* OECD cuts Chile growth outlook for 2013, 2014
* Growth seen ebbing on lower mining investment
* Group urges improved education, social programs
By Alexandra Ulmer
SANTIAGO, Oct 23 (Reuters) - Chile must spend to combat steep income inequality though economic growth will be lower than previously forecast for this year and next, the Organization for Economic Co-operation and Development said on Wednesday.
The organization lauded Chile's monetary policies as buffers to a potential slowdown in demand for its top export copper, but urged Santiago to tackle income inequality, ranked the highest among the OECD's 34 member countries.
"The challenge going forward is to ensure that the tremendous economic performance is shared among all Chileans," said the OECD Secretary-General Angel Gurria, a former Mexican finance minister. "More could be done to eliminate distortions and fight tax evasion," the OECD's report on Chile added.
The policy proposals echo some floated by presidential frontrunner Michelle Bachelet, who has made education and tax reforms the central planks of her bid to return to La Moneda palace. Chileans are widely expected to elect center-left Bachelet, who governed as Chile's first female president from 2006 to 2010, in the Nov. 17 presidential election or a likely Dec. 15 run-off.
That said, Bachelet has indicated she wants "to work towards" free education. The OECD says making higher education free for all would be "regressive," as affluent students would receive the same benefits as underpriviledged ones.
Stable, booming Chile has long been an investment darling in Latin America. The Andean country boasts the highest per capita income at more than $20,000 in Latin America, excluding the Caribbean.
But massive student protests that erupted in 2011 to demand free and improved education shook the political and business elite, and the 2013 presidential campaign has been dominated by debate over how the country can become 'developed'.
The OECD recommended Chile's labor market be more inclusive, especially for women and young people, and said there was scope for the mining industry to continue to reduce "its large amounts of local emissions and soil contamination."
Chile has enjoyed an economic boom on the back of high copper prices and avid demand from main metals consumer China, but a gloomier global outlook and slowing investment are seen weighing on its growth this year and next.
The economy is expected to expand 4.2 percent this year, down from the OECD's previous view of 4.9 percent. It is then seen picking up steam to clock 4.5 percent growth next year, though that is also below the OECD's former forecast of 5.3 percent.
Small, export-dependent Chile's GDP grew 5.6 percent last year.
Since then, growth has slowed "due to a deceleration of investment, as major mining and energy projects approached completion, and a weaker external trading environment," the report said. "Consumer confidence has also trended down in 2013."
The OECD highlighted that there are "no obvious signs of excess demand." Some economists say ebullient consumer spending in Chile, where malls are usually filled to the brim, is unsustainable.
Should demand from top trade partner China lag further, monetary and fiscal policies will be able to respond, according to the report, which was put together before the central bank surprisingly cut rates to 4.75 percent last week.
The Paris-based OECD is a forum of 34 mostly rich nations, with Mexico and Chile the only Latin American members. It issues a survey every 18 months on its members.