The thylacine in the headline is the long sought and now extinct, budget surplus. My latest in Inside Story.

In discussions about Universal Basic Income, lots of people are attracted by the idea of making things as simple as possible. Sadly, that doesn’t work well once you take a closer look.

The simplest UBI would pay every Australian an amount equal to the single age pension, which is just above the poverty line. That’s $20000/yr per person or $500 billion for a population of 25 million, about equal to total Federal government expenditure. That would replace about $180 billion in existing social welfare spending. That leaves $320 billion, approximately equal to total revenue from personal and income taxes.

To fill the gap, we would need either to double income tax revenue, scrap all other public spending, or some mixture of the two. Assuming that’s not feasible, we need to start complicating things. The most obvious step is to treat children differently, for example by giving them half the benefits of adults. But a fixed payment per child isn’t going to be work well, bearing in mind that it would replace existing forms of support which are based on assessments of need.

The key problem is that while tax is mostly calculated on an individual basis, welfare payments are made to households. To get things right, we need to accept that a complex world doesn’t allow for simple solutions.

Late last year, along with Emma Dawson, John Hewson and Angela Jackson, I took part in a discussion for the ABC’s Big Ideas program, hosted by Paul Barclay. It went to air recently. Here’s a link to the podcast[1]

Unfortunately, I don’t have the time/ patience to listen to audio. I also don’t like the sound of my voice on radio – this is true for many people I think. It would be great to have a program that took an audio file and generated text output. A very quick search mostly turned up paid transcription services. Does anyone have any experience with this.

fn1. Is a recording of a radio program a podcast? Can anyone clarify this.

This post is about a point which has come up here and there in the discussion about Universal Basic Income, but which I’ve never worked through properly.  

A preliminary observation is that it’s necessary to consider tax and welfare together as an integrated system. What matters most is the effective marginal tax rates (the sum of marginal income tax and benefit reduction rates). 

Then, starting with the current Australian tax-welfare system, and considering possible paths towards UBI, the key problem is that the tax system is organised (mostly) on an individual basis while the welfare system is organised (almost entirely) on a household or family basis. 

Mitchell, Wray and Watts Macroeconomics p 323, give a the correct version of the #MMT position on budget aggregates .

Taxes create real resource space in which the government can fulfil its socio-economic mandate. Taxes reduce the non-government sector’s purchasing power and hence its ability to command real resources for the government to command with its spending.

Take a situation where the national government is spending around 30 per cent of GDP, while its tax revenue is somewhat less, say 27 per cent. The net injection of spending coming from the national government is thus about 3 per cent of GDP. If we eliminated taxes (and held all else constant) the net injection rises towards 30 per cent of GDP. That is a huge increase in aggregate demand and could cause inflation.

(I’d say would rather than could, but otherwise spot-on)

Ideally it is best if tax revenue moves countercyclically, increasing in an expansion and declining in a recession.

(This exactly matches Keynes’ position “the boom, not the slump is the time for austerity at the Treasury”)

3 per cent average deficit over the cycle is consistent with debt averaging 60 per cent, nominal growth g and nominal bond rate r averaging 5 per cent. In this case, primary deficit is zero on average.

But if r<g (desirable), can run a primary deficit as well as a total deficit.

I was asked by a journalist about the long-term fiscal effects of the government response to the crisis. Here’s what I said

 In simple accounting terms the cost of the intervention so far can mostly be offset simply by cancelling the Stage 3 tax cuts legislated in advance for 2024-25 (this also happened when the Keating Labor government legislated for future tax cuts in the 1990s). These are projected to cost $95 billion over the five years to 2029-30
so the saving would easily offset the crisis intervention over 10 years.

That’s assuming that the crisis ends quickly and everything returns to the way it was before. I think we will end up with a substantially larger role for government, and therefore a permanent increase in the public sector share of national income, which means higher taxes.