Welfare experiment may have applications in Australia

Giving everyone an obligation-free basic income might change the way we think about welfare, but it is fraught with economic and financial risks.

Late last year, it was announced that Finland's national social insurance provider would conduct a pilot study from 2017 into fundamentally reforming its welfare system.

The idea is that the raft of unemployment, health, family and other benefit programs currently provided would be replaced by a flat, untaxed, basic income allocation for every adult, regardless of their employment situation or wealth status.

A small-scale trial will initially be undertaken, in which eligible Finns would receive a basic income of 550 euros each month during the pilot phase, to subsequently increase to 800 euros per month.

If the trials are successful, the government of Finland could consider scrapping much of its already expensive and complicated welfare state with a basic income, in what could be the most ambitious rollout of this radical idea ever seen.

The proposal for a basic income is only one aspect of a class of significant welfare reform ideas that have been recommended in the past.

Although basic income is often stereotyped as a concern for political progressives and social democrats, there have actually been several supporters of this welfare model amongst some classical liberals and libertarians.

Liberal support for the basic income is largely motivated by a desire to eliminate implicit poverty traps that come when welfare subsidies interact with progressive income taxes, and to downsize the wastefully large bureaucracies charged with administering complex welfare schemes.

There is also the concern among liberals that government all too often invokes paternalistic conditions upon welfare recipients, such as the numbers of jobs unemployment benefit recipients must apply for, or what people can or cannot spend with their welfare cheques.

Finally, it is envisaged a basic income model, or similar, could even be used to replace burdensome anti-job regulatory settings such as the minimum wage.

The libertarian author Charles Murray, for example, suggested an annual cash grant for each American adult citizen of $US10,000, whilst philosopher Matt Zwolinski is another high-profile liberal advocate for basic income.

Other liberals, most famously Milton Friedman, argued for the similar notion of a "negative income tax" in which, essentially, people earning below a certain threshold amount receive a subsidy from government rather than pay income tax.

If a person earns no income the negative income tax provides all of their income via a subsidy, and this is paid at the highest rate, and as the person earns more their subsidy is gradually withdrawn until they become a net taxpayer.

A concern widely raised against basic income is that it would induce a significant reduction of labour supply, as people elect to abstain from work in response to receiving a "no questions asked" transfer payment from government.

It is not necessarily conclusive that such an effect would dominate decisions about how many hours people aim to supply to the labour market, because for those already working it is effectively more expensive to take up leisure as post tax earnings are raised.

The magnitude of the labour supply effect will depend, in part, upon the level of payment provided under the basic income arrangement.

If the basic income is used to replace a variety of administratively complex means-tested welfare payments then the incentive for people especially on lower incomes to look for more work is probably enhanced, at least in some circumstances.

In addition to the potential impact of the basic income on employment, there is the question as to whether this welfare reform scheme might prove to be fiscally unaffordable.

The Australian welfare state is hugely expensive, being a major contributor to our overall budgetary problems, with the Bureau of Statistics estimating that spending by all levels of government on social security and welfare stood at $156 billion in 2013-14.

This figure does not include public sector expenditure on other aspects of the welfare state, including education, health, and public housing.

Whether a basic income would become more fiscally burdensome than what is already in place would critically depend upon both the coverage of the scheme and the payment rate which applies.

By way of example, each adult Australian resident could have received about $714 per month in a basic income guarantee during 2013-14, leaving the social security budget no worse off.

However our public sector is already deeply in debt, so providing a basic income payment at a rate markedly lower than $727 per month could be much more affordable from a fiscal standpoint.

On the other hand, organising such a policy change across the three levels of government would pose as a herculean, likely impossible, task.

The impacts of a basic income on employment and budgets are still being disputed, and in any case would need some testing in the real world, but other fundamental concerns have tended to be overlooked in the debate so far.

Some economists have warned that the integrity of a basic income regime is likely to be susceptible to political opportunism, for example extending welfare benefits to different constituencies for vote-buying purposes.

Essentially, even if the basic income initially cleared away the complexities of the existing welfare system, politicians would later attempt a return to discriminatory welfare by offering special benefits on top of the basic income to specific groups on the basis of their needs.

Making welfare more selective, and thus more discriminatory, in provision across the population has been the obvious experience in advanced countries, and there is nothing inherent in the basic income proposal to suggest it would fundamentally reform political behaviour in that regard.

Similarly, a basic income could, in fact, make paternalist policies even more attractive to politicians, because governments would have the opportunity to unilaterally impose directives upon everybody receiving basic income support.

There are plenty of problems with the Australian welfare system as it stands, being fiscally unaffordable, damaging to work incentives, and posing a paternalistic fist down upon those who cannot climb up the income scale.

The Finnish basic income experiment must appeal as an alternative, but it will be necessary to be clear-eyed about the potential downsides of extending a blank cheque to all.

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