by Lowell Manning

19 Epiha St Paraparaumu 6450

Tel/fax 04-2986890 Email manning@kapiti.co.nz

A Universal Income promotes social justice and wellbeing by providing an unconditional adequate living income to each individual. A number of options have been proposed in relation to the size and distribution of a Universal Income. This paper reports on detailed modelling to show what effects one such proposal would have on the real economy. There are profound macroeconomic impacts accompanying the introduction of a Universal Income. To be sustainable as well as politically and publicly credible, it will need to be embedded in a broad-based economic policy package. One such package is proposed for further study.

This paper shows that a Universal Income proposal as described is both technically feasible and administratively responsible as long as the Universal Income is accompanied by a raft of economic calming policies comprising:

Further detailed modelling work in the coming months should enable the numbers and indicators to be refined.

Lowell Manning has tertiary qualifications in civil engineering, social sciences and economics. He comes from a small business background in construction and environmental projects. A founder member of UBINZ, and past chair of the Electoral Reform Coalition, he has long had an interest in monetary reform and the manner in which costs are presently being externalised to the community at large by the private sector.

The economic basis of this paper is drawn from a research study on Universal Income dated December, 1997, done by economic consultants Integrated Economic Services Ltd of Wellington for the NZ Democratic Party Inc.. The contribution of IES is limited to an economic assessment of the proposal contained in this present paper. The proposal itself is solely the work of the author.

The December 1997 report "A UBI FOR NEW ZEALAND: FINAL REPORT" by John Lepper and Petrus Simons of IES contains the following standard disclaimer: "The views expressed are the authors alone and can in no respect nor under any circumstances be construed as agreed by the Directors, the employees or the customers of Integrated Economic Services Ltd. Any errors of fact, logic or judgement that the paper contains are the sole responsibility of the authors."

This paper offers a specific proposal for a Universal Income that can be introduced into the NZ economy. It is hoped the proposal will stimulate debate and further development of the policy package so it can be successfully introduced in New Zealand and elsewhere.

Van Trier ¹ found the three main historical proposals in the development of Universal Income (the Milner-Pickard State Bonus, the Social Credit National Dividend, and the Social Dividend of GDH Cole, James Meade and others) have two defining principles in common. These are a commitment to a more just society in which each person gets a share of the common social heritage and the available economic wealth; and distribution of that share as an unconditional cash payment to each and every person. The historical solutions seeking to satisfy the defining principles have had at least six common features:

• they are neutral in that they do not specifically seek to privilege any sector of society
• they see the physical implementation of Universal Income as technical rather political
• they see scope for sharing greater abundance through increased (sustainable) production
• they suggest a new form of social organisation that is neither capitalist nor socialist
• they offer individual economic security, wellbeing and freedom rather than a vision of what the world should look like
• they rely on empowering and enabling people rather than on using coercion and regulation

I suggest these features correspond well with the values and beliefs of many people in many societies around the world today. They cross cultural and religious boundaries, and could form the basis of a popular social movement to moderate the growing and invasive power of corporate libertarians ² and transnational corporations . The People's Earth Declaration ³ summarised the issue starkly:

The historical movements promoting universal income have witnessed the growth and decay of the Beveridge-Keynes Social Contract and the rise of corporate power through the combined effects of automation, the creation of debt bondage in the monetary system, and the corporate capture of the Bretton Woods institutions. Both the Quakers who proposed the State Bonus Scheme and the Social Credit movement that proposed the National Dividend are active in the world-wide resurgence of interest in universal incomes today. So it cannot be said concerns about the growth of debt bondage and corporate power are new. The underlying issue was recognised following an earlier war more than a century ago, well before the first Universal Income proposals arose as a social response to the economic and social impacts of World War 1.

I suggest the point has now been reached where the people of the world are in economic bondage, and their nations are being destroyed, and I am confident they will respond positively to a real Universal Income programme that can be integrated into existing national economies.

Van Trier, referring to the most general of the historical Universal Income solutions (Social Credit's National Dividend), says it would "mean an important, even irreversible step forward, but not a step towards, rather a step into a new society". ⁵ The peoples and nations of the world would be unlikely to want to return to the status quo given the misery, disempowerment and loss of human potential being generated by the present world economic and financial system. However, the cautionary principle requires that a practical Universal Income proposal is by nature evolutionary rather than revolutionary so it can be moderated in time and place to suit the needs of those it serves.

As well as indicating the level of and delivery mechanism for a basic income, a practical Universal Income proposal must offer an appropriate steering mechanism for the economy. It will have to recognise that wages in the modern era are becoming insufficient to guarantee reasonable living standards to wage earners and their families. It will need to provide a better understanding of the components and nature of the concept of the Social Dividend, and it will need to adapt to profound effects on economic behaviour about which we presently have limited knowledge.

The specific proposal is to abolish the Department of Social Welfare through the introduction of a full Universal Income, sufficient to ensure that no existing beneficiary group is worse off under the Universal Income proposal than it is now. The proposal treats Universal Income as an individual income; a monetised economic return on the use of the public domain by the market economy. As such, it forms part of what some call the Social Wage. ⁶ At first sight, it may appear to partially monetise existing unpaid work, but the universality principle precludes this being so in fact. There may be a sound case to be made in support of a separate "carer's wage" to monetise unpaid work in the home and community, but it is a quite separate issue from Universal Income. Case-specific Social Welfare functions such as CYPFS; and Disability, Invalids and Sickness allowances (to the extent they exceed the Universal Income) will be transferred to other government departments. However, to ensure a conservative economic approach, these special transfer payments have NOT been deducted in the economic analysis contained in this paper.

There are four elements to the income side of the proposal:

• (i) A " tax-free" [b] income of $115 per week for each adult (18 years and older) NZ citizen resident in NZ or in government service overseas, and legal immigrants and refugees
• (ii) A "tax-free" income of $50 per week for each child (under 18 years), as (i) above
• (iii) A "tax-free" housing provision of $140 per week, automatically distributed among those qualifying adults permanently resident and registered on the electoral roll at that address [cde].
• (iv) A "tax-free" "half-way" housing provision of $30 per person per week for those qualifying individuals permanently resident in private registered boarding houses, hotels, hostels, geriatric homes and the like and who are registered on the electoral roll at that address [ce].

The incomes generated from the Universal Income proposal are given in Table 1

Every eligible person will have an account at the Reserve Bank. The Universal Income will be available by weekly deposits from the Reserve Bank and can be accessed using a debit card. Children's' accounts will be able to be accessed by the main caregiver within certain limits and up to certain ages. When a child reaches a certain age part of their Universal Income will be automatically transferred to a sub-account that can be accessed by the child rather than the caregiver. The amount available to the child will increase as the child gets older.

The RBNZ agencies can be operated through the existing banking and/or Postbank system. There will be some increase in Valuation NZ staff to value newly registered premises, provision at local authority offices for electoral officers to administer the "housing provision" registrations and changes of address, and to conduct electoral roll checks.

The costs of the Universal Income administration are thought to be in the order of:

Total spending on benefits in the existing complex system of some 50 different benefit levels (plus abatements and clawbacks) in 1996/97 excluding imputed income tax was $9,786.258 million [a]. In addition there was a total of $896.93 million a in tax credits administered by the Inland Revenue Department through the use of Guaranteed Minimum Family Income (GMFI), the Independent Family tax Credit (IFTC), Family and Child Support payments; and $5.18 million in Housing subsidies [a].

The cost of administering Social Welfare is about $323.9 million [DSW: Statistics Report 1997 and Integrated Economic Services Ltd estimates]

The additional incomes over and above existing welfare incomes are given in Table 2

The base case given below is NOTIONAL only.

If the economy were monetised by adding the additional Universal Incomes of Table 2 WITHOUT taking any other measures into account , a substantial and unsustainable inflationary impact would be expected, along with other undesirable outcomes.

The purpose of doing such a notional "unrestrained" Universal Income Base Case is to provide a "worst case" scenario and an insight into what corrective measures might be needed, and to minimise bias in the analysis by assessing the impact of those measures against the base case.

The modelling by Integrated Economic Services ⁷ assumes Universal Income was introduced on 1st July, 1997 and existing GST and income tax scales were retained as at 1/7/97. It also assumes the Alliance programme proposed at the 1996 election is left in place ( except for its proposed 10% import duty). It assumes the existing benefit system (including GMFI and IFTC) and its associated administration is abolished.

The result is shown in Table 3

The notional base case shows, as one would expect, that government debt would almost double over three years, that about one-third of the Universal Income would be lost to inflation unless it were indexed in some way, the balance of payments current account would balloon out to unsustainable levels and the TWI would continue to fall, creating over time a crisis not unlike what has happened recently in Indonesia and elsewhere.

The notional base-case could well lead to a severe inflationary spiral due largely to the shift of real resources from the productive sector into consumption without a corresponding rise in production

Towards Constructing a Practical Universal Income Solution: Financial Transactions Tax ⁸

The financial transactions tax proposed here is designed as both a domestic consumption tax and as a means of establishing and maintaining current account stability. The tax would be automatically collected through the financial system.

The following table shows the impact of a 5% tax applied to both forex and domestic transactions. In practice there would be two such tax rates: a fixed one that might be lower than 5% levied on domestic financial transactions and forex for essential imports; and a variable tax (probably initially more than 5%) on forex for non-essential imports. Categories of "essential" imports would be largely limited to items such as information technology, machinery and equipment for productive purposes, and some raw materials.

The tax will eliminate transactions that have no basis in domestic production and long term investment, so it has been treated for modelling purposes as a tax on gross national turnover (Gross National Expenditure less changes in stocks plus exports )

The results are shown in Table 4

While the FTT at 5% reduces volatility of the current account, the financing requirement and inflation, additional measures will be needed to service the financing requirement, reduce the CPI surge, and further stabilise the current account. Ideally, in a final package, some effort could perhaps be made to reduce the impact of CPI cascading on people on low incomes, (such as by reducing GST on food and clothing) so as to help maintain their real purchasing power.

ADDING RESERVE BANK CREDIT AND A SAVINGS SCHEME TO THE BASE CASE+FTT AS SHOWN IN TABLE 4

An underlying challenge with a partial monetisation of the economy is the expansion of private credit that can result in the absence of suitable sterilisation measures. Some economists have expressed concern at the rate of credit expansion in recent years, and (among other things) its effect on the values of existing assets. Responsible use of Reserve Bank financing of some of the Universal Income will therefore include suitable sterilisation measures and it is possible these may in turn have a consequent impact on interest rates.

There is a long history of Reserve Bank funding activity in New Zealand, beginning when the Reserve Bank was established in the 1930's, including the State Advances Corporation and continuing with Producer Board stabilisation accounts into the 1980's. If all or part of the Universal Incomes were to arise from Reserve Bank Credit the monetisation implicit in those incomes could technically take place through the financial system rather than the government accounts. But the National Accounting methodology will need to show how the government financing requirement has been met if the Government debt is not to increase as a result of the process (although the internal debt may be less relevant if it is supplied interest-free from the RBNZ).

The macroeconomic flow diagram from financing $11 billion (see Table 4), is shown in Chart 1. Put in perspective, this represents an increase in M3 of around 11% (similar to recent annual increases in private credit growth in the banking system.) Some of the credit is recovered in the form of GST and excises as the Universal Incomes are spent, increasing the deposits of financial companies by perhaps $8 billion.

The RBNZ input will be sterilised by reintroducing Reserve Ratios to the banking system. This procedure can be used to restrain excess private credit growth. The direct effects of sterilisation can be that real interest rates will rise, lifting the exchange rate, reducing exports and increasing imports. Their extent will depend on the amount of sterilisation. In Chart 1 only the additional deposits have been sterilised, leaving the status quo in the banking system.

Sterilised Reserve Bank activity can have an opposite effect to the notional Universal Income base case (Table 3) where interest rates and the TWI both fall, exports are increased and imports reduced. Therefore, sterilisation can be used to complement FTT (though there still needs to be a greater offset of domestic consumption in favour of productive investment). The sterilisation accumulates over time unless all or some of the additional sterilised deposits (being non-interest bearing, and therefore "non-performing" ) are eventually cancelled by the Reserve Bank.

FTT (applied both domestically and on forex transactions) and Reserve Bank Credit (coupled with sterilisation) enable several of the key macroeconomic indicators to be managed successfully. However, the inflationary impulse produced by the initial monetisation still needs attention. There is little reason to suppose the additional Universal Incomes won't be used for domestic consumption. This paper takes the conservative view that ALL the Universal Income will go on consumption in the first instance, unless specific measures are taken to encourage investment.

It is therefore proposed that SOME of the Universal Incomes will be "frozen" for a period of three to five years. The process is simple. It involves "tagging" the Universal Income accounts in income steps (based on the previous year's income, subject to special provisions for changed circumstances) so that those on low incomes will be able to access all their Universal Income, while those on higher incomes will have all or part of their Universal Income temporarily transferred to an investment sub-account. Access to the sub-account will be electronically blocked until the investment is released and returned to the normal Universal Income account.

It may be (though it is not technically essential) that interest would be payable on the RBNZ savings accounts. They would be inflation proofed and government guaranteed and the savings directed into productive investment projects promoting sustainability, small business and other areas likely to increase employment and local development, thereby minimising the risk of "overheating" particular investment sectors. It may be that ALL RBNZ Universal Income accounts could be provided with an investment sub-account to provide for a voluntary savings programme. Such a voluntary programme could possibly attract enough savings to slightly reduce the amount that needs to be "frozen" for investment purposes.

A voluntary savings scheme might be successful because, unlike the present Welfare system, paid and unpaid work and initiatives that promote local economic activity such as LETS (Green Dollar) schemes can be actively promoted instead of being restrained or merely tolerated. As long as there is underutilised labour and sustainable resource capacity available, such schemes can enhance quality of life without impacting on the formal economy. This approach might release some Universal Incomes for savings and investment.

An arbitrary inflation objective would be say, to reduce the CPI impulse to below 6% in the first year and below 3% in the following years, while providing for stable high investment flows and a low inflation environment at the end of the three year transition period.

If the first-year (1998) GDP is about $120 billion (obtained from Table 4, by adding Growth and CPI to existing GDP), and an assessed maximum real GDP growth of 7% is maintained, UP TO 7.5% of $120 billion would have to be withdrawn from domestic consumption in the 1998 year. That means roughly one-third (say $9 billion), of all the Universal Incomes could need to be frozen, a sum believed to be realistic under this proposal. The savings scheme would also ease pressure on other key indicators such as the balance of payments current account. The actual figures still have to be worked through in detail.

The policy package framework of the proposal is given in Chart 2.

The theoretical underpinning of the package is to ensure that over time the real resource transfer from the Universal Income monetisation results from the growth of real production rather than by transfer of existing productive and tradeable sector resources to domestic consumption.

Some additional sterilisation will probably be needed to balance the current account but the use of the FTT may tend to depress real interest rates when the speculative demand for currency is removed, and this is reflected in Charts 4, 5 and 6.

The macroeconomic flow diagram for the policy package in the first year is shown in Chart 3

Chart 3 shows only a small private credit sterilisation program is needed to provide stability in the first year. The Universal Income monetisation has no major effect on either inflation or the balance of payments. However, the sterilisation increases when the "frozen" Universal Income is released.

If one third of the frozen savings were "released" in year 2 and another third in year 3, the macroeconomic flows would be as shown in Charts 4 and 5. However, if years two and four were "breather" years, and the compulsory savings released over 5 years rather than three years, there would be more time for productive capacity to "catch up" with consumption, improving the macroeconomic indicators.

The $26 billion held at the end of the transition period represents a sterilisation amounting to about 15% of bank deposits at end of year 4. Such a level is deemed to be firm but acceptable, and can be used to maintain considerable stability in the banking system during and after the transition period. Theoretically, cumulative sterilisation reserves could become a substantial (but non-interest bearing) part of the assets of the banking system, or they could be cancelled in part from time to time through appropriate accounting entries.

The Reserve Bank sterilisation tends to act with FTT in opposition to the unrestrained Universal Income base-case, while the savings scheme reduces the CPI inflation impulse to very acceptable levels. As the system settles, the Universal Incomes can be indexed against part of the increased production. When this is done, it may take perhaps 5 years to complete the implementation phase.

There is usually more than one way to "skin a cat". A tax-based comparison with the above proposal has been constructed using the same base-case elements . The comparison relies on taxing out the additional $17bn monetisation by way of a 70% increase in income and company tax from its present level of $24.6 bn to $41.6bn. [$0-$9,500 @ 25.5%, $9,501- $34,200@36.5%, over $34,201@ company tax rate of 56% ]. The results are shown in Table 5. Apart from creating more anomalies in family incomes, there are residual problems with economic performance and the current account, despite attractive budget surpluses.

While implementing Universal Income through direct taxation is probably feasible, it would be politically difficult. The reason is that the Universal Income monetisation is effected in large part by transfers from one sector of the community to another. The tax-based solution invites the theoretical criticism that it privileges some people over others. By doing so, I suggest it fails to satisfy the common features of a true universal income discussed earlier.

The introduction of a universal income will reduce, but not eliminate the incentive to "work" in the black economy, because the very high effective marginal tax rates that exist under the present Welfare system will be removed. This will further increase measured real GDP growth during the Universal Income implementation period.

Because Universal Income is by definition universal, it cannot properly be regarded in any way as a subsidy to any particular sector of the community under trade agreements.

The effect a universal income might have on labour supply has been an issue raised by those opposing Universal Income ever since the State Bonus Scheme was considered by the British Labour Party in 1921, among whose concerns was that minimum wages might go down rather than up, as Milner believed at the time.

Detailed studies by Card & Kreuger ⁹ show that employment in the USA is independent of the minimum wage. A universal income in the form proposed here is a dividend rather than a wage and the individual's total income is made up of both wages and dividends. However, in practical household pocketbook terms, many people will "interpret" their universal income of $115/week as an increase of about $3/hour in their basic wage rate.

The evidence supports the view that introducing a Universal Income will have little effect on employment (other than by increasing it as total production expands from the extra real economic growth it will bring). Nevertheless, it is proposed that minimum wage levels be reinforced to ensure the benefits of Universal Incomes are fairly distributed across the population and remain that way.

Because workers will be able to say "no" to unfair work practices there will probably be some change in wage relativity across different occupations. Average wages in "popular" jobs might be expected to drop towards the minimum wage, while those in less "popular" jobs will rise somewhat. Employers are likely to enjoy greater flexibility in working hours and in the duration and nature of the labour contracts they enter into with workers.

In a stable growing economy such as that resulting from implementing this proposal, there will be a trend toward greater automation in production as sustainable economic growth accesses the available labour pool. In the medium to longer term the trend will be towards higher wages quite independent of the level of the Universal Income, creating a high productivity high wage economy, reversing the trends of recent years.

Details (affecting about 40,000 superannuitants) will need to be worked out in relation to reciprocal pension and benefit arrangements with other countries. For travellers, the practical issues are to link departures/arrivals into the Universal Income system by using the RBNZ debit card at passport control, and to decide what time (if any) Universal Income recipients can continue to receive their Universal Income while they are away.

The introduction of Universal Income will almost certainly lead to increased public demand for education and skills development. This is because for the first time, some people who have previously been unable to seek to improve their education and skill levels, can do so. This will add to real economic growth, though it is worth noting the National Accounts presently treat expenditure on education services as a cost, whereas all or part of such expenditure might better be regarded as an asset (perhaps written off over, say 40 or 50 years).

Since this Universal Income proposal will work to the benefit of the whole nation by stimulating high, real sustainable growth as well as distributing many of its benefits on a universal basis, I expect it will be of great interest across the political spectrum. The proposal will make nearly everyone a winner because it is not robbing Peter to pay Pauline. Its success is derived from better sharing an economic pie that is steadily growing, rather than continually redistributing one that remains much the same year after year (or even shrinks when real measures of individual well-being are taken into account).¹⁰,¹¹

Despite the enhanced economic success and national sovereignty that will result from the programme I am proposing in this paper, there will always be people who believe they are entitled to a greater share of the nation's wealth. The political tensions this creates are healthy, and the essence of valid democratic debate. That is why the introduction of a genuine universal income has to be based on the principles of universality and improving individual wellbeing in the framework of a just society.

The level of the universal income will become THE political question in NZ's participatory democracy. "Conservatives" will want to restrain the indexation of Universal Income, while "progressives" promoting greater social justice will want a greater equity stake from their share of the public domain and therefore seek to accelerate the indexation of Universal Income. I submit this could help create a political win-win by facilitating consensus forming on other social issues like education and health. I propose that the enabling Universal Income legislation should entrench a base level of Universal Income not less than 25% of GDP ( about the level proposed in this paper) while maintaining an open upper limit.

The Alliance alternative budget programme has been used in the analysis because it maintains a commitment to "free" health and education and to traditional service levels. This UBI proposal works economically WITH traditional social provisions intact, and assumes they can and will be maintained into the future. There is no economic justification to reduce them, as the business sector will benefit from rising production and productivity, a stable currency and relatively stable price levels.

This paper shows that a Universal Income proposal as described is both technically feasible and administratively responsible as long as it is accompanied by a raft of economic calming policies comprising:

Further detailed modelling work in the coming months should enable further refinement of the numbers and indicators.

The proposal presented here is true to the principles and features of a true Universal Income system. It completely replaces the "Welfare" system as we presently know it, while at the same time promoting savings and sustaining real economic growth at levels not seen in NZ for more than a generation, if ever. The essence of the true universal income in the modern economy is that it recognises and makes provision for the delinking of incomes and traditional "work". This is the single most important feature of the post-industrial society and a primary source of the breakdown of the Beveridge-Keynesian welfare state.

There have been unimaginable losses of human potential during the 80 years it has taken to return full circle to universal income. Perhaps the least we can do now, is to take Van Trier's irreversible step forward into a new society.

1. Van Trier, Walter "Every One a King", 476 pages Department of Sociology, Katholieke Universiteit Leuven, Belgium, 1995  [back]

2 Korten, David C "When Corporations Rule the World" Earthscan Publications, London, 1995 ISBN 1-85383-434-3  [back]

3. The People's Earth Declaration, International NGO Forum, United Nations Conference on Environment and Development, Rio De Janiero Brazil, June 12th, 1992  [back]

4. Abraham Lincoln, Letter to Col. William F Elkins, 21st November 1864 in Archer H Shaw, "The Lincoln Encyclopaedia" , McMillan, New York, 1950  [back]

5. Van Trier, Walter "Every One a King", 476 pages Department of Sociology, Katholieke Universiteit Leuven, Belgium, 1995 p425  [back]

6. Keith Rankin, "A New Fiscal Contract? Constructing a Universal Basic Income and a Social Wage" Social Policy Journal of NZ, Issue 9, November, 1997  [back]

7. A UBI for New Zealand: Final Report; (Study for NZ Democratic Party), Dec 1997 John Lepper and Petrus Simons, Integrated Economic Services Ltd, Wellington.  [back]

8. Michalos Alex C "Good taxes" The Case for taxing Foreign Currency Exchange and Other Financial Transactions, Dundurn Press, Toronto, 1997, 87 pages, is a good primer with a good bibliography  [back]

9. Card D and Kreuger, "Myth And Measurement - The New Economics of the Minimum Wage" Princeton University Press, 1995  [back]

10. Jackson T & Marks N, "Measuring Sustainable Economic Welfare - A Pilot Index:1950-1990", Stockholm Environment Institute, 1994  [back]

11. Real World Coalition, Ed Michael Jocobs "The Politics of the Real World" Earthscan Publications, London, 1996.   [back]

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