09 December 2014

Rising inequality and slower growth

The west’s leading economic thinktank on Tuesday dismissed the concept of trickle-down economics as it found that the UK economy would have been more than 20% bigger had the gap between rich and poor not widened since the 1980s.

Publishing its first clear evidence of the strong link between inequality and growth, the Paris-based Organisation for Economic Cooperation and Development proposed higher taxes on the rich and policies aimed at improving the lot of the bottom 40% of the population [...]

The OECD said that the richest 10% of the population now earned 9.5 times the income of the poorest 10%, up from seven times in the 1980s. However, the result had been slower, not faster, growth.

It concluded that “income inequality has a sizeable and statistically negative impact on growth, and that redistributive policies achieving greater equality in disposable income has no adverse growth consequences.

“Moreover, it [the data collected from the thinktank’s 34 rich country members] suggests it is inequality at the bottom of the distribution that hampers growth." [...]

Rising inequality is estimated to have knocked more than 10 percentage points off growth in Mexico and New Zealand, nearly nine points in the UK, Finland and Norway, and between six and seven points in the United States, Italy and Sweden.

The thinktank said governments should consider rejigging tax systems to make sure wealthier individuals pay their fair share. It suggested higher top rates of income tax, scrapping tax breaks that tend to benefit higher earners and reassessing the role of all forms of taxes on property and wealth.

- Larry Elliott, 'Revealed: how the wealth gap holds back economic growth', Guardian, 9 December 2014
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