How the rich got richer and the poor got forgotten in New Labour's Britain
By Polly Toynbee

Just as Hurricane Katrina exposed the presidency of George W Bush, so the Glasgow East by-election last month shone a baleful light on New Labour. It wasn't the result itself, but the jolt that came from being reminded (or learning for the first time) of how badly so many fellow citizens fare. If this is what it's like after a decade or more of boom, what happens in a downturn?

Just as in New Orleans, the reporters and speechmakers came, saw and realised the prosperity and comfort of modern Britain isn't shared in Shettleston - or Sefton or Southwark or Wester Hailes or Wythenshawe or Whitehawk.

There is nothing new about the data. In all those places people die sooner, depend on cigarettes and alcohol more, subsist on benefits, do less well at school, get by on low-paid jobs if they work at all, and are sicker. But however stark, the enduring facts of inequality surface only occasionally, and when they do the shock is all the greater. Of course, government and city council policies have made a difference.

Everyone, the poor included, is materially better off than 10 years ago. Thanks to much-maligned tax credits, the overall number of children living in poverty has been cut. The housing stock is being improved. Teachers, better paid and resourced, do their best. Yet opportunity horizons in the schemes and estates have shrunk. Scotland, as with the UK as a whole, is a less mobile society. Where you come from, your parents' jobs (if they have one) and their income don't absolutely predetermine how many rungs up the ladder you'll climb, but they are more influential than ever. Self-made men, such as Alan Sugar or Tom Hunter, say I made it, so can they'. Individuals will always break out, but moral exhortation is empty in the face of gross disadvantage that starts before birth and builds with every passing year.

During the by-election, the Tory leader David Cameron went to the east end of Glasgow, not to address the people there who wouldn't in a million years elect a Tory, but to use it as a backdrop for a speech about responsibility addressed to the smug, well-heeled elsewhere. Cameron talked about the obligations of the poor to find work, eat less and be better parents. Not a word about the responsibility of the rich and the privileged.

It's been a silence reverentially observed by New Labour ministers too. Sons of the manse among them, they stood and watched, fingers on lips, as bankers paid themselves stupendous bonuses. According to Gordon Brown, the merest word out of place about top salaries would send them all scuttling overseas, depriving the UK economy of their services.

The same with the Tories, and their tales of "broken Britain". Its problems are fathers or under-attainment or deprived households. It's never greed, boardroom self-regard, tax evasion and excessive remuneration that even the big pension funds and insurance companies are now worried by.

So we don't have the conversation we need about inequality - whether within Scotland or the UK - that asks how much variation in reward is necessary to oil the wheels of enterprise. When does a growing gap between top and bottom become dysfunctional? It robs society and the economy of talent and potential by denying opportunity and demotivating those who see an unbridgeable gulf between where they are and where the top people sit. Studies show inequality and immobility are closely linked: the wider the gap, the harder it is for anyone to cross it. The conversation has to include tax. What if the amount contributed by the best-off determines the capacity of the government to help those at the bottom, to open schools and nurseries, to run job advice centres (or pay voluntary bodies to provide the service), to fund smoking cessation classes or to remake the infrastructure of blighted districts? Social progress depends on progressive taxation.

UK economic performance, at least till the banking crisis last year and the onset of this recession, was good, but not spectacular. But did it justify the Porsche-like acceleration of boardroom pay and the explosion of earnings at the top of the tree? Entrepreneurial rewards are being paid for humdrum performance, say the business school researchers.

In culture, television programmes have extolled the crude antics of bosses, while in policy Labour ministers have prostrated themselves - Peter Mandelson, remember, was "relaxed about people getting filthy rich". Excessive earnings became the era's badge of success. A spike in pay in sports, thanks in large measure to the pursuit of television rights by the likes of Rupert Murdoch, added to the sense that there is only one currency to denote success and worth and that is cash.

In our book Unjust Rewards, David Walker and I tried to find out a bit more about the attitudes of high earners. How much did they know or care about life in Baillieston or its equivalents; would they entertain the proposition that they should be contributing more to the general wellbeing; did they really think their astronomical earnings were justified?

On our behalf the polling company Ipsos Mori organised focus groups of top City of London lawyers and bankers: we persuaded them to take part on condition we did not name the firms concerned. No such thing as society, the lady said, and after 11 years of Blair and Brown, certainly these masters of the universe still believed in Thatcher's dictum. We got a professor of economics to lead the high earners through a crash course in how the other 99% live and we were amazed by their ignorance, and their cupidity. The rich know little and care less about the poor. They slip with complacent ease into the most banal clichés about the fecklessness of others. As for raising taxes to pay for better schools, more training, Sure Start programmes for infants, no sir. "It's our money; we're worth it." And don't get them started on inheritance or capital gains tax.

We wanted to test the proposition that high earners might sign up for a more equitable tax system if they could be persuaded that revenues would be pegged to specific projects, top-up schemes in schools or more resources for getting young people from poor homes into college. No way.

Public sector programmes, they replied, are always wasteful, never work and besides, they already paid quite enough tax, thank you. They were the geese that had laid the golden egg of UK prosperity (our focus groups were conducted on the very eve of the banking crash, which shows you how percipient these rich folk are). Tax us if you dare they seemed to say, but if you do we'll leave - except it turned out most of them had been with their firms for a surprisingly long time, most had nowhere else to go and certainly were not going to up sticks from their children's schools and leave the UK.

It's said (notably by Americans) that you can trust the rich to spend their money well and wisely. They relished citations of Adam Smith and his theory of moral sentiments at this point. Don't tax us and we will exhibit our humanity through charity. Philanthropy, it's claimed, is alive and well.

Well it isn't, not according to our research. Despite the growth in the ranks of the super rich, the total amount being donated to charity hasn't grown. The media make a fuss over individuals such as Tom Hunter, ignoring the wider picture of meanness. The top fifth of households in the UK give less than 1% of their total income, while the poorest tenth give 3%. The Charities Aid Foundation report for 2007 noted "a fall in the proportion of high level donors".

So what's to be done? One way or another we need to have that essential conversation about inequality. The cooling economic climate is forcing fresh thinking about pay, taxation and fairness. If the jobs, incomes, homes and prospects of ordinary people are being hurt, how much is paid out in boardroom and bonuses - and how much is not collected in tax - become legitimate public concerns. Labour's blunder over the 10p tax rate crystallised the new public concern. Gordon Brown's disastrous decline has levered the lid off, and not just on the left.

With the governor of the Bank of England bemoaning greed among bankers and the leader of the Tory party regretting child poverty and shrinking mobility, it's clear that new avenues are opening up, regardless of who holds power at Westminster or Holyrood. In the chill of financial crisis and economic slowdown, fairness matters more than it has for a long time. In straitened times, poorer people will need more, not less, protection; the better off should contribute most.

This is no longer a simple left vs right or nationalist vs unionist cause; all parties will be impelled to respond to the public mood. Inequality makes the poor sick and the rich insecure. An instinct for equity is hard-wired into people which makes it a permanent staple of democratic politics, no more so than in times of adversity.

Unjust Rewards by Polly Toynbee and David Walker, published by Granta Books, £12.99. Polly Toynbee is a columnist for the Guardian