Economics and finance, Government and governance, Trade and industry | Australia

18 August 2020

A sustainable recovery from Australia’s economic downturn will require a universal basic income, among other sweeping changes, Charles Millward writes.

If the predictions of the International Monetary Fund are anything to go by, Australia faces an economic contraction of 4.5 per cent in 2020. Even with all going well, 2021’s growth will leave the country in its pre-COVID-19 economic position.

But these are just predictions. The key question for Australian policymakers is how much damage has been done to the economy, both in the short and long term.

It is very difficult to know how many hospitality, travel, retail and other businesses directly affected by the virus have shut down permanently and how many workers in these industries, often the most vulnerable and in insecure employment, have had to draw on savings or accumulate debt.

What is not difficult to know though, is that the government must act. There are several policy responses it can take, if it is willing, that will significantly stem the economic bleeding, and these must be the core of post-COVID-19 economic policy.

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First, people who can demonstrate a clear COVID-19-related loss of earnings in 2020, compared to prior years, should be compensated in some way outside of just the social safety net. One way to do this would be through a mechanism built into the tax system.

This can be funded accordingly by those who came out of COVID-19 unscathed, and who can afford to pay more in taxes.

Second, Australia’s Jobseeker experience has demonstrated that the country needs a universal basic income. COVID-19 has exposed the inherent fragility of complex developed economies like Australia, and, if the government hopes to avoid the rampant wealth inequality and societal division that the world is witnessing in the United States, everyone needs their most basic needs met.

Of course, this will be re-distributive, but more importantly, it will stimulate spending in the economy, something that businesses and workers have been calling for throughout the pandemic, and help prevent a serious post-COVID-19 downturn. It will be an especially welcome boost to the economy’s most fragile businesses, such as those in hospitality and retail.

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Finally, Australia’s overvalued property market needs to be addressed as a matter of urgency.

Obviously, low interest rates and a favourable tax environment for property contribute to this phenomenon but just as important is the deliberately controlled supply of land in Australia. Deliberately limiting zoning approvals for undeveloped land contributes to inflated property prices and is prevalent across the country.

Some governments, like that of Texas in the United States, have avoided this problem by always making more land available for development in response to demand, and Australian governments should follow in their footsteps.

To avoid disruptions from deliberately orchestrating a fall in Australian property values, the central bank should rely for a period on inflationary finance to ensure nominal price stability in the market albeit real values are dropping.

High property prices of course suit many of Australia’s states which rely on income from stamp duty, as increasing the value of property released to developers by limiting supply in turn inflates stamp duty revenues.

On top of this, money raised through land sales is itself a contributor to states’ budgets. An awareness of this problem is causing states like New South Wales to consider replacing stamp duties with land taxes, and a version of this approach is emerging in the Australian Capital Territory.

An even more ambitious proposal has been made by PriceWaterhouse Coopers to increase the Goods and Services Tax (GST) to 12.5 per cent to fund the states.

Although a GST is regressive, and a tax on consumption, within the framework of a universal basic income its shortcomings could be outweighed by this revenue.

In all, any post-COVID-19 recovery should involve serious structural reform of the Australian economy, and unless the government is willing to take serious economic action, it will not see serious economic results.

Compensation for those people and businesses who have lost earnings during the pandemic, a universal basic income, sweeping change to Australia’s property market, judicious use of inflationary monetary policy and a look at the GST should make up the core of the government’s recovery approach.

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2 Responses

  1. Russell Ayres says:

    I am greatly attracted to the idea of a UBI, for all the reasons many rehearse. The one, potentially huge, problem I have not seen any adequate rebuttal for is the inflationary effect of pumping large amounts of cash into (mostly) consumer pockets. This effect would likely be strongest in the goods and services that the worst off in society need most, such as food, housing, medical services and education. If there is good, clear economic modelling that shows how this can be avoided, I am all in! (NB: all of the trials to date have been partial, either geographically or in terms of specific community groups. There has, as far as I know, never been an economy-wide – ie covering a currency area – trial.)

  2. Meg H says:

    This would be a step in the right direction however I believe it should be linked to a reduction in the working week hours from 37 1/2 hours to between 30 and 32 1/2 hours per week. People could choose to work 4 by 7 1/2 hours per week or 5 x 6 or 6 1/2 hours per week whatever suits their home life.. this would insure that the fewer jobs available would be spread amongst many more people. People working less would get less take home pay however the universal basic income would more than compensate for this.

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