Big pay rises for people already earning at least £1m a year could be the result of a return to levels of reward for bankers and top company bosses not seen since before the financial crisis, according to the head the UK’s leading economic thinktank.
New data collected by HMRC and released alongside the chancellor’s spring statement showed pay for the highest earners rose nearly 6% between April and September last year, compared with 3.7% for the rest of the workforce. The Institute for Fiscal Studies (IFS) said the pay disparity would exacerbate inequality.
Paul Johnson, the director of the IFS, said the full reasons for fast-rising executive pay were unclear but “maybe that’s returning to where they were pre-crisis.”
There are 31,000 people in the top 0.1% income bracket in Britain, with pay levels running into seven figures or more. This group accounted for 8% of all PAYE income tax and national insurance receipts in 2017-18, according to documents prepared by the Office for Budget Responsibility (OBR), the government’s independent economic forecaster.
OBR data shows just over £286bn was collected in PAYE and national insurance contributions in 2017-18. This means £22.6bn came from just 31,000 people, the equivalent of £730,000 each.
According to figures released by the European Banking Authority earlier this week, more than 3,500 bankers in the UK are paid more than €1m (£850,000) a year, with total income of almost €10bn between them. Their average pay was €2m (£1.7m).
The IFS said pay growth had risen rapidly for the lowest-income workers after hikes to the minimum wage by the government, but that average pay after inflation for the workforce at large remained below the level of 2007, before the financial crisis struck.
Presenting the analysis, Johnson said the Bank of England had looked back through history to find a worse period for workers’ pay. “It’s reached the early 1800s. I think it might be heading to the black death soon,” he said.
The stark analysis of pay in modern Britain comes a day after Philip Hammond used the spring statement to persuade MPs that ratifying the prime minister’s Brexit plan could unlock a “deal dividend” to help bring austerity to an end.
In its verdict the IFS said that crashing out of the EU without a deal would erase the £26.6bn in spending headroom the chancellor said he had built up for handling a chaotic exit or for ending austerity.
The IFS also attacked Hammond’s claim that the funds represented a dividend. “It’s not really a deal dividend, it’s if things go as planned,” Johnson said. The spring statement forecasts from the OBR had been “predicated on a fairly smooth transition. They’re certainly not predicated on crashing out without a deal”, he said.
The IFS said that if the chancellor was going to raise spending he would need to ignore a Tory manifesto pledge to balance the books by the mid-2020s. It said the deficit – the annual shortfall between spending and tax income – could probably not be removed by then.
The IFS said several measures were still in place which suggested austerity was continuing, including the freeze on benefits, which has cost 10 million families an average of £420 a year.
Matthew Whitaker, the chief economist at the Resolution Foundation, an independent thinktank, said it was clear from the OBR forecast that the chancellor has the spending power to end austerity. From the OBR’s figures, by 2022-23 he will have the headroom to allocate £24.9bn to unprotected Whitehall departments in a move that could raise their share of GDP back to levels seen in 2015-16. He could also afford to spend £10.7bn on reversing welfare cuts.
The foundation said an increase in inequality in 2018 would get worse in 2019 without a change of course as the benefit freeze in April and increases in council rates of at least 4% were only slightly offset by a rise in the work allowance on universal credit and a freeze on fuel duty. An increase in the personal allowance to £12,500 would also benefit the richest taxpayers.
“Taken together, these five policies boost 2019-20 incomes by an average of £280 for households in the top fifth of the income distribution, but reduce them by £100 for those in bottom fifth,” it said.
