During Manchester Policy Week, four leading UK thinktanks were invited to debate what government and the state might look like beyond the current period of austerity. Panellist Duncan Exley (pictured above) of the Equality Trust believes the practice of government will become increasingly difficult from 2015, due to the policies of previous governments and the alarming inequality in the UK economy.

The government that takes power in 2015 will be obliged to deal with policy challenges that are the result not only of the financial crisis and the responses to that crisis of previous governments, but also with challenges peculiar to the high levels of inequality currently seen in the UK. These challenges will make the practice of government more difficult.

To give some context: the UK is one of the most unequal economies in the developed world (seventh out of the OECD 34, behind Chile, Mexico, Turkey, the US, Israel & Portugal).

At the start of the 1980s the UK was about average for a developed country. During the course of that decade, inequality rose sharply and consistently. Since the early 90s we have remained fairly stable at our ‘new normal’. However, economic projections suggest that we will see a “speeded up replay” of the 1980s inequality hike in the five years to 2015.

The next government will have to govern a country increasingly split by income into a number of castes with often opposing priorities.

For example, the Government – now and in future – must decide how to pay for pensions; an obvious answer is to raise the state pension age, but what is a fair retirement age, when a woman in Tower Hamlets can expect to a healthy life expectancy of only 54 but her counterpart in Richmond can expect to stay healthy until she’s 72?

The government will also find that inequality reduces its room for manoeuvre on a number of issues. The most obvious example is that those in the middle and bottom of the income scale are having their disposable incomes squeezed, which restricts the potential of consumer-driven growth and/or drives up debt, and reduces the government’s taxation choices.

Simultaneously, concentrations of wealth at the top mean more money looking for investment opportunities such as residential property speculation, which have obvious further impacts on living standards.

There is a significant risk that increasing inequality will prove increasingly sclerotic for party politics as well as government. (This obviously has knock-on effects in the policy sphere).

As the economic realities of people at different levels within the income strata diverge, parties will find it increasingly difficult to offer policies that are universally appealing.

This is likely to be visible in regional differences (in 2011 per head gross disposable household income was 51% higher in London than in the North East), increasing the chances that party support will solidifying on regional lines. Recently, Lord Liddle warned the Labour Party against a return to what he called “them and us politics”; but we may find that such a thing is the inevitable result of a “them and us” society.

High levels of inequality can also be expected to affect parties – and therefore policy – through their funding streams. Those at the top of the income scale will continue to be able to afford to make large donations to parties, while those further down are likely to be increasingly unwilling or unable to do so, especially if the proportion of workers employed in low-skilled, part-time and casual jobs – where unions find recruitment difficult – increase and so restrict Labour’s potential funding.

According to a growing body of data, domination of party funding by the richest tends to lead to further inequality, as policymakers find it hard to win support for policies that will moderate income gaps from funders who are at the top end of that gap and would prefer to stay there.

The Equality Trust believes that as a nation, we need to have a long-term aim of reducing inequality to a level currently seen among the better-performing OECD economies. This won’t be an easy task, because there will be opposition from powerful interests, but the opposition will only increase if we allow inequality to increase, as will the difficulty of governing.