Amidst COVID-19, the Australian government used welfare payments to sustain the Australian economy, while workers were displaced from their jobs. However, COVID-19 has forever changed the job market with many industries not regaining pre-pandemic levels of employment.[1] If the government were to provide welfare payments without means-testing, is this sustainable for the economy in the long run?
What is universal basic income?
A universal basic income (‘UBI’) is defined as a ‘regular cash income paid to all individuals’ without any eligibility requirements.[2] It provides a guarantee in the often-unstable labour market. With the rapid development of technology, and numerous jobs being automated by machines, UBI provides a safety net for displaced Australian workers.[3] Thus, in theory, it ensures people are not left destitute.
Funding a universal basic income scheme
While the idea of having a UBI in Australia sounds like an attractive solution in theory, it is often difficult to implement. To fund such a project, it relies on cutting public spending on other programs or increasing taxation.[4] On the other hand, compared to other wage subsidies, UBIs are easy to implement with every individual receiving a fixed income regardless of their wealth. However, we should also carefully consider whether billionaires should be included in such a generous scheme.
Why should we have a universal basic income?
A UBI is argued to be the most effective way of combating poverty because it reduces ‘poverty traps.’[5] This describes situations where increasing one’s income leads to the removal of the state benefits they receive. Consequently, receiving UBI payments is the same as working a minimum wage job. A UBI, compared to means-tested benefits, is given to all of society and as a result, they immediately receive the benefits of holding a paid job.
Additionally, untargeted welfare schemes avoid the ‘precarity trap.’ The bureaucracy of current welfare systems causes people to experience long delays and discourage job-seeking with fear of losing their wage subsidy if their new job does not work out. Under a UBI system, people are not discouraged from trying different jobs. Instead, individuals are encouraged to contribute to and explore the labour market since they have a financial safety net.
It would enable the government to engage in more targeted schemes to build a future workforce emerging from COVID-19. The focus shifts by equipping employees with new skills such as adaptability and providing support for people finding new jobs. According to Mckinsey, ‘25 percent more workers may need to switch occupations’[6] due to the effects of COVID-19. Additionally removing the bureaucratic nature of means-tested benefits means a higher proportion of cash is spent on recipients who desperately need the benefits.
Why should we not implement a universal basic income?
One of the key criticisms of implementing a UBI is that it is financially irresponsible. This is because even if the UBI ‘was set to a level to provide a modest but decent standard of living it would be unaffordable and lead to ballooning deficits.’[7] It is generally accepted that taxes would fund such a scheme, however, this may lead to detrimental side effects. For example, wealth taxes are often unsuccessful as seen by Francois Mitterrand’s attempt to tax the rich in France, leading to families fleeing to other parts of Europe.[8]
Additionally, it has been argued that UBI removes incentives for individuals to pursue jobs and perpetuates society’s falling labour participation rate.[9] People would prefer not to work, as there is no financial uncertainty, shrinking the economy since workers are not entering the labour market and developing skills.
UBI in practice
The utility of UBIs is unclear as economic experiments do not always reveal the long-term effects and potential changes in community attitudes.[10] Additionally, no studies have fully implemented such a scheme. However, applying the basic principles of a UBI in Madhya Pradesh, India, resulted in positive outcomes by empowering the community to pursue better nutrition and job opportunities.[11] It is hard to extrapolate the same conclusion to Australia as Pradesh is still in the early stages of development in its economy.
Overall, it is difficult to assess whether a UBI could be successfully implemented in Australia. As mentioned before, welfare safety nets are rarely universal, and this is reflected in their financing mechanism, taxes. The pandemic has changed the labour market forever due to the ‘simultaneous shocks to supply and demand’.[12] A UBI would help alleviate the effects of job displacement and encourage workers back into the market while protecting them while they look for new jobs. Thus, in the face of such uncertainty, we must consider a universal basic income to help rebuild Australia’s labour market from the effects of the pandemic.
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[1]Australian Unions. (2021). For a Stronger, Balanced and Inclusive Recovery. https://www.australianunions.org.au/wp-content/uploads/2021/04/AU_MON_Recovery_NPC_web-1.pdf
[2] McDonough, B., & Bustillos, M. J. (2019). Universal basic income. Taylor & Francis Group.
[3] Braverman, H. (1998) Labour and Monopoly Capitalism: The Degradation of Work in the Twentieth Century. New York: Monthly Review Press
[4] Hanna, R., & Olken, B. A. (2018). Universal Basic Incomes versus Targeted Transfers: Anti-Poverty Programs in Developing Countries. The Journal of Economic Perspectives, 32(4), 201–226. https://www.jstor.org/stable/26513502
[5] Standing, G. (2017) Basic Income: And How We Can Make it Happen. London. Penguin.
[6] McKinsey Global Institute. (2021). The future of work after COVID-19. https://www.mckinsey.com/featured-insights/future-of-work/the-future-of-work-after-covid-19
[7] Goldin, I. (2018) ‘ Five reasons why a basic income is a bad idea ’ . Financial Times , 11 February. Retrieved from www.ft.com/content/100137b4-0cdf-11e8-ba cb-2958fde95e5e.
[8] Sachs, J., Wyplosz, C., Buiter, W., Fels, G., & de Menil, G. (1986). The Economic Consequences of President Mitterrand. Economic Policy, 1(2), 262–322. https://doi.org/10.2307/1344559
[9] McDonough, B., & Bustillos, M. J. (2019). Universal basic income. Taylor & Francis Group.
[10] Devala, S., Jhabvala, R., Mehta, S. K. and Standing, G. (2015) Basic Income: A Transformative Policy for India . Bloomsbury: London.
[11] McDonough, Brian, and Morales, Jessie Bustillos. Universal Basic Income, Taylor & Francis Group, 2019. ProQuest Ebook Central, https://ebookcentral.proquest.com/lib/monash/detail.action?docID=5981686.
[12] OECD (2021), “An assessment of the impact of COVID-19 on job and skills demand using online job vacancy data”, OECD Policy Responses to Coronavirus (COVID-19), OECD Publishing, Paris, https://doi.org/10.1787/20fff09e-en.