Tackling income inequality presents challenges for Scotland

20 January 2014

Scotland faces significant challenges in closing its “inequality gap”, according to new research carried out by University of Stirling academics and funded by the Economic and Social Research Council (ESRC).

Scotland and the UK currently have much higher income inequality than comparable Nordic countries such as Norway and Denmark, with Scotland having a gap against these Nordic countries of 4.7 points on the Gini Coefficient - the recognised measure of the equality of a nation’s income distribution.

The Scottish Government has stated that reducing inequality is a strategic priority. The research found the Scottish Government’s current fiscal powers – including council tax and the new Scottish Rate of Income Tax – are relatively ineffective at tackling inequality because they cannot be targeted at specific income groups.

However, while an independent Scottish government would have access to the full range of fiscal powers, the research found the impact on inequality of exercising these additional powers would in fact be relatively small.

Dr David Comerford, author of the research and researcher in Economics at Stirling Management School, said: “An independent Scotland would have access to fiscal powers with which it could influence inequality more directly than it can at the moment.

“However, achieving the level of inequality reduction the Scottish Government desires through fiscal policy alone would require major policy change. This could be problematic because Scotland’s high degree of integration with the rest of the UK means such policy change could trigger migration between countries.”

If the Scottish government increased the rates of Job Seekers’ Allowance and Income Support by 10%, it would close just 3.2% of the ‘inequality gap’ between Scotland and the Nordic countries by reducing the Gini Coefficient gap from 4.7 points to 4.5 points. 

If the Scottish government added one pence to the upper rate of income tax, this would close 1.0% of the gap.  Similarly, if it chose to lower the Additional Rate tax threshold from £150,000 per annum to £100,000, the gap would close by only 1.6%.

Co-author David Eiser added: “The Nordic countries have lower levels of inequality than Scotland not only because they have more progressive tax and benefit policies, but also because the level of inequality in income before taxes and benefits is much lower than in Scotland.

“Our report shows once the effect of tax rises on migration and labour supply are considered, the revenue raised from a one pence increase in the basic rate of income tax in Scotland could fall from £320 million to £210 million, and the revenue raised from a one pence increase in the upper rate of income tax could fall from £40 million to only £2 million.”

He added: “given the scale of labour mobility between Scotland and the rest of the UK, a fiscal solution to inequality could be detrimental to government finances because raising taxes will increase incentives for high earners to relocate, and likewise raising benefits could harm work incentives. Achieving Nordic levels of inequality in Scotland will likely have to involve some equalisation of incomes before taxes and benefits, rather than a large increase in redistribution.”

This research was commissioned by the ESRC to inform debate about the benefits and constraints of constitutional change in Scotland.

Background information

University of Stirling ESRC Future of the UK and Scotland team
The University of Stirling ESRC Future of the UK and Scotland team comprises Professor David Bell, Dr David Comerford and David Eiser. Last November they published the report   Inequality in Scotland:  trends, drivers, and implications for the independence debate. The team is also running a blog site looking at the economics of independence. This team’s work on inequality uses a new model of the Scottish economy developed at Stirling, which analyses taxes and spending among Scottish households.

Stirling Management School
Stirling Management School is one of the largest Schools in the University of Stirling.  Renowned for its outstanding research activity, the most recent Research Assessment Exercise (RAE 2008) confirmed 85 percent of the School’s research was of an international level. Research output in: retail studies; social marketing; public sector; consumption, markets & cultures; and contemporary workplaces was deemed to be world-leading, while the School’s Accounting and Finance Division was ranked 1st (equal) in Scotland and 5th in the UK. Visit the Stirling Management School.   

Economic and Social Research Council (ESRC)
The Economic and Social Research Council (ESRC) is the UK's largest organisation for funding research on economic and social issues. Find out more about the ESRC’s Future of the UK and Scotland activities.

 

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