The relationship between poverty and mental health is indisputable. However, to have an influence on the next set of sustainable global development goals, we need to understand the causal relationships between social determinants such as poverty, inequality, lack of education and unemployment; thereby clarifying which aspects of poverty are the key drivers of mental illness. Some of the major challenges identified by Lund (2014) in understanding the poverty–mental health relationship are discussed including: the need for appropriate poverty indicators; extending this research agenda to a broader range of mental health outcomes; the need to engage with theoretical concepts such as Amartya Sen's capability framework; and the need to integrate the concept of income/economic inequality into studies of poverty and mental health. Although income inequality is a powerful driver of poor physical and mental health outcomes, it features rarely in research and discourse on social determinants of mental health. This paper interrogates in detail the relationships between poverty, income inequality and mental health, specifically: the role of income inequality as a mediator of the poverty–mental health relationship; the relative utility of commonly used income inequality metrics; and the likely mechanisms underlying the impact of inequality on mental health, including direct stress due to the setting up of social comparisons as well as the erosion of social capital leading to social fragmentation. Finally, we need to interrogate the upstream political, social and economic causes of inequality itself, since these should also become potential targets in efforts to promote sustainable development goals and improve population (mental) health. In particular, neoliberal (market-oriented) political doctrines lead to both increased income inequality and reduced social cohesion. In conclusion, understanding the relationships between politics, poverty, inequality and mental health outcomes requires us to develop a robust, evidence-based ‘political economy of mental health.’