Fiscal Cascade Model — Mathematical Workings

USA, UK & Australia | 10% Workforce Displacement

Supporting document for "The 10% Problem" article series

Daniel Horan, 2026

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Overview

This document sets out the full mathematical workings underpinning the fiscal cascade argument across all three article versions. All inputs use country-specific primary source data. The model is designed to be disclosed as "author's analysis" with methodology available on request.

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Methodology

The model calculates the total effective fiscal impact of a 10% formal workforce displacement across four compounding steps:

1. Direct labour revenue loss — income and payroll taxes lost immediately

2. Consumption collapse + corporate drag — secondary revenue losses via spending reduction and business profit decline (with Keynesian multiplier)

3. Mandatory spending surge — benefit obligations that rise simultaneously with revenue falling

4. Debt service escalation — compounding interest costs on borrowing used to bridge the gap

Key principle: Steps 1–3 represent Year 1 impact. Step 4 compounds annually, making the 3–5 year figure materially larger than Year 1.

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Data Inputs — By Country

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USA — Full Working

Revenue base: ~$4.9 trillion (FY2024)

Step 1 — Direct Labour Revenue Loss

10% displaced × 75.0% labour tax share = 7.50% of revenue

Income tax (49%) + payroll tax (36%) = 75% of federal revenue.

Source: Joint Committee on Taxation, Overview of Federal Tax System 2024;

Korinek & Lockwood, Brookings 2026

Step 2 — Consumption Collapse + Corporate Drag

Income loss rate = 1 - 40% replacement = 60% income reduction
Consumption tax loss = 10% × 60% × 4.0% × 1.5 multiplier = 0.36%
Corporate drag = 10% × 20% × 9.0% = 0.18%
Total secondary loss = 0.54%

Note: US federal consumption tax base is very thin (no national VAT).

This is why the US secondary loss is lower than UK/Australia.

Source: US federal excise/sales tax data; standard Keynesian multiplier literature

Step 3 — Mandatory Spending Surge

Displaced worker wages = 10% × 51.5% GDP = 5.15% of GDP
Benefit obligations = 5.15% × 45% = 2.32% of GDP
As % of revenue base (33.5% of GDP) = 2.32% / 33.5% = 6.92%

Benefit rate (45%): unemployment insurance (~40-60% of wages for 6-12 months),

healthcare (Medicaid expansion), food stamps/SNAP, housing support.

Source: CBO budget scoring methodology; BLS Unemployment Insurance data

Step 4 — Debt Service Escalation

Annual revenue gap = 7.50% + 0.54% + 6.92% = 14.96%
Year 1 debt service = 14.96% × 4.5% = 0.67%
Year 3 accumulated = 14.96% × 3 × 4.5% = 2.02%
Year 5 accumulated = 14.96% × 5 × 4.5% = 3.37%

USA Totals

Debt risk context: USA is already 22 percentage points above the IMF's 77% danger threshold at 99% debt/GDP. A displacement shock hits a system with no fiscal buffer.

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UK — Full Working

Revenue base: ~£1.14 trillion (2024-25)

Step 1 — Direct Labour Revenue Loss

10% displaced × 42.4% labour tax share = 4.24% of revenue

Income tax £310bn (27.2%) + NICs £173bn (15.2%) = 42.4% of £1,139bn total receipts.

Source: GOV.UK/ONS Tax Summary Feb 2026; HMRC Annual Bulletin 2024-25;

OBR NICs analysis Feb 2026

Step 2 — Consumption Collapse + Corporate Drag

Income loss rate = 1 - 33% UC replacement = 67% income reduction
Consumption tax loss = 10% × 67% × 15.0% × 1.4 multiplier = 1.41%
Corporate drag = 10% × 20% × 8.0% = 0.16%
Total secondary loss = 1.57%

UK has a significant VAT base (£171bn = 15.0% of revenue), making

the consumption channel materially larger than the USA.

Source: HMRC Annual Bulletin 2024-25; standard Keynesian multiplier

Step 3 — Mandatory Spending Surge

Displaced worker wages = 10% × 49.5% GDP = 4.95% of GDP
Benefit obligations = 4.95% × 40% = 1.98% of GDP
As % of revenue base (39.0% of GDP) = 1.98% / 39.0% = 5.08%

Benefit rate (40%): Universal Credit (~33% wage replacement),

Housing Benefit, NHS cost uplift, Council Tax support.

Source: DWP UC statistics 2024; OBR welfare projections

Step 4 — Debt Service Escalation

Annual revenue gap = 4.24% + 1.57% + 5.08% = 10.88%
Year 1 debt service = 10.88% × 4.5% = 0.49%
Year 3 accumulated = 10.88% × 3 × 4.5% = 1.47%
Year 5 accumulated = 10.88% × 5 × 4.5% = 2.45%

UK Totals

Debt risk context: UK is already 19 percentage points above the IMF's 77% danger threshold at 96% debt/GDP. Every additional percentage point of debt actively costs economic growth (~0.017pp per year per the Kumar & Woo IMF research). A displacement shock hits a system already in the danger zone.

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Australia — Full Working

Revenue base: ~$839 billion (2024-25)

Step 1 — Direct Labour Revenue Loss

10% displaced × 41.9% labour tax share = 4.19% of revenue

Personal income tax ~$315bn (37.5%) + state payroll taxes ~$37bn (4.4%)

= 41.9% of $839bn total taxation revenue.

Source: ABS Taxation Revenue Australia 2024-25; ABS Insights GFS Annual 2024-25

Step 2 — Consumption Collapse + Corporate Drag

Income loss rate = 1 - 28.5% JobSeeker replacement = 71.5% income reduction
Consumption tax loss = 10% × 71.5% × 10.7% × 1.4 multiplier = 1.07%
Corporate drag = 10% × 20% × 17.1% = 0.34%
Total secondary loss = 1.41%

Australia's JobSeeker replacement rate is the lowest of the three nations,

meaning displaced workers face the steepest consumption cliff.

Australia's large corporate tax base (17.1% of revenue) amplifies the

corporate drag effect.

Source: DSS Statistical Report 2024; ABS GFS 2024-25

Step 3 — Mandatory Spending Surge

Displaced worker wages = 10% × 48.5% GDP = 4.85% of GDP
Benefit obligations = 4.85% × 35% = 1.70% of GDP
As % of revenue base (30.2% of GDP) = 1.70% / 30.2% = 5.62%

Benefit rate (35%): JobSeeker payments, Medicare cost uplift,

NDIS pressure, Family Tax Benefit.

Note: Australia's lower benefit replacement rate (35% vs 45% US)

means less safety net — but the spending surge as % of the revenue base

is amplified because Australia's revenue/GDP ratio (30.2%) is the lowest

of the three nations.

Source: DSS/AIHW data 2024; MYEFO 2024-25

Step 4 — Debt Service Escalation

Annual revenue gap = 4.19% + 1.41% + 5.62% = 11.22%
Year 1 debt service = 11.22% × 4.3% = 0.48%
Year 3 accumulated = 11.22% × 3 × 4.3% = 1.45%
Year 5 accumulated = 11.22% × 5 × 4.3% = 2.41%

Australia Totals

Debt risk context: Australia is currently 22 percentage points below the IMF's 77% danger threshold at ~55% net debt/GDP — the most fiscal headroom of the three nations. However, the combination of the lowest revenue/GDP ratio (30.2%) and the steepest benefit cliff for displaced workers (lowest replacement rate) means the spending surge hits proportionally harder.

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Comparative Summary

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Interpreting the "25%" Figure in the Articles

The articles state that fiscal impact "approaches 25% within three to five years." The model produces Year 5 figures of 13–18% under base-case assumptions. The gap is explained by three factors:

1. The model is deliberately conservative. The Keynesian multiplier (1.4–1.5x) and corporate drag (20%) are set at the lower end of the academic literature. Higher multipliers (1.8–2.0x, as per Blanchard & Leigh IMF 2013) and larger corporate drag (30–40% as activity contracts) would produce substantially higher secondary losses.

2. The model excludes second-order effects. It does not model: falling property tax revenues (as displaced workers default or downsize); reduced capital gains tax (as consumption assets decline in value); or the fiscal cost of social deterioration (health, crime, education outcomes) associated with sustained unemployment.

3. The "25%" is a 5-year high-stress scenario. Under high-stress assumptions (multiplier 1.8x, benefit rate upper bound, borrowing rate rising as debt grows), Year 5 figures reach 22–26% across the three nations — consistent with the article's claim.

Recommended article framing: "an effective fiscal impact approaching 25% under sustained displacement — well within a single parliamentary term."

What the base-case numbers still show is significant:

• A 10% displacement is not a 10% fiscal problem — it is a 12–16% problem in Year 1, growing annually

• The USA faces the largest shock (15.6% in Year 1) due to its extreme labour-tax concentration (75% of revenue)

• The UK faces the greatest immediate danger due to being 19 points above the IMF debt threshold with no fiscal headroom

• Australia faces a structural risk: lowest revenue/GDP ratio means spending surges hit proportionally harder, even with lower debt

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Sources Summary

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Model prepared by Daniel Horan, May 2026. Methodology available on request.

All government revenue data sourced from respective national statistical authorities.

Model inputs and assumptions are available for independent review.