Could the idea of a universal basic income work in Australia?

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By Mark Liddiard, Curtin University

From next year, Finland will become the first country in the world to introduce a universal basic income, a bold policy idea that gives every citizen a basic obligation-free living wage to meet their living costs.

At first glance, the concept of a universal basic income seems both costly and at odds with our prevailing sense of conditionality. That is, what benefit to individuals or society as a whole can possibly flow from letting the idle live in uninterrupted idleness? And how could any politician conceivably sell such an idea in Australia, where the divisive narrative of “lifters and leaners” has been a key plank in justifying recent welfare cuts?

However, Finland is not alone. Switzerland recently voted on whether to introduce a universal basic income, while in the Netherlands, the city of Utrecht is also considering the idea. It may simply be a matter of time before the idea of a universal basic income becomes mainstream in Australia.

The idea of universal basic income has a long history of support from both sides of politics. One of the reasons for this is that a key objective is to reduce disincentives to work. This sounds counter-intuitive – giving everyone a basic income to live on without working would surely increase disincentives to work?

But we know that welfare tapers – or the loss of welfare income for each dollar earnt in the labour market – can often be steep enough to ensure that work does not pay, or pays so little extra for a full week of work, that it discourages job seekers. With a universal basic income, those who want to work keep job income on top of their basic income.

An added advantage is dramatically reducing the costs of administering ever more complex welfare benefit systems. In Australia the cost of administering Centrelink is around $3 billion, so simplification can offer huge potential savings, as pointed out in last year’s Review of Australia’s Welfare System report.

Of course, setting up a basic income scheme is not without cost in itself – approximately 1% of GDP according to modelling. In a landscape of debt and deficit, policy-makers are seeking to cut public spending on welfare, not expand it, even if Australia’s economic circumstances are far more favorable than other economies. Yet a universal basic income can be a potent vehicle for enhancing consumer spending, raising economic growth and generating employment.

As we recently saw with the reception of Duncan Storrar on the ABC’s Q&A program, politicians ignore the economic contribution of poorer households at their peril. Poorer households do not simply pay tax when they go to the shops or fill their car with fuel but, as shown by the recent NATSEM modelling around raising GST, they pay proportionately more of their disposable income under regressive taxes than the wealthy. The reality is that poorer households are critically important as economic consumers.

As the Eurozone, the UK and Australia all face the growing challenge of deflation, we must grapple with how to generate economic growth when traditional monetary policies such as cutting interest rates – and even more unorthodox approaches like quantitative easing – have ostensibly failed.

Giving every citizen a basic income is one possible solution. An historical challenge to the concept of a universal basic income has been the impact on inflation. But with deflationary pressures engulfing global economies in 2016, the challenge is how to generate consumption.

Still, intriguing challenges remain. Finland, like many Scandinavian countries, offers comprehensive child care and other welfare services free at the point of provision. For more privatised welfare states, such as Australia, this presents some challenges. Modelling suggests that some groups, such as single parents with child care costs, for instance, may be worse off without adjustments.

A greater challenge may be the prevailing vilification of welfare claimants, which has been a key narrative in selling welfare cuts in Australia, so moving to a scenario where all are offered unconditional money is difficult to see.

Yet ironically we know that Australians broadly support more, rather than less, public spending. While there appears to have been a recent decline in support for more spending on welfare benefits, 40% would also like to see more spending on social security benefits. In the same way that most of us want to see business pay more, rather than less tax, it may be that Australian politicians are currently out-of-step with public attitudes.

The recurrent Coalition mantra that growing the economic pie is key, not how the pie is split up, is a case in point. Generating economic growth to raise revenue to pay for public spending is certainly important. But so is sharing the spoils of that economic growth, as we see with the growing focus upon widening inequality in Australia and internationally.

The language of “lifters and leaners” may help to sell welfare cuts but works less well in the context of the working poor – those in insecure employment faced with low and stagnating wages for whom the recent pre-election budget offered nothing, as Duncan Storrar’s appearance on Q&A and his broader reception made clear.

A system whereby the “strivers” get enough to live on – and also get to keep whatever else they earn – while the “skivers” do not starve but are tangibly worse off – may prove to be attractive to an increasingly disaffected electorate.

The Conversation

Mark Liddiard is a senior lecturer in social policy at Curtin University

This article was originally published on The Conversation. Read the original article.

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Rohan
Rohan
4 years ago

“As we recently saw with the reception of Duncan Storrar on the ABC’s Q&A program, politicians ignore the economic contribution of poorer households at their peril.”

Lets fact check that shall we? Storrar receives:

tax payer subsidised housing – check
tax payer funded health care – check
tax payer funded educational opportunities – check
tax payer funded welfare that puts food on his table and clothes on his back – check

So what exactly does this man contribute to the economy? Looks like everything on the ledger above is a liability to the tax payer.

Never a truer word spoken: “Socialism eventually runs out of other peoples money” – M Thatcher.

Michael
4 years ago
Reply to  Rohan

Rohan… see my comment. What if it is not ‘other people’s money’?

Michael
4 years ago

Most people see a Universal Basic Income (UBI) as simply another ‘transfer payment’, funded out of tax… leading them to see the UBI as a replacement for ‘welfare’. It means that the money previously dedicated to paying ‘benefits’ for the ‘poor’ has to be spread across all citizens… watering down the impact. People are rightly outraged at the thought of giving precious tax dollars to those who don’t deserve it.

The only ‘saving grace’ is that it removes the ‘poverty trap’ that now occurs where benefits are reduced as income goes up, discouraging people from taking part-time work.

There is another way to look at the UBI.

Imagine if the UBI is not funded out of tax… or out of anything. Imagine if it is an UNFUNDED payment.

Most people recoil at this idea… because it conjures the image of people going into debt, leaving others holding the baby.

However, this response is founded on a misunderstanding that compares ‘the economy’ with an ‘individual household’.

No household can ‘create its own money’. However, every country that has its own currency does just that.

Barring Quantitative Easing, money is usually created ‘out of thin air’ by Commercial Banks as they make loans. This is not my contention See http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

That is: all new money is ‘unfunded’.

It is as simple as: debit loan in the name of the borrower (say $100) and credit deposit also in the name of the borrower ($100). The double entry creates the money (out of thin air). The debit represents the debt that must be repaid, while the deposit provides the cash to spend. As this new money is spent into the economy it creates new demand.

Under this system, the economic stimulus generated by the new money depends upon who is borrowing for what purpose.

Consumer Borrowings increase consumer demand

Car Borrowings increase demand for cars

Housing Borrowings increase demand for houses

Business Borrowings increase demand for capital goods, as well as financing increases in working capital

Government Borrowings increase demand for infrastructure, but are also (wrongly) used for operational costs and transfer payments.

The loans must be repaid of course.

By taking the loan, the borrower is given a right to consume resources they have not earned. As they work/invest to generate new value, they earn income equal to the value they create. This income is used to repay the loan. Once repaid, they and society are square. They will have put in (via work/investment) what they took out when they spent the proceeds of the loan.

As the loans are repaid, the money is written back into the thin air from which it came – simply by reversing the entries in the banks books: cancelling deposits by the borrower against the outstanding loan.

In this circumstance, we cannot be surprised that total world debt keeps increasing. It cannot be otherwise. To finance a growing world economy, the total money supply must increase… requiring an increase in total debt. That is, there must be more new loans written in any time period than are repaid.

As debtors become stretched and/or asset values become inflated, the business cycle is exacerbated causing lending to slow, putting economies into recession. If lending collapses (so more loans are repaid than are re-issued), Depression ensues.

Conversely, as lending increases, the new money gives effect to ‘latent demand’: demand that we all have, but cannot signal due to a lack of money. (This latent demand is not usually factored into economic models, as economists commonly disregard borrowing in the erroneous belief that all borrowings are from the existing pool of money).

However, it is a plain fact: there is never a lack of real demand. Everyone of us would buy some thing or some service… if only we had the money!

Loans are one way to create the money to give effect to this latent demand.

Given this reality, the UBI should simply be seen as an ADDITIONAL (sorry for shouting, but it is necessary to make the point 🙂 ) way of spending new money into the economy to drive demand.

There are two major differences between lending money into the economy and issuing it via the UBI:

First, because the UBI would be paid to everyone equally, no person is advantaged over another. As such, there is no need to repay the money. It simply represents a ‘permanent’ increase in the money supply.

Secondly, there needs to be a mechanism to determine ‘how much’ is issued at any time. Too much, and too many people may drop out of work and inflation ensue. Too little, and there will be unmet latent demand, despite there being under-utilised resources in the economy.

This fact provides the market mechanism to set the UBI.

The aim would be to set the amount in keeping with the Central Banks twin objectives: to keep inflation and unemployment low.

Under this scenario, the Bank would gradually increase the daily amount, while keeping watch on the labour market and inflation. As the amount of the UBI increases, people will decide to drop out of paid work (to pursue other interests: education, research, gardening, family, social events, sport, cultural activities, etc…all the things we would like to do if only we ‘had the money’) As this happens the labour market will tighten. At some point the slack in the labour market will be taken up and inflation may start to appear.

At this point the rate of the UBI would be held.

Over time, as more and more of the supply chain is automated, demand for labour may fall again. Requiring another boost to the UBI.

If inflation kicks in due to too much money chasing too few resources, the Central Bank could simply levy a flat tax on all transactions, with the money being written back into thin air. The tax would not be to raise revenue, but solely to withdraw money from an overheating economy.

Because the new money would go to everyone, it would provide a much better signal for overall demand (compared to the narrow interests usually served via borrowings).

Also, it would have a much greater direct impact on the economy, as most of the money would get spent immediately on personal needs…. boosting business and flowing to the rich in the form of profits which can be re-invested to grow their businesses… as money flows up much faster than it trickles down!

The UBI eliminates the poverty trap.

However, it is no panacea. There will still be drug and alcohol and gambling and mental illness and family abuse and crime as well as disability.

These human imperfections require specific initiatives to be funded out of tax… based on our collective compassion, and self-interest for a peaceful society.

However, the UBI would put a floor under poverty and relieve a lot of pressure from people at the bottom end.

No one could complain that someone who could work was not working, as by definition there would be no job for them, while they would be getting exactly the same UBI that you and every other person gets.

Such an unfunded UBI is fair, efficient and ensures that overall demand is a better reflection of the needs of all citizens (not just those who can afford to borrow). Being ‘broadly based, such a UBI would focus the efforts of business in meeting more of the needs of the general population, reducing some pressure on families and perhaps even reducing crime.

It would also generate increased revenue for the government (through tax on the additional production it generates), while saving on unemployment benefits and perhaps some other support payments (but not all).

It can be introduced slowly, by starting with a small amount and increasing it slowly and seeing what are the effects. If done this way, there can be no downsides… since it can be halted as soon as any adverse effects are noticed.