Reducing income inequality is the key to driving economic growth

BY Fraser Tennant

Reducing income inequality is the key to boosting economic growth, according to new research by the Organisation for Economic Co-operation and Development (OECD).

In ‘Focus on Inequality and Growth’, the OECD offers evidence that inequality affects growth because it undermines educational opportunities for children from poor socio-economic backgrounds – lowering social mobility and hampering skills development.

"This compelling evidence proves that addressing high and growing inequality is critical to promote strong and sustained growth and needs to be at the centre of the policy debate," said OECD's secretary general, Angel Gurría. "Countries that promote equal opportunity for all from an early age are those that will grow and prosper."

OECD analysis shows that, in the UK, rising levels of inequality “cost the economy almost nine percentage points of GDP growth between 1990 and 2010”. In the US, over the same period, it was seven percentage points.

In Mexico and New Zealand, the research estimates, rising inequality has knocked more than 10 percentage points off growth. Italy, Sweden, Finland and Norway have also experienced depreciation, albeit at much lower levels. Conversely, greater equality in Spain, France and Ireland has led to an increase GDP per capita.

Key findings include: (i) the gap between rich and poor is now at its highest level in 30 years in most OECD countries; (ii) a long-term trend increase in income inequality has curbed economic growth significantly; (iii) although the overall increase in income inequality is driven by the very rich 1 percent pulling away, what matters most for growth are families with lower incomes slipping behind; and (iv) tackling inequality through tax and transfer policies does not harm growth, provided these policies are well designed and implemented.

Making strong reference to this last point, the OECD is calling on governments to do more than just implement anti-poverty programs and to invest a great deal more in educating those on low incomes.

Mr Gurría said "Policy needs to confront the historical legacy of underinvestment by low income groups in formal education. Strategies to foster skills development must include improved job-related training and education for the low-skilled, over the whole working life."

The OECD believes that the countries which promote equality for all will be the ones to grow and prosper in future.

Report: Focus on Inequality and Growth

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