Inequality in Australia has grown between 2011 and 2014 and its impact on the economy could cost up to $500 per person by 2019-2020.

This is the finding of a new paper from the Inclusive Prosperity Commission within Labor’s thinktank, the Chifley Research Centre.

It suggested that if no action is taken to reduce inequality, it would eventually cost Australia 3% of GDP over the next 25 years.

The commission is led by Chifley Research Centre’s executive director and former speechwriter to Julia Gillard, Michael Cooney, and the former Labor treasurer Wayne Swan. Amanda Robbins of Equity Economics was the principal author.

The analysis found that between 2012 and 2014 Australia’s income Gini index – the most common measure of income inequality – grew by 1 percentage point from 32% to 33%.

The paper found: “Over the next five years, this is projected to reduce the level of GDP by $13.1bn or 0.7% lower than it would otherwise have been in 2019-20. This approximately translates to a reduction of around $500 per person.”

The paper warned inequality will have an impact on Australia’s capacity to transition from a mining economy to a more innovative, modern economy.

“Our ‘order of magnitude’ estimate shows that rising inequality, left unchecked, poses a serious economic risk for Australia,” the paper concluded.

“Rising inequality will reduce the pace at which the economy can grow, damaging long-term growth prospects and even worse, negating hard-won gains of successful economic policy in the past.”

The paper found over the long term, a one Gini point increase in inequality is estimated to reduce the level of GDP by 3%.

“As a comparison, this is equivalent to wiping out the gains of the national competition policy reforms, which were estimated to have boosted GDP by 2.5%,” the paper said.

“Another comparison is with the stated impact of the three North-Asia FTAs (Japan, Korea, China), which are expected to raise GDP by only 0.1% over the long-term.”

The paper’s policy prescriptions include access to quality education from early childhood, ensuring womens’ return to work was financially viable through childcare and paid parental leave as well as affordable healthcare. Unsurprisingly, the paper also suggests changing the tax mix in line with Labor policies to crack down on generous tax concessions in the areas of negative gearing, capital gains and superannuation.

Cooney said the new evidence showed that middle Australia was already paying a price for increased inequality.

“Governments need to do more: through policies which lift wages for middle class and working class Australians and ensure people reliant on government payments have adequate incomes, and with wider health, education, housing and retirement income policy.”