HOW TO IMPLEMENT A UNIVERSAL BASIC INCOME WITH LOW RISK

This is the third in a series that explores the pros and cons of a Universal Basic Income (UBI). It explores how a UBI can be implemented with very low risk.

The first examined the need for a UBI and compared it with Welfare, and a Job Guarantee.

The second explored how a UBI can be funded without increasing taxes or debt, or taking money from other programs, or causing excessive inflation.

The fourth, fifth and sixth in the series identifies the Benefits for Individuals, for Business and the Economy, and for Government and the People

Establish a New Authority to Manage the UBI

This Authority would be given sole responsibility for:

1. ensuring everyone who is entitled receives the UBI, without ‘double dipping’ and for on-going management of the UBI
2. setting the target amount for the UBI and timing to get it to the poverty line, and then keeping it at or above that level.
3. ensuring payment of the UBI was managed to limit its inflationary impact and to keep the labour market in dynamic balance, as explained below.

Start Small

First, we propose starting at just $10/week. Increasing the UBI amount gradually over 5 years — to give the supply chain time to adapt without causing shortages that drive inflation.

Importantly, with a progressive roll out, we don’t have to model or guess what might happen. We can observe any change in behaviour (good or bad) and halt the periodic increase in the UBI if the bad appears to outweigh the good (until the problem is counter-measured), or more likely speed up — as the good prevails.

If, as the UBI is increased, inflation rises too quickly, the strategy will be to increase interest rates on all new bank lending — except for borrowings aimed at increasing the supply of the ‘basics’. Banks would be left to make this decision on a case by case basis in accord with Reserve Bank guidelines.

This strategy switches some of the influx of new money into the economy from specific bank borrowers, to the people in general.

The reduction in lending should not send the economy into recession as the total of new money going into the economy (via the UBI and the remaining bank lending) should see the economy kept at full capacity.

Using the UBI to Help Manage the Economy

If interest rates are raised imprecisely (almost inevitably) and lending reduces too quickly, the rates can be dropped again.

As well, if the labour market begins to retract, the UBI can be readily increased to ensure everyone still has enough to live on, and to keep the economy ticking over… just like JobKeeper did.

This should help to mitigate the normal business cycle, though it will never be perfect.

Also, if automation and virtualization cause job losses, the UBI can be increased to keep the labour market in dynamic balance.

As the UBI is raised, people will choose to drop out of the labour market and live on the UBI (and whatever other passive income they may have). We can tell when the market is tightening again (eg as recruitment times push out). At that point, the Authority would hold the UBI until the market is back in balance

Used in this way, the UBI becomes another tool for managing the economy. Due to its direct impact on incomes, it would be a much sharper tool for managing employment than simply adjusting the cash rate, as happens now.

Integration with Welfare

Also, we propose treating the UBI as income for welfare, so that benefits and costs would naturally go down as the UBI is increased, without adversely impacting anyone’s entitlements under the current system. This would also have the effect of reducing the inflationary impact of the UBI

Recovering the UBI Based on Income

To further offset the injection of new money, the new Authority responsible for managing the UBI would be empowered to recover 32.26% of the UBI from gross income — up to an income of $80,600 pa. Above that, the full UBI would be recovered.

For ease of administration, the recovery can be collected along with Group Tax, GST, or via your Annual Tax Return. However, it would be entirely independent of tax. That is, normal tax rates would continue to apply to your earnings.

The tax collected would continue to go to the government, while the recovery of the UBI would be returned to the new Authority to help fund the ongoing UBI, limiting the need to create new money each cycle.

Everyone would get the $500 every week, with each person paying back some or all (or none) — depending on their individual earnings (as reported to the tax department).

It would mean that around 75% of the population would see some benefit, with the rest no worse off. It would especially benefit people who do unpaid work in the home, as well as low-wage earners who would get an income boost at no cost to employers

Net Benefit to Those Who Need It

By giving the UBI to everyone, we ensure the universal and unconditional nature of the payment. By recovering a fixed percentage based on income, and by treating it as income for welfare, we greatly reduce the net cost, while ensuring the money goes to those who need it.

Basic Income Insurance

Also, by paying it to everyone, it would act like basic income insurance.

Most people face the risk of losing their income at a moment’s notice. If this happens, the UBI would continue to be paid — no delay, no need to apply. And without an income, there would be no recovery deducted, so you’d get to keep the full amount.

Also, there would be no need to tell anyone if you are looking for new work, or when you get it, or how much you are getting paid (except the tax dept, as normal).

Importantly, you won’t have to jump through ‘welfare hoops’, and instead can focus on doing what is best for you: looking for new work, retraining, spending more time caring for family, starting a new business, etc..

Summary of Offsets and Strategies to Limit Inflation

At $500/week/adult, the total UBI could amount to an injection of $520 billion per year. In a $2 trillion economy this would be unsustainable. Hence the decision to target the net benefits to zero/low income earners.

There are also other offsets which are estimated in the table below:

The rest of the money to push growth and inflation to the long term targets would continue to come from bank lending

If demand inflation becomes a problem before the UBI reaches the Poverty Line:

1. Increase Interest Rates to damp bank borrowing. Ideally, using a differential structure. Rates should be increased on all borrowings except for those raised to increase our capacity to supply the ‘Basics’. This would help shift resources more to meeting basic needs and less on other spending. And, if that is insufficient:

2. Levy a flat % on all spending until inflation is brought under control

By increasing the UBI and interest rates together (and if necessary, imposing a new spending levy), we can shift economic activity to meeting more basic needs and less on other spending, while keeping the economy at full capacity

The beauty of a flat amount UBI combined with a flat % tax on spending is that it creates a ‘progressive’ system, with most of the net benefit flowing to those on zero and low incomes — though everyone is treated the same!

Overall Impact

The estimated net amount of money to be injected into the economy would be around $100 billion per year. This is a big number if compared to government spending. However, as suggested, this money should not form part of the government deficit, as it is really spending by the people.

The correct comparison is with total GDP.

In Australia’s $2 trillion economy, where we are aiming for around 3–4% growth and 2–3% inflation, the risks to the economy are on the upside as the money will certainly spur growth as people spend it to express their unmet needs in the market.

To believe that it could be inflationary, is to believe that Australia lacks the resources to meet everyone’s basic needs once the supply chain has had the chance to adapt. This would seem unduly pessimistic.

Regardless, taking a gradual approach will allow us to see what happens — without putting the economy or people at risk, as the increase in the UBI can be halted at any time, before a problem becomes entrenched.