UK government can stop or regulate the rate of banks' lending to reduce borrowing.

Reference List

Bell, B. and Van Reenen, J., 2010. Bankers' pay and extreme wage inequality in the UK.

Bell, B.D. and Van Reenen, J., 2013. Extreme wage inequality: pay at the very top. American Economic Review, 103(3), pp.153-57.

Brewer, M., Muriel, A., Phillips, D. and Sibieta, L., 2007. Poverty and Inequality in the UK: 2008.

Brewer, M., Sibieta, L. and Wren-Lewis, L., 2008. Racing away? Income inequality and the evolution of high incomes. Institute for Fiscal Studies Briefing Note, 76.

Cingano, F., 2014. Trends in income inequality and its impact on economic growth. Joseph Rowntree

Foundation and Schmuecker, K., 2014. Future of the UK labor market. York: Joseph Rowntree Foundation.

Iacoviello, M., 2008. Household debt and income inequality, 1963–2003. Journal of Money, Credit and Banking, 40(5), pp.929-965.

Mwega, F.M., 2016. Financial regulation in Kenya: Balancing inclusive growth with financial stability. In Achieving Financial Stability and Growth in Africa (pp. 99-122). Routledge.

Rowlingson, K., 2011. Does income inequality cause health and social problems?.

Steele, L.G., 2015. Income inequality, equal opportunity, and attitudes about redistribution. Social Science Quarterly, 96(2), pp.444-464.

Stiglitz, J.E., 2012. The price of inequality: How today's divided society endangers our future. WW Norton & Company.