UK Politics

Free-marketeers would be foolish to back Universal Basic Income

BY James Cullimore   /  7 August 2018

You would be forgiven for having missed the Shadow Chancellor’s big policy announcement last week. The headlines have been, quite rightly, dominated by the anti-Semitism scandal currently engulfing the Labour Party. But last Wednesday, John McDonnell suggested that Labour will include a pilot of universal basic income in their next manifesto. The details are still under review, but the idea of a basic income for all citizens seems high on McDonnell’s list of priorities and would likely be a key feature of any future Labour government’s economic programme.

Universal basic income entails the state distributing an annual sum to all adults, which covers the minimum cost of living. In its purest form, it is entirely non-means tested and would provide everyone with the same amount.

The concept is popular amongst those on the libertarian right, dating back to Friedrich Hayek and Milton Friedman, as well as the radical Left. Its most high-profile supporters include Facebook’s Mark Zuckerberg, no socialist himself.

The principal concern which unites these unlikely bedfellows, is that automation and robotics are going to displace labour on a mass scale, making it necessary to provide a minimum income for all. In its utopian form, a universal basic income will free individuals to pursue artistic or leisurely pursuits, having been liberated from the threat of absolute poverty. The logic runs that rather than provoking a return to Luddite resistance, the masses will embrace the freedom and abundance that comes through technological change.

The Left also regard it as a means of reducing inequality and economic insecurity, whilst libertarians detect an opportunity to abolish cumbersome layers of welfare bureaucracy in place of a simplified system which also maximises individual choice.

Is any of this realistic? Probably not, but there is little empirical basis upon which to provide a definitive answer either way. Various small-scale schemes, including the most recent high-profile case in Finland, have not produced any discernible insight into the effects of a universal basic income. The majority of the experiments have been severely limited in scope, including in Finland, where participants were exclusively unemployed. Interestingly, the project has proved politically unpopular and has not been extended by the government.

Currently, there are pilot schemes underway in Silicon Valley and several European countries, including Scotland. However, free-marketeers in the UK would be foolish to support Labour’s proposal to introduce a similar pilot in England. Sensible analysis suggests that in practice, it will lead to higher taxes, higher debt and mass delinquency.

A policy of money for nothing undermines the incentive to work. Governments subsidise activities which they want to encourage (such as the production of green energy) and tax those which they want to reduce (like smoking). Therefore, it is inevitable that if you subsidise people to not work, many will do exactly that, even if there is employment available. This problem would be confounded by the perverse incentive for employers to offer lower wages, knowing that their employees are subsidised by a state income (much like tax credits). No wonder the idea is doing the rounds amongst those in Silicon Valley…

What’s more, large numbers of people out of work historically generates negative social consequences. Rather than a utopian society of leisurely and artistic pursuits, universal basic income will create enclaves of people who are dispossessed and languishing in relative poverty, cast as surplus to requirements. Crime and drug abuse often fills the void left by the absence of earning a living. Rather than reducing inequality, it would erect a stark divide between the productive and the unproductive.

The financial cost would be equally as damaging. Some on the right suggest that transferring to one, single payment made to all households would be cost neutral, since it would simply replace the existing welfare system. However, an OECD report has revealed that a cost neutral basic income would leave those at the lower end of the income distribution worse off relative to the current system, except for the very poorest.

Meanwhile, those on middle incomes would be better off, since the basic income would be greater than the losses incurred from the abolishment of tax-free allowances. In short, it would be a subsidy for the middle classes at the expense of the poor.

Therefore, for the policy to be redistributive, it would have to be funded by taxation as well. As Robert Colvile, the director of the Centre for Policy Studies outlined in an article last year, even to fund the RSA’s meagre proposal of £3,692, lots of people would have to pay significantly more tax. To get to a level where people could live sufficiently off their state income, the costs would be astronomical. This would be an intolerable burden for individuals and business, with far-reaching consequences for the economy.

This is the fundamental flaw with the whole concept of a universal basic income; it is simply unaffordable. At a time when the tax burden is at its highest level since the mid-1980s and the government is in search of an extra £20bn for the NHS, we are already in danger of undermining the limited progress we’ve made in tackling the debt and deficit since 2010.

What’s more, the policy appears wholly unnecessary in our current moment. Income inequality is at its lowest since the mid-1980s and employment is at its highest since records began. As for the future, it is difficult to know what new technologies will bring. But is it not conceivable that like previous technological revolutions, this one will change the nature of employment rather than eliminate it entirely?

There are more immediate threats to employment than Artificial Intelligence. Those who believe in the free-market should focus their attention on winning the battle of ideas, not telling everyone that robots are going to steal their jobs.