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I come back to my starting point: the widely perceived unfairness of growing inequalities, the results of which can be seen in every aspect of our national life. Above all, this not only undermines the basic moral assumption underpinning the market economy of proportionate rewards but demoralises those at the bottom end of the market by devaluing their contribution. It sets the rich apart and spreads discontent. As Professor Wilkinson has put it, it is likely to mean that the rich have less sense of responsibility to the poor and that the poor may be beset with a sense of fatalism and disengagement. It needs to be tackled on many fronts, both to advance the prospect of the worst off and to create consensus about rewards at the top end of the market that is acceptable to all who participate in it. It needs to be addressed by Governments and employers. Our present financial instability should not distract us from this task. On the contrary; the present shake-up should act as a salutary shock in recommitting us to the creation of a flourishing society, in which all have a proportionate share and in which there is a shared sense of well-being. I beg to move for Papers.

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11.51 am

Lord Desai: My Lords, I am sure that we are all grateful to the noble and right reverend Lord, Lord Harries, for his brilliant introduction to this important topic. At the outset, let me state my areas of agreement and disagreement with him. I agree very much with him about the problem of poverty and that we must urgently address it, but I part company with him on the question of whether inequality breeds poverty. I shall certainly say something about what the financial markets have done to inequality. Indeed, I shall take it up first because it will be more controversial.

The noble Lord is quite right that the system of bonuses and compensation in financial markets encouraged excessive risk-taking, as did the very cheap liquidity that has been available for the past 15 years. This financial crisis has, however, shown us how fragile some of these numbers are. One gentleman lost $1 billion in the Bear Stearns fiasco—he also has the misfortune of owning Tottenham Hotspur, but we will leave that aside. If the stock market were also to collapse by, say, 40 per cent tomorrow, a lot of those people’s spikes would come down, and it would not benefit a single person in this economy. This is not a zero-sum game. Moreover, some of these numbers are what Karl Marx called fictitious capital. The people who were compensated two years ago by Bear Stearns—some of the brightest people—were paid in shares but with a three-year delay. They have found that what was worth $1 million is now worth $10,000.

I agree that there is a spike at the very top—the top 1 per cent—but the spike exists in the few mainly Anglo-Saxon economies that have very vibrant financial markets. These financial markets have generated fantastic returns not only by recklessness but, mainly, because some highly educated and intelligent research economists have created some very complex financial instruments that have made it possible for people to take risks. These are rewards for risks.

Now, we have to insist that if the risk-takers fail, we will pay no heed to their problems. If they believe in the market, let us enforce the market on them. Let no bank be saved. If banks are saved, let none of their shareholders receive any compensation for their loss. I think that the Northern Rock policy is correct and the Bear Stearns one is somewhat wrong but that is neither here nor there. We have to be completely ruthless. If people say they believe in the free market, let us say: “You play by the free market. There will be no compensation”.

However, as soon as markets begin to collapse, everybody comes on to the scene and all the newspapers tell the Governor of the Bank of England and the Chancellor that something must be done to save the system. Nothing must be done to save it. The system must live or die by itself. We are not interested. The most interesting part of the latest crisis is that the real economy has so far not been affected. We do not know what it has done to the spike, though we will in about three years. I am taking a harder line on this than I necessarily would if I were a Minister, but since there is no prospect of that, thank God, I can do so.

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The calculation of income distribution in percentages leads to the idea of a zero-sum game or a fixed pie. We have to part company with this idea. Over the past 20 years, while the financial markets have been perhaps reckless and perhaps quite mad, income growth also has been quite spectacular, and not only in this country. The growth in Asia and the removal of millions from poverty would not have been possible had the financial markets not made it viable to transfer capital to countries such as India, China and lots of others in Asia where it was needed. I am therefore not entirely in agreement with the noble and right reverend Lord about the evils of the financial system. I do not have to declare an interest because I have made no money from the financial markets. I can boldly say that I am not bothered about it.

I would like to say just one more thing, because my time is running out. I think that poverty is the most serious problem in our society. It has happened because changes in the economy have removed the need for manual unskilled and semi-skilled labour. That has been the biggest transformation in our economy. Unless people are highly educated and highly skilled, they will not get a living wage in our economy. As the noble and right reverend Lord said, some of the wages paid for manual and unskilled jobs are absolutely appalling. I agree with him that we ought to do as much as we can to shore up the situation. One thing we must not do, however, is to take seriously the EU’s definition of poverty as such and such a percentage of median income. We must concentrate on poverty as a standard of living measured directly in terms of what people need. We must try to eradicate that poverty and problems of ill health, but we must not be bemused by such statistics.

11.58 am

Lord Marlesford: My Lords, we have had a very stimulating start to the debate with those two terrific speeches. I do not think that I shall be able to compete.

The word “inequality” can have two meanings. One implies an unfair situation; the noble and right reverend Lord has given many examples and this is the aspect that we will primarily be discussing today. The other, as Peter Bauer—later Lord Bauer, one of the most brilliant lecturers when I was an undergraduate at Cambridge—used to say, is that inequality merely means “difference”. I believe that in discussing financial inequality we should keep both meanings in mind.

I would suggest that there are four important principles when considering public policy on financial inequality. The first is the need to stimulate economic growth, which is the only way in which all can be made better off. The second is to recognise the difference between the tax system and the social security system, because they both have quite different purposes. The third, as the noble Lord, Lord Desai, said, is to focus on absolute poverty rather than relative poverty. The fourth is to avoid giving financial help from state funds to those who do not need it at the expense of those who do. In my book, that is, quite frankly, immoral. I should like to say a brief word on each of these.

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A culture of incentives is crucial. The French philosopher Bertrand de Juvenal once said:

The fact is that man is quite a selfish creature who wants the best for himself and his family. Taxes should be used to raise the revenue needed with the minimum dislocation to the functioning of the economy. The concept of the “social wage”, which will always exist in any society as justifying high taxes, was at one time used to justify virtually unlimited tax take. But a high social wage can rapidly become unsustainable through the limit it imposes on growth. In Europe, it is still a problem in both France and Germany. It is one of the main challenges that President Sarkozy has today. People of course enjoy public benefits, but when it comes down to it most prefer to make their own spending decisions, and the net utility of private spending is usually higher as well as more efficient.

To use high taxes to impoverish the rich does not enrich the poor. We had a long experiment disproving this. When Mrs Thatcher was elected in 1979, the top marginal rate of income tax in Britain was 98 per cent and the threshold at which it came in, in today’s money, was under £100,000 a year. Those were the days of the brain drain when many of the brightest and best people migrated to countries, primarily the United States, where their talents could be rewarded.

Confiscatory taxes really only came to an end some 20 years ago when, in his March 1988 Budget, my noble friend Lord Lawson reduced the top rate of income tax to 40 per cent. Such was the rage from the Labour Benches when he announced it that that was the only occasion ever that the House of Commons has had to be suspended in disorder during a Budget speech. I should take this opportunity to give the present Chancellor, and indeed the whole Government, warm congratulations on keeping to this top rate over the 11 years that they have been in power.

I very much agree with the noble Lord, Lord Desai, that although the state has a real responsibility at the bottom end, at the top end the market must pay the costs and get the benefits. People should suffer for failing and be rewarded for succeeding. I well remember that the American industrialist, J Peter Grace—who ran W R Grace & Co, a big chemical company—once said to someone who asked for a lot of money: “I shall have absolutely no problem in paying you that. You may just have a problem in earning it”.

The social security system must be used with imagination, flexibility and as far as possible with simplicity. There is no point in having complicated schemes which people do not understand and do not use. We must focus on those who are truly deprived, whether it be because of ill fortune, ill health or simply their own inadequacies. As we all know, there are those who simply cannot cope with life. They will always need the state to give them the decent standard to which, in a civilised society, they are as entitled as the rest of us. Absolute poverty can and must be eliminated in a prosperous society.

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By definition, however, relative poverty will always exist. We are back to inequality meaning “difference”. But the state should focus its efforts on what it can achieve. For example, it has a duty to ensure that all families are decently housed. It cannot and should not take responsibility for ensuring home ownership for all; we have seen the disaster that that can lead to, especially in the USA. A real effort should be made to stop giving benefits in kind tax-free to those who do not need them. Two obvious examples are the winter fuel allowance and free bus and tube travel for the over-60s. Both benefits should be taxed. In the former case especially, the tax collected would enable the level of winter fuel payment to be raised, which would really help the poorest.

Many improvements to how we do things can and must be made. But I believe that these four principles can help ensure that Britain remains a compassionate and decent as well as a prosperous society.

12.05 pm

Lord Livsey of Talgarth: My Lords, I thank the noble and right reverend Lord, Lord Harries of Pentregarth, who we all know is a very caring and constructive person. I particularly appreciate the moral philosophy that he introduced into this debate when opening it. It is important to take account of, and indeed act on, the principles involved in addressing inequality.

Financial inequality exists widely in the nations and regions of the United Kingdom. The result is, on the one hand, poverty, poor housing—and unaffordable housing at that—social exclusion and unemployment; on the other, relative prosperity, a better quality of life, quality employment and more life opportunities, with better housing and better health. If we have a social conscience, we must address this and try to put it right.

I am grateful that this debate is about the whole of the United Kingdom. In the other place I represented a part of Wales. Because of the devolution settlement, we do not have much chance these days to make comparisons, but in this case we can make some. I will concentrate to some extent on the situation in Wales and say that it is almost identically replicated in the north-east of England and in Cornwall, which have very similar economic indicators, and in some other parts of the EU. I shall then suggest how we might address these matters and improve on them.

The current performance of the Welsh economy is well below expectations, particularly taking into account the application of EU funding in west Wales and the valleys. The evidence is that the gross domestic product per head remains stubbornly fixed at 80 per cent of the UK average. It was that before devolution and it has not moved much. If one applies the gross value added measurement, which takes on board some services as well, it has declined from 84 per cent in 1995 to 78 per cent in 2004. In west Wales and the valleys, it has gone down to 65 per cent. We do not have a very sound economy. Much of the spending has been in the public sector rather than the private sector. If one compares these figures with those for other parts of Britain and Europe, one finds

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that the gross domestic product of west Wales and the valleys is 79 per cent of the UK average. It is slightly lower in Cornwall. But in Bucharest, Romania—which has not been in the EU for very long—it is 74 per cent. In Warsaw it is 81 per cent. It is even higher in Prague and Bratislava than it is in west Wales and the valleys. In contrast, the figure for Ireland is 143 per cent, as a result of a revolution in the way that it has been managed in recent times. Noble Lords will not be surprised to learn that inner London is on 303 per cent of the EU average, which is an extraordinary situation.

Average disposable income for a family in Wales stands at £21,182, a figure which may reflect two people working. What interests me is that that family spends 13.3 per cent of its income on food. When I was lecturing 25 years ago, it was 27 per cent, which is a percentage that poorer members of our society are probably still on. On a per head basis in Wales, people are on £11,900 compared with £15,000 in London, a difference of £3,100. I do not see that that is fair at all. We know that the cost of living in London is higher, but it is quite hard to make a living in my part of the world. It is clear that where I come from there has not been enough focus on innovative and entrepreneurial economic activity, both private and social, but that is now being addressed.

The success of Ireland over the past 20 years should be an inspiration to many of the regions and nations of Britain which are not so well off. For the first time in the history of Ireland, an indigenous moneyed class has emerged after a long economic boom. The Bank of Ireland estimates that from a few hundred euro millionaires 20 years ago, there are now 300,000, which is hard to believe. Ireland has an educated labour force and a strong demand for labour in well-paid jobs. An in-depth study of the Irish experience and the application of the principles involved is something that many of the poorer nations and regions of Britain could benefit from.

We have a huge mountain to climb. The Joseph Rowntree Foundation has laid bare the scale of the challenge. More than a quarter of Welsh children live in poverty, while average family incomes, to which I have already referred, show huge disparities with other parts of the United Kingdom. I believe that the Barnett formula should be revised so that it is based on need. At the moment in Wales, with its GDP running at 80 per cent of the EU average, the question of need is not being met.

In conclusion, Wales, Cornwall and north-east England are way behind other parts of the United Kingdom, and indeed in many sub-regions of those areas, incomes are only two-thirds of the UK average. The result of that is poverty, child poverty and a lack of opportunity in employment. Essentials such as food and housing are rendered unaffordable because they absorb an ever larger proportion of net income. This creates debt. Of the 10 regions with the highest rates of unemployment benefit for longer than five years, five areas are in Wales.

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I finish by saying that the Barnett formula needs to be completely updated on the basis of need and government policy needs to concentrate on upgrading investment and entrepreneurship in our poorer regions so that average incomes are brought up to a level where essentials are affordable. In that way, the populations of these areas will not continue to suffer.

12.14 pm

Lord Sutherland of Houndwood: My Lords, I congratulate my noble and right reverend friend Lord Harries of Pentregarth, first, on securing this debate on such an important topic and, secondly, on providing us with a stimulating introduction that has already provided a lively debate and no doubt will continue to do so. I wish to address my remarks for the most part to a particular group in the population where there is significant inequality and, as a result of that, poverty; that is, the older members of our society. Earlier discussion at Question Time indicated that if this is a serious issue, which I believe it is, it is one that will grow in both complexity and impact on our community. The noble Baroness, Lady Andrews, gave us a couple of figures: for example, that there will be an additional 2 million people over the age of 65 in our society before long. I can give your Lordships a rather different figure. If I stick to my time in the course of my speech your statistical life expectancy will increase by 1.5 minutes. One cannot claim the deposit individually but that is one of the more interesting statistics of society.

The noble Baroness, Lady Andrews, pointed out that the life expectancy of children being born now is such that one in five will live to the age of 100. Those are significant facts, so if there is inequality and poverty in the older community within our society it will have a huge impact. As the noble and right reverend Lord pointed out in his speech, there are two ends to the equality debate. Over the past couple of weeks we have had warnings from the Foreign Office about so-called SAGA louts. There are those who have money and who are misusing it, but that is not the experience of many older people in the community. They are not all out there having SKI holidays; that is, “spending the kids’ inheritance” holidays: many are stuck in their homes as a result of inequality and poverty.

I accept the points made about the definitions of poverty. There is a great danger in simply taking a statistic or a percentage and defining poverty in that way. However, I shall give a version of one of the statistical indicators to which the noble and right reverend Lord, Lord Harries, pointed. If one takes seven stops on the Central Line in London, one’s life expectancy goes down by about 10 years. This is not individually; it is statistically, but that is the issue of life expectancy in our community. There are poor communities where life expectancy is low. In the same communities—if we look at the available deprivation indices—not only is life expectancy low; earnings are low, employment prospects are bad, housing is bad, health is clearly measured on low scales, and educational success is low. Those indices kick in in the same parts of the major cities and rural communities

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of our country, so there are issues of poverty and ways of geographically tackling and looking at them.

I want to make a couple of points about pensions in relation to the older section of the community. Separating the measurement of what should be paid by pension from some form of average earnings has been a mistake and will penalise many people. I hope that the Government will look again at how the pensions available through the state system are calculated. They should be linked to the earning power—50 per cent of average earnings or whatever—of our community. That should be possible because the tax system should be able to reflect the income coming from earnings going up and perhaps the benefits available to the poorer members of the community.

I wish to make a further point about pensions. Only 17 per cent of women qualify for the full state pension. That is bound to have an impact on poverty and it is a blatant form of inequality. The women in question have not been able to work permanently throughout what is regarded as normal working life because they have taken time off to have children, to care for them and to bring them up. They may now be taking time off to care for elderly relatives, thereby providing a service to the community. However, that is not recognised in their pension benefits. For various reasons—partly because of the age in which they were reared and learnt their attitudes to life—that same group in the community are bad at claiming benefits. Help the Aged estimates that £4.5 billion in unclaimed benefits lie within the system. That is the reality. Perhaps some of it should be unclaimed, but it is worth asking the Government to examine why those benefits are unclaimed. It could well be that people who formed their attitudes to life 60, 70 or 80 years ago simply have a style of life that is not rights-focused. That may produce a guffaw in certain parts of the City or incredulity among younger members of the population who have been brought up in a rights-focused society, but the danger is that we are not respecting these attitudes as part of the reality of how we treat people. Rather, I fear we might be exploiting them: if they do not claim benefits, fine, the money remains in the public purse.

Those are some of the difficulties that older members of the community face. What can be done about them? I shall stick to the issue of the possibility of employment beyond current employment age. We have the prospect—I think it is inevitable—of the age at which state pensions can be claimed being raised. That is the stick, but there ought to be carrots in place. If older people want to continue working, and 53 per cent of them estimate that they need to because they have inadequate financial resources, what are the incentives for employers to do something about that? Who is looking at the tax threshold that discourages older people from continuing to work and discourages employers from taking them on? Those are areas where not only the comparative wealth of individuals could be helped but no doubt their health as well. Positive social attitudes would come out of all this. I commend to the Government the need to look at the employment of older people as one of the ways in which we might begin to deal with this issue.

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