Basically, the IFS have found that income inequality between the richest and poorest members of society declines “in the wake of extended falls in the stock market” (this is intuitive: falls in the stock market equate to falls in the incomes of the wealthiest). By contrast – at times when the stock market is operating smoothly – income inequality is hardly altered by redistributing wealth via both higher taxes for the rich and increased welfare payments for the poor. In other words, the redistributive policies of the past decade have had almost no effect in bridging the wealth gap.
Given that prospects for the stock market in 2008 are looking increasingly dreary, we should expect declines in income inequality this year. With the Tories recently releasing their welfare proposals to much fanfare, and with both the Treasury and the (Peter Hain-headed) Department for Work and Pensions having a lot to prove, it wouldn’t be surprising if the Government attributed any such declines in inequality to their tax and welfare policies. Thanks to the IFS, we now know better.