BRITAIN'S NEW FINANCIAL APARTHEID

The British middle classes are divided into the many, the Feelglums, and the few, the Feelgreats. It does not augur well for the Conservative Party, argues Boris Johnson

IT IS typically British of our middle classes that the one aspect of their predicament which they find most galling is the one they can do least to rectify. I do not mean the fact that they have been coshed by the biggest tax rises in peacetime history, that they live under the daily threat of redun- dancy, that their houses continue to be worth less than their debts, that they are forced to withdraw their children from prep school. No, what really provokes them, and what all the polls agree will cost the Conservatives dear at the next election, is a phenomenon which, for better or worse, has been identified with a single man.

It is a measure of Tory anxiety that even Mr Bill Cash, not normally thought of as an opponent of the free market, has denounced Mr Bryan Townend, the chair- man of Midlands Electricity, for taking a £125,000 pension as well as a £165,000 salary. Mr Major has set up a Cabinet Committee to wring its hands over the question, while the assistants of Mr Gor- don Brown, the Labour Treasury spokesman, keep newspaper fax machines churning with a stream of fat cat revela- tions.

And yet there is so much more to this than party political point-scoring. For I think we are seeing a partial answer to the mystery of why, when the economy is now positively fizzing, the Government remains so chronically unpopular. It lies in the deepening schism between the Feelglum classes of middle management and a group that we might call not the Feelgoods, but the Feelgreats. What we have here is a phenomenon with profound implications, the makings of a kind of financial apartheid.

To understand what may be in store, look at America. As ever, the analogy is imperfect, but it is likely to be instructive. It has been well documented that the mid- dle classes there, especially the white males, are as dismal, truculent and uncer- tain as they are over here. Both Bush and Clinton have felt the lash of electoral dis- satisfaction — and have also felt slightly baffled, given that the US economy is per- forming historically well, with total output roughly doubling since the early 1970s.

Clinton's recent drubbing at the polls almost certainly owes something to the problem identified by Kevin Phillips in a new book, Arrogant Capital: Washington, Wall Street and the Frustration of American Politics. There is income growth, but it is skewed to an electorally insignificant minority. Phillips demonstrates that so much of the increment has gone to the richest Americans, in their roles as officials or owners of corporations, that the median US income has fallen. In 1993, the US economy grew by 3 per cent, while the median income of American families fell by 1 per cent. Indeed, the only people who have done really well are not the top 1 per cent, but the top half of the top 1 per cent: even the suburban orthodon- tists on $250,000 per year did not substantial- ly increase their share of US income during the 1980s.

Partly this is a function of the much dis- cussed job insecurity. But percolating up through the income groups is a relatively new emotion for the British middle classes. It is the spleen of comparative have-nots against a small group of haves. For it is not just the new kings of the privatised utilities who are experiencing sensational improve- ments in their circumstances.

Look at the highest-paid directors of the FT-SE 100 firms, many of whom received pay increases of over 30 per cent this year, the rise alone being enough to buy a gar- den flat a short walk from Kensington Gar- dens. Someone at Unilever — the company will not release the name — is now on £706,000 per year, having received a pay rise of 65.7 per cent. The top man at man- agerially challenged S.G. Warburg, who may or may not be Sir David Scholey, has been given a 220 per cent boost, even as his firm sacks 180 of its sales force. At BAA, Reed Elsevier and Arjo Wiggins, according to Monks Partnerships, a firm that knows about such things, the highest-paid direc- tors are now tottering home with pay-pack- ets a third bigger than last year.

This does not produce generous emo- tions in the middle-class breast; not least since salaries in modern British industries, especially the lately privatised ones, are apparently determined on the zero-sum principle. That is to say that while Cedric rakes it in at the top of British Gas plans are announced to cull 25,000 staff, or at least prune their wages and holiday entitle- ments. The children of the middle man- agers are going without their Nintendos, in other words, so that Cedric may resurface the tennis court and build a gazebo over the swimming-pool. According to figures produced by the Labour Party, about 100 people are likely to become millionaires as a result of electricity privatisation; and yet the water and electricity industries are poised to lay off 20,000 to 30,000 over the next two or three years.

And the gap widens. As the economy booms, companies are not putting their money into wages: far easier to put the profits into dividends, which can be readily cut back again. And who benefits? The Cedric Brownes, with share options some- times worth more than the salary. As Kevin Phillips shows, the Americans are familiar with all this. Over the last decade, he says, `corporations purged employees, especially older ones close to retirement, cut employ- ee benefits, slashed real wages and shut down plants. For the first time in modern US history, stock prices decoupled from the real economy, enabling the Dow-Jones industrial average to keep setting records even as employees' real wages kept declin- ing.'

Well, we are not quite there yet. No one has yet postulated that middle-class incomes in Britain are declining, though one could argue that the class has been col- lectively robbed of about £20 billion in the two tax-raising budgets of 1993. Even Mr Clarke has admitted that the added tax burden was equivalent to about 7p in the pound.

It rubs salt into the wound that Tory tax- ation has been much less painful for the Feelgreats. Looking at the period of Tory rule from 1979 to 1995, Income Data Ser- vices has calculated that gross earnings for chief executives have risen 579 per cent, from an .average of £18,333 to £106,168. Across the economy as a whole, gross pay rose by 403 per cent. But look at what hap- pens after tax. Net pay has gone up all round by 409 per cent, but for the chief executives it has risen by 645 per cent.

To put it another way, net pay for the fat cats was 3.8 times average earnings in 1979. Today, the Feelgreats are 5.46 times as rich as the Feelglums.

There is good news in all this. As this magazine has argued before, or at least as I have argued in this magazine, it is reassur- ing that Britain's middle-management classes, credited with the nation's relative economic decline, are being kept in some- thing approaching a keen, appetitive state. It is good that the middle classes are being weaned, brutally, of their addiction to house-price inflation. It is a sign of economic robustness, sure- ly, that companies feel able to offer such splendid remunerative packages to Cedric Browne and his kind. There is, though, a drawback, and it is a serious one.

The disparity in incomes creates a morose, vengeful and politically short- sighted middle class, electorally far more numerous than those few whose earnings most reflect the underlying strength of the economy. In those circumstances vital eco- nomic reforms, on both sides of the Atlantic, may prove impossible. In their rage, the middle-class Feelglums in Ameri- ca brought in Gingrich, supposedly with a mandate to do violence to the budget deficit and federal spending. If one studies his 'Contract With America' closely, how- ever, it is clear that he and his allies do not contemplate any serious erosion of the Social Security budget. They would not dare. If anything, the Republicans are like- ly to increase expensive middle-class enti- tlements, such as tax breaks for families with children.

In Britain, too, politics are dominated by a terror of upsetting middle-class sensibili- ties, from the Labour Party to even the most Jacobin of right-wing Tories, Mr Peter Lilley. To take the most salient example: if the Government is to have the remotest chance of winning the next elec- tion, it knows it must begin to cut taxes for those embittered erstwhile Tory voters, perhaps as early as next November. And the middle classes, after all they have been through, will be thoroughly deserving of Mr Clarke's generosity. In the current cli- mate of strong economic growth, however, the Treasury warns that the manoeuvre may trigger an inflationary boom of the kind seen in 1988.

The best way, the classic, proper, Tory way to avoid this would be to offset the tax cuts by a reduction in public spending; and as the Welsh Secretary, John Redwood, correctly pointed out last week, the Gov- ernment approaches the subject with all the zeal of a Muslim confronted by a pork chop. For his pains, Mr Redwood was denounced as 'mad' by a Cabinet col- league. And, indeed, to suggest that Peter Lilley, the Social Security Secretary, could shrink his £80-billion budget by abandon- ing the curious policy of universal entitle- ment to the middle classes is to provoke a sharp intake of breath.

Dear me, no, say those close to Mr Lil- ley, anything like what Mr Gingrich pro- poses would be 'electoral suicide'. The Government's view is that middle-class benefits, having been conferred for hous- ing, invalidity, or children, cannot be revoked without political mayhem. It is eas- ier, frankly, to whittle away at the entitle- ments of the poor.

Clutching the welfare state like a com- fort blanket, then, the middle-class Feel- glums have sunk British politics in inertia. Their mood will not lift until the benefits of the economic recovery have spread from the very few. They may be in for a long wait.

Boris Johnson is assistant editor of the Daily Telegraph.