The countries around the world suffer from the effects of growing internal inequalities and should seriously consider the redistribution of wealth through tax policy and transfer payments, according to the International Monetary Fund (IMF). While overall global inequality has declined over recent decades due to economic growth in countries such as China and India, the local inequality has risen sharply in some countries, especially in large countries like the US and China. IMF warned that excessive inequality could reduce economic growth.
The progressive taxation and transfer payments are the key components of effective fiscal redistribution, advice the IMF Fiscal Monitor report.
The IMF’s recommendations appear to be inconsistent with the views of the administration of US President Donald Trump whose new tax proposals are based mainly on tax cuts for companies and the wealthy citizens.
In its report, the IMF notes that the decline in global global inequality over the past 30 years, as a result of globalization and technological progress, hides profound problems in countries. Over the same period, 53% of countries report an increase in income inequality. Latin America remains the biggest region in the world, where such effect is experiences. Especially strong is the rise in inequality in developed economies, but it spreads around the world.
In many developed economies, such as the United States, for instance, the growing gap between rich and poor is the result of greater concentration of wealth in the richest 1% of the population.
IMF also recommends narrowing education gaps to eliminate income inequalities.
At the same time, the fund warned about increased risks to China’s financial stability in terms of size, complexity and growth rates in the country’s financial sphere.
“China’s steady growth and robust financial sector policies in recent quarters have diminished concerns about possible slowdown in short-term growth and negative second-round effects for the global economy, but the size, complexity and growth rates in the country’s financial sphere suggest an increase in the risks to financial stability”, said the experts from the IMF. They explain that the assets of the Chinese banking sector have risen from 240% of GDP at the end of 2012 to 31% of GDP in 2017.
“Moreover, the widespread use of short-term wholesale funding and shadow lending has led to increased vulnerability of banks”, adds the IMF report.
According to them, Beijing has encountered the need to balance the hardening of the financial sector policy and the slowdown in economic growth.