How To Fund a Universal Basic Income (UBI) in Australia
“The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.” ― Franklin D. Roosevelt
This article is the third in a series of eleven short papers that address how we can use ‘market mechanisms’ to better share the world’s resources, without destroying the biosphere upon which all life depends; now and into the future.
It shows how to fund a Universal Basic Income in Australia
Each of the articles is written to be ‘self-contained’. If you want an overview of the series, it is provided here.
The first in this series of articles identified the root cause of ‘systemic’ poverty as a lack of money in the hands of people who cannot participate in the production process: young, old, incapacitated, their unpaid carers and those between jobs: 50+% of the population!
This is not a static group; people move in and out throughout life.
The ‘unpaid group’ is ‘us’, depending on our age & circumstances during life.
The second article showed how a Universal Basic Income (UBI) could eliminate ‘systemic’ poverty, if it is set to pay everyone a ‘base income’, sufficient to meet their essential needs; with the provisos that additional money would be required to cover the additional costs of those with special needs (eg disabled and aged), as well as for children; and that other system changes would be required to the deliver universal healthcare, education and housing at an affordable cost.
This article suggests an amount for the UBI and explains how we can fund it.
Some stats using the 2016 census, adjusted by guess to 2020 numbers. They are only used for indicative purposes. They are not meant to be definitive.
- 25,500,000 Total Population
- 5,500,000 children under 18
- 16,000,000 18–65
- 4,000,000 are over 65
Of those 18–65 (roughly)
- 13,000,000 are in the workforce
- 1,500,000 care for dependents without pay
- 1,500,000 are students or other dependents
The Australian Government has recently decided that $750/wk is the minimum that everyone thrown out of work due to the COVID-19 pandemic should get to ‘survive’… if you still have a job.
In total there are around 2 million adults, with around 1 million children, living in poverty in Australia. This represents about 12% of the population; but 17% of children (mostly in single parent households) and 33% of pensioners (mostly renters). Most of the rest are single parents (mostly women), and a small percentage of people who are long term unemployed and disabled. These percentages have not changed substantially for decades, indicating a systemic problem.
Establishing a Base Rate
More work needs to be done, but for the sake of calculation…
Let’s make the UBI $500/week to guesstimate the gross cost to provide it. It is a bit more than the pension and just above the poverty line.
It would be payable to all permanent residents over 18 for life, or until they leave Australia for any period longer than (say) six weeks. The money would be re-instated if and when they return.
We would still need to pay extra for kids and also to support people with special needs (eg disabled), so the payments we currently make to support them could continue in addition to the UBI. We could also lift rent assistance for those on the age pension.
Integration with Tax and Welfare
The UBI would count as income for both tax and welfare purposes.
Total Unadjusted Cost
The cost to pay every adult over 18 (approx 20 million people) would be around $520 billion pa; over 25% of GDP.
Offset by some Welfare Savings
We already pay around $200 billion in benefits. As well, there is the cost to administer all the current programs. Allowing for the need to pay on-going child support, disability and some aged care rent support, let’s say we can save $120 billion in both payouts and administration.
This brings the net cost to $520 bn — $120 bn = $400 billion pa.
Offset by Adjusting Incomes
At introduction, we can further limit the cost by reducing wages of employees via their employer, and via the tax system for self-employed and passive income earners, as follows:
- If you earn less than 25% of the median income, say $300/wk, you keep all your income, on top of the UBI.
- Above $300 earned income, you keep the whole UBI, but your earnings would be reduced by 40 cents in every dollar earned above $300 up to $1,576 (which is about 125% of the median wage)
- Above $1576, your earnings would be reduced by the full amount of the UBI. At this level, there would be little incentive to give up your earned income to live on the UBI… though you would have that choice!
It would mean:
- Someone earning up to $300/wk would then get between $500 (UBI) and $800 (500 UBI + 300 earnings)/wk
- Someone earning between $300 and under $1,576 would be better off, though the higher their earnings, the less they would benefit from the UBI, as their wages would be reduced (not the UBI).
- Someone earning above $1,576 would have their wages reduced by the same amount as the UBI, so they would be no better or worse off. Only 25% of income earners earn more than $1512/week
Similar adjustments would be made via the tax system to self-employed and passive incomes. As well, as the reduced wages would result in increased profit, to avoid that profit being spent into the economy (in addition to the UBI), the saving on the reduced wages could also be recouped via the tax system.
Importantly, these provisions greatly reduce the amount of money we need to ‘pump’ into the system to provide the UBI, while ensuring most people are better off, and no one is worse off.
Given there are 13 million workers, with half earning more than the median wage) we can guesstimate the savings that the phased reduction in wages/earnings would result in. While some above the median would get some benefit from the UBI, others below the median would get less benefit than the full UBI.
For the purposes of calculation, we could say around 6.5 million x $500 x 52 = around $170 billion could be saved
This would bring the net cost down to $400 — $170 = $230 billion.
This is a conservative estimate, as there is no allowance for people earning passive income who may have their incomes reduced by all or part of the UBI. I’ve taken only ‘wage-earners’ into account.
Even $230 billion would still represent 11.5% of the total GDP of $2 trillion
As the UBI would be taxable, it would mean that to the extent it boosted total income, some extra income tax would also be payable. This could equate to a few billion dollars pa. To be conservative, these savings have not been specifically counted as they are within the margin of error of these calculations.
- There is a constant flow of funds into the economy via bank lending with the proceeds of the loans spent into the economy by the borrowers. This money flows through businesses to pay increased executive salaries and profits that are mostly spent into the financial economy to buy securities and existing property. Once it flows into the financial economy, the money rarely trickles back down and needs to be replaced by further borrowings that get spent into the real economy.
- Money is also extracted from the real economy in the form of superannuation contributions and retirement savings (less fees and payouts). Even some part of insurance premiums goes out of the real economy and into the financial economy. All these outflows must also be replaced by new borrowings.
- There is also untapped spare capacity in the supply chain to respond to the higher demand flowing from the extra UBI, without adding to price pressures — as long as the extra demand is introduced at a pace that allows businesses to adapt.
- Increasing automation and virtualisation (remote working, health and education in particular) will also expand supply while reducing cost and increasing profits and/or reducing prices. This can look like a fall in the size of the economy, though it represents a way to supply more to meet the higher demand generated by the UBI without triggering inflation.
- Also, we don’t just want ‘stability’. The aim is to achieve around 3% pa growth. (As and aside, this growth can be derived without harm to the environment as discussed in article eleven of this series). This growth too has to be financed by new borrowing, of around $60 billion pa.
- The extra profits and higher salaries flowing from the injection of the UBI would also be taxable, taking further money out of the economy as tax.
- Also, we could expect a drop in drug and alcohol abuse and gambling, as well as mental and physical health issues, while seeing improved educational outcomes and less crime flowing from the payment of the UBI; given the clear link between these behaviours and poverty. All at considerable saving to the economy, not to mention the resulting social and individual well-being.
While I don’t have a definitive answer, assuming the 3% growth target can be funded by the UBI, as well as replacing some of the other borrowings flowing into the financial economy (how, is discussed later in the series) — let’s say, conservatively, we can offset $70 billion of UBI via a combination of the above measures.
This would bring the net cost to $230 bn — $70 bn = $160 bn
As well, there is a general consensus, that apart from ‘real growth’, we also want around 2–3% of inflation. Given inflation was under 2% and has since fallen off a cliff, there is scope to also inject more money via the UBI to boost demand and prices without exceeding the inflation targets. This could absorb, say, another $20 billion of UBI
This would bring the net cost to $160 bn — $20 bn = $140 bn
If we just injected this money into the economy every year, we would certainly get runaway inflation.
However, we can now easily put in place an extra Goods and Services Tax (GST) applied to all transactions (with a rebate on asset re-sales to avoid double taxation).
The $140 billion is around 7% on on top of the $2 trillion GDP.
To avoid inflation, the $140 billion could be kept circulating by applying a 7% GST on all spending. To distinguish it from the current GST, it is referred to as the UBI-GST
This tax would not be going to pay for ‘government goods and services’, it would be going back equally to every adult. It just circulates the money.
RE-DO CIRCULAR DIAGRAM HERE
UBI -> People -> (Business -> Wages + Profits) + UBI-GST-> UBI ->
This would take our total GST to 17%, not an unusual percentage across all developed countries (excluding USA).
The next in the series looks at how to set up the system with minimal risk.