Economics

Money for nothing: could Universal Basic Income take off?

BY Ian Stewart   /  12 March 2018

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to & view previous editions at: http://blogs.deloitte.co.uk/mondaybriefing/

In the aftermath of the financial crisis poverty, inequality and social inclusion have become high profile issues. To its adherents, and there are many, the solution is for the state to provide adults with a Universal Basic Income (UBI) to cover their basic needs, allowing them to earn whatever they wanted in addition. Implementing a UBI would represent a profound change in the role of the government and its effect on peoples’ lives.

The origins of today’s UBI go back at least 500 years. Sir Thomas More mused on the concept in his book Utopia 1516. More’s fictional utopia was an island state where citizens were ruled by benign scholars. Providing an income to all citizens would, More believed, reduce the incentive for crime and promote harmony.

In recent years, the idea of a basic income has drawn support from many quarters. For some on the left it offers a response to poverty and inequality. As a universal benefit, it could supplant means-tested or conditional benefits, which some see as demeaning. Free market supporters see basic income as a means to promote liberty and, by replacing existing welfare systems, shrink the state. And there are some, including Facebook billionaire Chris Hughes, who argue that a basic income will be needed to counter mass unemployment created by job-destroying new technologies.

Rutger Bregman, author of Utopia of Realists, and a leading advocate of UBI, says it, “is all about the freedom to say no. That’s a privilege for the rich right now. With a basic income, you can say no to a job you don’t want to do. You can say no to a city in which you no longer want to live. You can say no to an employer who harasses you at work…that’s what real freedom looks like” (Financial Times weekend magazine, March 10/11th 2018).

Different advocates of UBI imagine very different types of schemes. Here we focus on the shared characteristics of all UBI schemes.

Most supporters think a basic income would strengthen the bargaining power of labour, pushing employers to create higher-paid, higher-skilled jobs. It could radically simplify the welfare system and eliminate the disincentives to work inherent in means-tested benefits. (As earnings rise means-tested benefits are withdrawn, often creating punitive effective ‘withdrawal’ rates).

Basic income has attracted widespread and practical interest. Trials are underway in Finland, Canada, California, the Netherlands, Uganda and Brazil. Scotland is running experiments in four council areas and the Indian government is reported to be considering trials.

But if UBI is a good idea that has been around for so long why has no country ever adopted one?

There are fundamental problems. A UBI goes to everyone, not just lower income households, or those with special needs. It could be hugely expensive. In its purest form, as a replacement for means-tested benefits, a basic income would be unable to direct extra support to those in greatest need. This would exacerbate poverty.

As the Organisation for Economic Development (OECD) has concluded, “A universal basic income paid at a flat rate to all citizens would fail to reduce poverty levels in advanced economies and require substantially higher taxes to fund its simplicity…Large tax-revenue changes are needed to finance a basic income at meaningful levels”. For the UK, the OECD estimates that a UBI could cost as much as £44.3 billion, equivalent to the defence budget every year.

A flat rate UBI would, the OECD says, create “many gainers and losers…under a basic income less clearly targeted on poor families, poverty levels would rise in the UK, France and Finland and would be unchanged in Italy — the four countries studied in detail in the report.”

There are concerns that a UBI could erode incentives to work and to save. Critics also worry that UBI ignores the non-financial value of work, bringing purpose, status, relationships and structure to peoples’ lives. Would we really be happier not working?

Rolling out a UBI over an entire nation would be a mammoth task. In the UK, the history of far more modest projects, from the computerisation of NHS records to the implementation of the Universal Credit, is not encouraging. The Institute of Government has described Universal Credit as, “essentially a good, if highly ambitious, idea that has proved vastly harder to implement than its proponents ever imagined.”

Finally, nobody knows how people and economies would respond to the implementation of a UBI. Trials offer a worthwhile, but limited way of experimenting. The risks and uncertainties attached to implementing a UBI across a whole economy would be enormous.

Contrast this with the existing welfare systems of larger, rich nations. Britain’s welfare state has evolved over more than a century. It is progressive, can respond to social change and is affordable. If voters want less poverty and inequality the existing system can deliver it. The real question is not about systems. It is about the willingness of the public to fund more generous social provision. A UBI would not remove that constraint.

This is not, quite, the whole story. It is possible to imagine an emerging nation adopting some variant of a UBI to create basic welfare provision. And in the distant future it is possible to imagine a future in which machines entirely replace humans in the workplace. I don’t, for the moment, think it will happen. If it did, a basic income might well become essential to share the benefits of growth.

PS: Last week, the media covered two stories on the strength of manufacturing and wider corporate activity in the UK. The EEF, an organisation of manufacturers, upgraded its growth outlook and now expects manufacturing to grow by 2% this year, significantly faster than the overall economy. The CBI’s gauge of growth of business output also hit a two-year high in February. With a significant slowdown in consumer spending, the corporate sector seems set to drive growth in 2018.