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The ongoing financial crisis and economic slump have re-opened the question of the link, if any, between inequality and growth. A large part of this literature has focused on the impact of inequality on consumption. In the past, inequality was seen as reducing growth through its dampening of aggregate demand as income moved away from the'spending classes'. Attention has now turned to the alleged relationship between inequality and financial crisis, though consumption continues to play a role. In these new models, inequality leads to financial instability via an unsustai a le su ge i the le el of households indebtedness within the economy. As even a brief overview illustrates, the mechanisms at work in the inequality-household finance-growth nexus are therefore complex, though the attention they have attracted clearly reveals their importance.

This paper surveys the debate on how inequality can affect growth, focusing on the UK, both with respect to the origins of the recent crisis and to the policy debates on how to navigate through the current fragile stages of the recovery. Household indebtedness grew sharply in the pre-crisis years and arguably played a part in exacerbating, if not causing, the recent slump. In this paper, we carry out one of the first explorations into how inequality may have been a driver behind this rise in unsustainable debt. Going forward, high levels of inequality might reduce consumption and therefore growth. This argument is of particular relevance given that consumption made up around two thirds of UK growth in demand over the past two decades (BIS/DFID, 2011). It has therefore been argued that a more equal or broad …