Australia should introduce a universal basic income

| June 26, 2019

Discussion about a Universal Basic Income (UBI) often views it as something utopian and unaffordable, and perhaps not even desirable if a guaranteed income discourages people from working.

However, more careful examination suggests it could actually be key to solving some of our most pressing economic productivity issues, not least stalled wages growth and the need to encourage gainful employment of our ageing population.

But turning first to the question of affordability, this is obviously something that should be evaluated in a broad context, covering reform of existing welfare benefits and tax allowances and concessions, and with more diligence than the crude and most inaccurate back-of-the-envelope estimates that are sometimes used to dismiss the concept.

My analysis indicates that a UBI averaging about $300 a week – a bit less than the current shared-household pension, but rising with age so as to equal the pension at age 65 – could be given to about 11 million people, or roughly everyone in Australia aged 25 to 65, less about 3 million people not seeking work, at a cost of around $170 billion every year.

This could be substantially funded by some $100 billion of increased income taxes from replacing the tax-free allowance with a minimum rate of 20-25% followed by 30% in place of the current 19% band and higher rates thereafter, similar to current tax scales.

This could provide a net benefit to almost all taxpayers, albeit reducing with higher income, and the remaining cost could be funded by reducing or abolishing $50 billion per annum of current family and unemployment benefits, including $18 billion for FTB and $11 billion for Newstart, and by slashing the absurd and unsustainable existing tax concessions on capital gains and superannuation, which currently cost at least $60 billion per annum and need major reform anyway.  Obviously this needs more detailed work, but it does appear to be more realistic than some people claim.

UBI recipients may still have to accept work offered to them, but the onus would be on competing employment agencies administering the UBI to find people suitable employment. This could potentially mean working in partnership with unions and superannuation funds to form “Capitalist Co-ops”, rather than forcing those struggling to find work to make umpteen, ineffective “compliance” job applications which only make companies’ recruiting job more onerous and inefficient.

A reform such as this would substantially resolve one of the major deficiencies of the current system, which is the punishingly-high effective marginal tax rates – sometimes over 100% – experienced by the unemployed as their benefits are reduced when they gain paid work.

Far reaching benefits

The introduction of a universal basic income could have far reaching benefits too.

Firstly, by more effectively encouraging the unemployed into work, this could increase labour market wages pressures, which in turn forces companies to invest in compensating productivity improvements.

Secondly, labour would be priced more efficiently, and similarly across all ages – including “retirement” – with a fixed, minimum cost of living component met by the UBI or pension and a variable component aligned to the marginal cost of labour.

This fundamental change would allow minimum-wage rules to be discarded, thus making marginal employment opportunities more viable.

A good example would be an “Uber-pensioner”, who may be happy to drive customers part-time for a very low marginal rate if they gain positive value from their employment by getting out and talking to people.

Currently these opportunities are suppressed by protectionism of minimum wages for the under-65s – which also worsens the fiscal problems from an ageing population – but with a UBI, this restriction would no longer be necessary.

Yet even without minimum wage rates, workers may be better off both financially and psychologically, because a UBI would protect them from the fear of unemployment, which would also improve their bargaining power with or without union backing and hence may deliver higher wage rates if the work performed is worth it.

Even without higher wages, a reduced risk of poverty from unemployment should increase people’s confidence and boost consumer spending, which is currently suppressed by the fears of job insecurity caused by casual “gig employment”.

Similarly, as others have argued, the protection of a UBI as fall-back could encourage greater risk-taking and innovation, which future productivity growth depends on.

In the longer term, two-part pricing of labour would efficiently address the oft-cited risks posed by increasing automation, since the UBI would protect a minimum standard of living whilst enabling labour to compete against “robots” at low marginal rates without forcing the use of overpriced and uneconomic labour that’s worth less than the disinclination to work.

The risks from future automation are not as abrupt as there being “no jobs left”, but as society’s wealth grows, new incremental production has marginally less value, so without a UBI, people are forced to work for an income doing things of less and less value (producing stuff that we don’t especially want or need).

In short, a UBI could offer an efficient route to a future utopia!