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Bookmark and ShareFaiza Shaheen is a researcher on economic inequality at nef.

Out of balance. (Image by CarbonNYC via Flickr)

The 2010 Budget is a reminder of just how every government decision has repercussions for economic inequality. Apart from the obvious inequality related tax changes, proposals such as the Green Investment Bank, the extension of the jobs programme for young people, the increase in the stamp duty, fuel payments, bank accounts for everyone, the freeze on inheritance tax and lack of deep-seated financial reform could all contribute to either hindering or aiding the struggle for economic equality.

Take the Green Investment Bank, a proposal signalling a step in the right direction (although still small in scale compared to the Green New Deal which is needed) – if the money is used to create high quality green jobs in places that have struggled to recover from de-industrialisation then it could begin to counteract both wage and spatial inequalities.

On the other hand, the likely benefits derived from tackling financial exclusion by ensuring everyone has a bank account are dwarfed by the costs of continuing without radical financial reform. Without reform, the risk-taking behaviour and bonus culture will continue to make the rich richer whilst putting the economy and jobs at risk.

Even changes in income tax are likely to have a negligible impact on economic inequality. The introduction of a 50 percent tax rate for those earning over £150,000 is welcomed, but inequality cannot be remedied simply by small changes in tax, and it is certainly not just about taxes on income. Firstly, whilst much needed, a progressive tax system is a curative rather than preventative measure, meaning that growing wage differentials are left untouched. Secondly, wealth is fundamental in enforcing economic hierarchies. A report for the National Equality Panel found that the richest 10 per cent are now hundred times wealthier than the poorest 10 per cent. The freeze on inheritance tax is obviously not going to help reverse this situation.

Finally, one also needs to be watchful of how government departments make their efficiency savings. The types of jobs that are cut, such as administrative positions, and the ways in which back office functions are re-organised could result in both less entry-level service jobs and poorer quality frontline services – both of which have a greater impact on lower income groups.

Overall, the combination of proposals could have a negative net impact on inequality. This is why it is so important for the yearly Treasury budgets to cost proposals according to repercussions on inequality, as suggested by the One Society Campaign. And let’s not forget that nef’s calculations in The Great Transition put the cumulative cost of addressing social problems associated with economic inequality at £4.5 trillion by 2050.

Some may argue that the Labour Party are constrained on what they can do on inheritance tax and tax reform simply because they do not want to scare off voters. But we need to ask why the rich, who are a tiny minority (only 10 per cent of the population earn over £40k and 1.5% over £100k), are so influential. The answer to this question gets at the root of why inequality still takes a backseat when constructing policy.

Bookmark and ShareAndrew Simms is nef‘s Policy Director and head of nef’s Climate Change programme.

How should a Green Investment Bank most effectively be set up?
The banking failure laid bare the private sectors’ veiled dependence on the public sphere in bad times. But, a publicly owned Green Investment Bank will be proactive, not just there to pick up the pieces of mistakes made elsewhere. It should provide affordable credit, capital and guarantees, and in the process leverage further investment, but only to groups, companies and initiatives that will help push a rapid transition to a low carbon economy. Capital can be raised from a mixture of bonds, carbon taxes, the redirection of resources held in other part public owned banks and “green” quantitative easing. Working mostly at a large scale, the Green Investment Bank will need a network of more local, sister banks able to provide capital for smaller scale initiatives.

What should it use its financial resources to support?
The priority will be to finance a new low-carbon infrastructure for Britain. From new and renovated low-energy building stock, to a new multi-scale, multi-technology renewable energy power system, to a clean, efficient, transport network with a hugely enhanced role for mass public transit, the bank would be instrumental in rewiring the nation for a low-carbon, high well-being future. In essence, it will help to write a national insurance policy against a future of high and volatile fossil fuel prices, geo-political insecurity and carbon constraints due to global warming.

(originally published in the Guardian)

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nef employees blog in their personal capacity. The opinions expressed here do not necessarily reflect those of the new economics foundation.