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

India: an economic powerhouse on standby

BY Fraser Tennant

India is a sleeping economic powerhouse which should rank among the world’s strongest economies, according to a report published this week by Deloitte.

The report – ‘Competitiveness: Catching the next wave’ – portrays India as a country possessing the basis for great economic strength, such as stable democratic rule, a global outlook, a young demographic base, growing incomes, and an increasingly educated workforce.

But, on the downside, the report makes abundantly clear that the assertion that India is, or should be, a major global economic player is largely theoretical.

Decades of chronic infrastructure paralysis and indecisive political decision-making have resulted in a country which, in automotive terms, is driving with the handbrake very much on.

Despite this, according to report co-author, Gary Coleman, a managing director at Deloitte Global, India is on the cusp of a startling revival. He said: “India is a large market with rising purchasing power, a strategic location with links to fast-growing economic regions, and a young population eager to take part in the nation’s development.

“Recent policy moves such as the Reserve Bank of India’s shift to an inflation-targeting framework, along with the new government’s focus on fiscal consolidation, have helped improve business sentiment.

“Another positive indicator is the government’s initiatives to upgrade ties with major economies, ease decision making, develop infrastructure, and promote manufacturing.

“However, it’s still a long road ahead. Change is never easy, but the government can draw comfort from the economy’s inherent strengths. They will serve as a solid base from which policymakers can steer India’s economic ship to catch the next wave of growth and prosperity.”

Deloitte’s report certainly paints a picture of a sleeping economic giant, just waiting for the right time to stir from its slumber. Whether the stimulus for the awakening will prove to be of domestic or international origin remains to be seen, but what is clear is that India is poised to take its place among the global economic elite.

Report: Competitiveness: Catching the next wave

UK growth to decline sharply

BY Richard Summerfield

The UK will experience economic growth of just 2.4 percent in 2015, according to a recent report from forecasting group EY ITEM Club. The forecast is significantly lower than predictions issued by the Bank of England, the Confederation of British Industry and the International Monetary Fund.

In its ‘Autumn Forecast’ the EY ITEM Club noted that the UK’s changing economic fortunes are likely to be based on uncertainty both at home and abroad. Political uncertainty in the UK will likely deter businesses from investing in the coming year.

Potential constitutional reform, the impending general election and a possible 2017 EU referendum are all expected to curtail investment activity. Further, burgeoning geopolitical risks, most notably the crisis in Ukraine, have heavily dented business confidence in the UK’s key European markets.

Peter Spencer, chief economic adviser to the EY ITEM Club, said “The forecast for GDP growth is still relatively good. What has changed is the global risks surrounding the forecast and the headwinds facing investment by firms. Looming political uncertainty risks denting corporate confidence - the question now is how will these risks play out? I expect caution to become the order of the day.”

Although, as the report notes, growth in business investment in the UK will have increased to 9 percent in 2014 compared with 2013, it will drop sharply in 2015 to 5.8 percent. The faltering European recovery and the relative devaluation of the euro compared with the pound have had a detrimental effect on the UK’s export business. According to Mr Spence, the outlook for UK exports appears to be “dreadful”.

Weaker global economic growth and stagnating UK wages and productivity will all combine to keep interest rate rises at bay. In the UK, interest rates have been at 0.5 percent for more than five and a half years. The report also predicts inflation will remain low going forward. Inflation is currently at a five-year low of 1.2 percent, but that figure is likely to increase marginally, averaging 1.3 percent next year.

Report: EY ITEM Club: Autumn Forecast 2014