IMF economists suggest tools to tackle inequality

Say raising retirement age, scrapping regressive taxes can help address the issue

Raising the retirement age and scrapping regressive taxes such as deducting the interest on mortgages can help richer governments address income inequality without straining their pocketbooks, IMF staff said in a paper on Thursday.

In recent months, the International Monetary Fund has taken an increasingly vocal stance on the widening gaps between rich and poor nations. IMF staff say they have focused more on inequality due to interest from the Fund's 188 member countries.

From Asia to the United States, the richest 1% of earners have taken home a growing share of the economic pie, leading to pressure on policymakers to do something about it.

In a wide-ranging paper, IMF officials offer cash-strapped governments a menu of options on how to customise their social protection programs to get the biggest bang for their buck.

"The key message that I want to convey today is that when it comes to fiscal redistribution, design matters," David Lipton, the IMF's first deputy managing director, said in a speech. He presented the paper at the Peterson Institute for International Economics in Washington.

Richer countries with aging populations may consider raising the retirement age to preserve pensions while saving money, the IMF staff said.

Developing economies could focus on better targeting social programs and raising property taxes, among other policies, the economists said. For other advice, see the paper:

Lipton noted that in most developing countries, the poorest 40% of the population ends up receiving less than 20% of the benefits from social spending.

The IMF analyses the economies of each of its 188 member countries and offers advice on government budget and monetary policies. Lipton said the IMF has always assessed the impact of countries' tax and spending policies on "distributional goals."

"There are many cases where we will express our view if we think that policies are likely to undermine growth ... by having adverse consequences upon the poor," Lipton told reporters.

IMF economists also point out that 50% of IMF programs include a requirement that authorities not reduce social spending below a certain level.

But the Fund had not traditionally focused on income inequality until recent years. IMF Managing Director Christine Lagarde sounded the trumpet on rising income disparities in two major speeches last month.

And another IMF study two weeks ago said income inequality can lead to slower or less sustainable economic growth, while redistribution can actually help an economy.

"We hope this signals a long term change in IMF policy advice to countries - to invest in health and education and more progressive fiscal policies," said Nicolas Mombrial, a spokesman for the development advocacy group Oxfam.