Widening income inequality has wiped as much as six to nine percentage points off the UK growth rate, a new report shows.
The report – Trends in income inequality and its impact on economic growth – from the OECD, found that income disparities are the single biggest impact on growth. When income inequality rises, economic growth falls.
The gap between the rich and poor is at its highest level in most OECD countries – a forum of 34 countries committed to democracy and the market economy – in 30 years, with the richest 10% earning 9.5 times more than the poorest 10%. In comparison, the ratio stood at 7:1 in the 1980’s.
“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 Secretary-General Angel Gurría.
“Countries that promote equal opportunity for all from an early age are those that will grow and prosper.”
Lack of investment in education by the poor is the main factor behind inequality hurting growth, says the OECD. England has the highest University tuition fees in the European Union (plus Iceland, Liechtenstein, Norway, Montenegro and Turkey), according to analysis by the European Commission. Universities in Scotland do not charge tuition fees to home students.
Undermining educational opportunities for children from poorer backgrounds hampers growth, through lowering social mobility and detrimentally affecting the development of new skills.
According to the report, people whose parents have low levels of education see their educational outcomes deteriorate as income inequality rises. By contrast, there is little or no effect on people with middle or high levels of parental educational background.
The impact on growth from income inequality stems not only from the gap between the poorest 10% and the very richest, but the gap between the bottom 40% with the rest of society.
Anti-poverty campaigns will not be enough to tackle income equality, the report says. Increasing access to public services, such as high-quality education, training and healthcare, will create greater equality of opportunities in the long run.
The report also found that redistribution policies – social security benefits and progressive tax policies – do not harm growth, provided they are well targeted and implemented.
Policy makers need to concentrate their attention on improving the income outcomes of the bottom 40%, the report recommends. Income redistribution efforts should focus on families with children and youth and should promote skills development and learning across people’s lives.
Oxfam’s head of UK campaigns, Nick Bryer, said: “The OECD’s report is the latest sign of a new emerging economic consensus – today’s extreme economic inequality harms not only the poorest people, but also economic growth.
“The OECD is right that investment in education and other public services is key to tackling inequality – yet this is being undermined by a global system that makes it easy for companies and rich individuals to avoid paying their fair share in tax.
“We agree with the OECD’s analysis that if countries are to prosper then they need to tackle inequality. In a world where the richest 85 people have the same wealth as the poorest 3.5 billion we need urgent action to even things up. Only then will we start to see growth and prosperity that benefits everyone, both in poor countries and developed economies like the UK.”