Damien Grant: Morgan's welfare revolution fails on the details

The Morgan scheme does two things. It increases the demand for leisure by paying people not to work and reduces the demand for working by increasing taxation. Photo / NZ Herald

Gareth Morgan has produced a comprehensive and interesting book on the failings of our welfare industry and has proposed an alternative.

His solution - the unconditional basic income (UBI) - is simple, dramatic, and wrong.

The first part of the book, The Big Kahuna, is an excellent and well-researched summary of how we found ourselves with the current mosaic of conflicting, confusing and mostly ineffective social welfare policies.

This alone is worth the price of admission.

The solution proposed by Morgan is to scrap the entire regime and replace it with a UBI of around $11,000 a year, paid to all citizens regardless of circumstances.

He also advocates a revamped tax on capital that I shall not deal with today.

Morgan provides some costings. By his analysis, government spending will rise from the current $68 billion to $84 billion. Our nominal GDP is around $190 billion. Forty-four cents in every dollar earned would go in tax.

National Super, Working for Families, DPB, the accommodation supplement and random ex-gratia "recoverable assistance" would all be scrapped.

He is not advocating abolishing taxpayer funding of health or education.

The Morgan plan has advantages. It is simple, reduces incentives to game the social welfare system and creates social opportunities not available at present.

But these advantages are paid for by staggering tax increases imposed on those remaining in employment.

The Morgan scheme does two things. It increases the demand for leisure by paying people not to work and reduces the demand for working by increasing taxation.

Morgan is confident that the introduction of a UBI will not result in the beaches at Piha becoming crowed mid-week - and I agree - but in reality it doesn't really matter.

Economically, the unskilled are irrelevant. They are a commodity.

Only talent matters and a progressive tax system hurts the most productive members of the community.

High-income earners react to increases in tax by working less, thus paying less tax. Worse, they take their skills offshore.

Talentless poets would remain. Radiologists would depart.

Those with skills who remain will work less, making access to them more expensive, which will make the UBI worth less, leading to demands that it increase.

To be fair, most of the extra tax would be recycled straight back to those remaining in employment but even a marginal change amplifies quickly. Ten thousand leaving the workforce means millions upon millions in lost taxes.

That must be recovered by taxing the remaining workers more, who react by working less, and so on.

This is not to defend the current scheme. Morgan is right, it is beyond repair. We need a radical solution, but the answer to a broken social welfare state is not to make everyone a beneficiary.