Income Inequality and Public Debt in OECD-Countries

Abstract

Purpose: The aim of the paper is to present the theoretical and empirical arguments for the causality between growing income inequality and increasing public debt within the capitalist economies.

Methodology: The paper consists of two major parts. The first part discusses the long-term changes in value of public debt and income inequality within countries, and presents the theoretical arguments for the causality between these two categories. The second part of the paper is an attempt to investigate the impact of inequality in the upper and lower parts of income distribution on an increase of public debt in a sample of OECD-countries in 1995–2010. The statistical analysis is based on calculations of: (a) correlation coefficients between income inequality and public debt; and (b) parameters of regression equations of the level and rate of growth of public debt in a sample of countries. The parameters of regression equations were calculated with ordinary least squares and fixed effects methods.

Findings: The results of the calculation illustrate that the growth of income inequality in the upper and lower parts of distribution stimulated an increase in value of public debt in the OECD countries between 1995 and 2010.