‘Predistribution’ is an interesting idea. But what exactly is Ed Miliband going to do about it?

September 6, 2012

So Ed Miliband’s new big idea is “predistribution.” Rather than trying to make society more equal by further increasing redistribution (by increasing taxes and benefits) Ed has been setting out how he going to try and get the economy to produce more equal outcomes in the first place.

The portentous title of the speech (Labour’s New Agenda) suggests you’ll be hearing more about the “P” word.

Predistribution is the sort of stupid made-up word that only a policy wonk could love, but there’s an interesting point here.

According to OECD data, the UK’s tax and benefit system is more redistributive than most industrialised countries. In fact it now does as much to reduce inequality as the tax-benefit systems of famously egalitarian countries like Sweden, Norway and Denmark. And it does a lot more to reduce inequality than tax benefit arrangements in the anglo countries.

Despite this, out of 34 OECD countries, the UK has the seventh highest income inequality after tax and benefits have been taken into account. That’s because it starts with the fourth most unequal pre-distribution.

As the graphs above show, during their time in office, Labour did a lot to make the country more redistributive. That has advantages, but the problem is that it often screws up incentives: higher tax rates and more benefit spending might not be great for the economy.

Scandinavian countries end up equal than the UK not because they are moving more money around, but because they start off with a more equal distribution.

Could we find a way to start off more equal? I think Miliband is right to ask the question, but he isn’t going to find an easy answer.
As one former Labour adviser pointed out on Twitter, it’s not actually that easy to change the underlying market distribution of income.

So what might predistribution mean in practice?

A big increase in the minimum wage would be a kind of predistribution. But the “bite” of the wage has been increasing since its introduction, and the Low Pay Commission (which advises on setting the rate) has warned that at the moment a big increase would risk simply pushing people into unemployment.

Ed Mili said today that he wanted to encourage more employers to pay the “living wage”, something he pledged in his leadership campaign. The campaign group “London citizens” have been doing a good job of persuading large firms (particularly lawyers and banks) to pay their lowest paid staff more. But as a voluntary scheme, it is hard to know how big an impact it will make.

Miliband said that predistribution meant “Higher skills with higher wages.” But he didn’t say how his approach to skills or education would be radically different to the last Labour government or the current government. He repeated his call for an “industrial policy”, but it’s unclear how this would be different from the sort of grants and soft loans that governments have been pursuing for donkey’s years.

He also said that:

“Centre-left governments of the past tried to make work pay better by spending more on transfer payments. Centre-left governments of the future will have to also make work pay better by making work itself pay.”

This is a little hard on the Blair government. Blair and Brown hugely expanded tax credits which were (in part) about making work pay better. If Miliband wants to “make work pay” he could shift the balance of resources from benefits that aren’t linked to work (like child tax credits) towards mechanisms that make work pay (like the working tax credit). To this end, Labour seems to be inching towards some big announcement on childcare subsidies, which can help make work pay. But we don’t know the details, or how it would be paid for.

If predistribution is just about improving education and reducing unemployment then we can all agree its a good thing, but it won’t be very original. Without some signature policy to back up the interesting rhetoric, people are probably not going to notice it.
What could that headline policy be? Fans of predistribution could do worse than think about housing. Our failure to build enough housing for years on end led to soaring prices. That’s been bad for everyone, but most of all for the have-nots.

As the chart below shows, the housing factor alone has increased inequality in Britain hugely (shown by the widening gap between the green and red lines). In fact the cumulative effect has been only a bit less important than the big tick up in inequality in the 1980s. People on the left have complained about that increase for decades. But in contrast, housing’s stealthy role in increasing inequality has never triggered any political response. Perhaps predistribution should begin on the home front?

This article originally appeared on The Daily Telegraph’s website

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