by Imran Dean, UK
The results of the recent UK elections have come as a surprise to many people. All the polls, political analysts and journalists got it wrong. Who would have ever thought that we would have a Conservative majority? This result could have a huge impact on how the UK will look in the next five years.
The election saw a complete dominance from Scottish National Party in Scotland, which could threaten to break the union. We also have an “in or out” referendum on Europe in 2017, but most importantly we still have to tackle the deficit and continue to grow the anaemic economy.
Focusing on the last point, much of this election was about spending cuts, and it was clear no party would give the finer details. Only time will tell where the Conservatives will decide to cut spending.
What is deeply concerning and what Labour argued was the growing rise of income inequality. The table below shows the income inequality between residents in the following countries.
Gini Coefficient (After Taxes and Transfers)
Source: OECD Factbook 2013: Economic
One of the issues that was raised in the elections was the growing inequality in the UK. Whilst the UK economy has improved, it has not been without a wider social cost. It is a moot point if this is inherent in a Conservative economic framework but as was evidenced by New Labour it is certainly not exclusive to one party.
It is an issue of concern and if it does not make the headlines today, then when new cuts begin to bite it is likely to come to fore soon. It may surprise you but the UK has one of the highest income inequality gaps amongst the OECD countries. In the next five years this could widen further if we do not try and level the playing field.
There are many different ways this could be improved, such as through higher taxes or by increasing the minimum wage etc, however such measures are unlikely to provide a lasting remedy. There is a more fundamental change that needs to take place and we need to take a step back and analyse how such inequalities rose to such levels in the first place. Perhaps unsurprisingly the origins lie in the financial crisis of 2008-09, that was based on a financial model that favoured high risks. Banks had bad lending practises and took excessive risks that resulted in huge losses and ultimately required a bail out from the government. Critically, individuals were paid high salaries and bonuses rewarded excessive risk-taking – risk that provided no real contribution to society if they came good and generated a profit for the fund managers.
Former British Prime Minister Gordon Brown famously said there would be no return to “boom and bust” economics, yet the Government’s lack of regulatory action and proper oversight proved how wrong his prediction was in just a matter of a few years. Whilst recessions are possible in any economic model, the depth and extent of them in a high risk and debt-based capitalist system can be much greater and if current policies persist we are likely to see another significant recession in our lifetime again.
As companies continue to make record profits year after year, you have to ask yourself who benefits from this. It tends to be shareholders of these companies and the top executives (ie the top 1% of our society). As companies try to create more efficiency they cut staff. Furthermore, wages are not increased at the same rate as the CEO’s pay, and this sets in motion a misalignment of wealth. Whilst it is reasonable that people at the top should be rewarded more it needs to be linked in to a fairer structure that provides greater balance and stability. Should the sole aim of companies be to increase shareholder value, as is taught in finance classes across the world, or should we start measuring the value of companies in a more just way, perhaps factoring in how they contribute to wider society? The primary function of financial institutions is to provide access funds to, to help individuals get a loan to obtain finance for education, a mortgage for a house or for starting a new business.
So the question is can our current financial system be redesigned? Drawing inspiration from my own faith Islam, I think there is a case that needs wider airing. One of the key principles of finance in Islam is that of risk sharing which means a fixed guaranteed rate of return, ie interest, is not allowed. Trading is encouraged which allows a business to buy and sell goods, using its own capital, speculating that items can be brought at one price and then sold at a higher price on another day or in a different market for example. Islam is therefore an equity based system, not a debt based system. This is essentially a capitalist system but with safeguards against exploitation and unnecessary or excessive speculation. It allows reasonable profits and, furthermore, it discourages hoarding of money by levying a tax which is then distributed to the poor (Zakat). Such principles create a system that is more just and fair in that it creates a society where banks and the individuals share the profits and, critically, the risks. It also promotes the idea that money has no intrinsic value and remains purely a medium of exchange. Therefore, money should not be made through money itself but rather through legitimate trades in goods and services. I believe these to be some interesting concepts that could be usefully adopted in the West from a financial system that is alien to many people, as I consider that we would not have had the financial crisis if such ideas had been adopted.
Whilst capitalism has helped to drive economic growth and promote competition, given the advancements of technology and the globalisation of the world, we also need to think what type of capitalism we want and the potential impact it has on income inequality.
The next five years of this parliament will shape the future of the UK. There are a number of tough decisions that the government will have to make, but a sincere focus should be kept on reducing the income inequality in society. This would in turn help solve many issues the country faces.