Italy

G7 Finance Ministers and Central Bank Governors' Meeting: Inequality and Growth

 

Remarks by Angel Gurría,

OECD Secretary-General

Bari, Italy, 12 May 2017

(As prepared for delivery)

 

 


Minister Padoan,

Ministers, Governors,


Growth seems to be slowly picking up. This is good news.


But we are still facing a vicious circle of low productivity growth, sluggish demand, stagnant wages and, in many G7 countries, rising or high levels of inequalities.


It is important to ensure that growth is broad-based and does not leave large sections of the population behind. Over the years, we collectively focused on how to grow faster, how to grow the proverbial “size of the pie” - and, after the crisis, on how to grow again! In so doing, we somehow neglected to reflect about the nature of the growth, the sharing of the pie and social outcomes. We know, now, that besides the ethical and political implications, those aspects are tightly interwoven with the level of our economic performances.


This is why, today, I am glad to present to you our report “A Fiscal Approach for Inclusive Growth in G7 countries.” We address the latest OECD evidence on inequality trends in G7 countries; our views on the causes and drivers of the phenomenon – the role of globalisation, of digitalisation, of innovation, of technological change; the distributional consequences of the trends and the changes in labour markets policies; and of course the enduring impact of the crisis on inequalities.


Let me highlight three key messages from the report:


My first and central message is that inequalit-IES are bad for growth. I am using the plural when talking about inequalit-IES on purpose: Income inequality is a very relevant measure as it gives us an idea of how the benefits of growth are shared across all segments of society. But our evidence suggests that inequalities in wealth and in opportunities may reflect even deeper disparities and fractures within our society. They actually have even more pronounced adverse effects, not only on social outcomes but also on the growth potential of our economies – what we call the “nexus” productivity and inclusiveness.


For instance, more unequal countries show larger skills mismatches than more cohesive ones, with significant negative effects on productivity. Large inequalities jeopardise future growth and productivity potential through low labour force participation, low employability and marginal attachment to the labour market. Similarly, inequalities in access to quality health services (in particular primary care and prevention policies) have significant consequences in the productivity of poorer members of our societies.


My second message is that a focus on inclusiveness also makes sense from a public finance perspective: pro-inclusive growth policies can help you balance your budgets.


Indeed, public finances have been under increasing pressure over the last decades: since 1990, social public spending, on average, across the OECD increased from about 17 percent to over 21 percent in 2014 , mainly driven by ageing, health and pensions. Larger inequality levels would pile additional pressure on fiscal space, directly through increased need for transfers and redistribution or through foregone tax revenues, as well as indirectly through lower output growth.


My third message is that inclusive growth requires a whole-of-government approach and that you, Finance Ministers, can play a major role.


You can make a difference because you have very powerful policy levers at your disposal to boost growth and inclusiveness. You have the budget. You control tax and spending policies.


But let me be very clear: our report does not call for lavish public spending or higher taxes across the board!


A lot can be done, for instance, to adjust tax systems to increase progressivity without resorting to raising marginal income tax rates. New tax mix and designs that play on a different structure of taxation while being fiscally neutral can be put in place, such as:

  • using part of the revenue raised from broadening the tax base to compensate low-income households through income-tested tax credit or benefit payment;

  • increasing recurrent taxes on immovable property while allowing for tax allowances for the poor and/or more progressive rate regimes based on owners’ income. 


And the same applies to spending. Our PISA assessments, for instance, shows that countries, that have the same level of education spending, can have very uneven outcomes of their education systems, including in terms of inclusiveness and social mobility. Thus, our report identifies a series of innovative interventions - on social protection, education, preventive health, active labour market policies, etc. - that offer the biggest “bang for your buck”.


Equally important is your key role in the definition of structural reforms. And, as we argue in the report, inclusive growth requires balanced and country-specific policy packages. These not only entail fiscal measures, but should also promote competition, or the diffusion of innovation from frontier firms to laggard firms, which can help to bridge the productivity and wage gaps.


Let me conclude by congratulating Pier Carlo and the Italian G7 Presidency, for bringing this issue to the agenda of Finance Ministers and Central Bank Governors. The adoption of the Bari Policy Agenda as deliverable of this meeting will send a strong political message about the commitment of your governments to boost both growth and inclusiveness, while enhancing public trust.


Please count on the OECD to support you in this endeavour!


Thank you.


 

 

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