Utilising the Transactional Efficiencies of Contingent Loans - A General Framework for Policy Application

This chapter argues that the administrative costs of contingent loans are likely to be substantially lower than the costs of providing traditional financial products via the private banking system. Building on the notion of ‘transactional efficiencies’ discussed by Stiglitz in Chapter 2, this chapter argues that recent technological developments have created unique opportunities for governments to extract economies of scope and scale by utilising the information, administration and debt collection assets associated with the tax and transfer systems of a developed nation state as the ‘infrastructure’ needed to provide low cost loans to individuals in a wide range of circumstances. The ability of the taxation and welfare systems to recover debts at low cost from future income flows also creates opportunities to design loan repayment schedules which the private sector have proved unwilling to provide and which are welfare enhancing at both the individual and macroeconomic level. The chapter provides examples of where the tax system is already being effectively used as a ‘bank’ in multiple countries and concludes that the main barrier to making greater use of the low transaction costs associated with ‘contingent banking’ are likely to be ideological rather than economic.