Since the outbreak of the economic crisis in 2008, recovery is announced and expected for “the next
year”. However, if there was recovery in some OECD countries, it was anaemic to say the least. And in many others, recession has returned. What does this mean for household incomes , especially for those at the bottom of the ladder, and for inequality? Our new report and comparative data send a warning sign, if not a “red flag” for government policies which aim to bring public spending under control without paying due attention to effects on the income distribution.
In most OECD countries, poorer households lost more or gained less than richer households between 2007 and 2010. The top 10 per cent of the population did better than the
poorest 10 per cent in 21 of the 33 countries we reviewed. The richest 10 per cent of the population earned 9.5 times the income of the poorest 10 per cent in 2010; for comparison: in the 1980s this ratio stood at 7:1 and has been rising continuously ever since. Rising inequality adds to the pressure coming from falling real incomes in many countries, threatening social cohesion and increasing poverty risks.
We also looked at how poverty evolved in OECD countries. Using pre-crisis income levels as a benchmark, the number of people living in income poverty rose during the crisis in most countries. But not all population groups were hit in the same way. Between 2007 and 2010, average relative income poverty in OECD countries rose from 13 to 14% among children and from 12 to 14% among youth, while it fell from 15 to 12% among the elderly. This confirms the trend of young people and children replacing the elderly as the group most at risk of income poverty which we had already been observing across the OECD. Child poverty has risen in 16 OECD countries since 2007, with increases exceeding 2 points in Turkey, Spain, Belgium, Slovenia and Hungary. Given the well-known long-term damage that poverty in childhood can do, it is urgent for governments to privilege spending that targets children and young people; cutting in this area means forsaking investment in the future.
What about the welfare state and its ability to protect citizens from the impact of crisis? Here, the news is better. The report shows that the welfare state has cushioned the blow for many. Without the effect of taxes and transfers, inequality would have increased by more in the first three years of the crisis than it had in the previous twelve years. Automatic stabilisers and stimulus packages in many countries have prevented income inequality going from bad to worse, at least during the first years of the crisis. This is worth underlining since the redistributive effectiveness of tax and benefit systems decreased in the decade preceding the crisis in many OECD countries, with falling tax rates and benefit replacement rates which failed to keep path with real earnings growth. If tax and transfer systems had kept their capacity of redistribution, the welfare state could have been even more effective in countering the initial adverse effects of the crisis on household incomes.
However, our report only tells the beginning of the story, up to 2010. Meanwhile, many households have exhausted their rights to unemployment and other benefits and many governments have shifted their fiscal policy stance toward consolidation, often implying austerity packages. However, further social spending cuts in OECD countries risk causing greater inequality and poverty in the years ahead. Policies which put OECD economies back on the growth path will not besufficient. What we need are policies for inclusive growth which do not leave an increasing number of people on the wayside.
Social Policy Analyst, “Income distribution and poverty”
OECD Directorate for Employment, Labour and Social