London pulls away from rest of UK in wealth, says first paper in major inequality study

London has been far more economically productive than the rest of the country over the last two decades while earnings in the capital are much higher than elsewhere, a new study by the Institute for Fiscal Studies (IFS) has shown.

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The IFS has today launched the Deaton Review of inequalities in the UK, which it said will be “the most comprehensive scientific analysis of inequalities yet attempted”.

The five-year project will be chaired by Nobel prize-winning economist Sir Angus Deaton and funded by the charity the Nuffield Foundation. It aims to understand inequality in income, wealth, health, social mobility and political participation in Britain.

In a study released today to mark the launch of the review, IFS economists found that real economic output grew by 3.1 per cent a year in London on average between 1998 and 2017, compared with 1.9 per cent in the UK as a whole.

Average weekly earnings among full-time employees in London are a third higher than the UK average, the study found, although it said high housing and other costs mean Londoners’ real living standards are not as different as these figures suggest.

Social mobility is also better in the capital, the study found. A child growing up in London to parents in the bottom third of income has a 30 per cent chance of moving to the top third, compared with 22 per cent nationally.

Britain has the second-highest income inequality of any major economy, the report said, with only the US more unequal. The share of income going to the one per cent of richest households has nearly tripled in the last four decades to around eight per cent today.

However, inequality in overall household income – that is, earnings, benefits and other sources – has changed little over the last 20 years, as the rapid expansion of welfare programmes such as tax credits has made up for rising inequality in earnings.

Speaking about the launch of the Deaton Review, Paul Johnson, director of the IFS, said: “I can’t think of anything more important than understanding what drives the inequalities we see today and working out what we might do to influence them.”

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Tim Gardam, chief executive of the Nuffield Foundation, said: “The Deaton Review is a project that sits at the heart of the Nuffield Foundation’s purpose to advance opportunity and social well-being. The multidimensional nature of inequality is among the most contentious issues of our times.”