Money for all? The costs and savings of a Universal Basic Income

The idea of giving everyone in society an income is an old one- Thomas Paine suggested it way back when. However, it is being taken increasingly seriously and the Green Party, Labour and now the SNP are supportive or investigating it.

There are several arguments for some form of Universal Basic Income (UBI). Arguments can be made from philosophical principle, such as the argument that a UBI offers a unique and valuable kind of freedom to all members of society (see the work of Phillipe Van Parijs).  However, another argument is that the UBI would be more economically effective, partly because of the bureaucratic savings involved.

A third argument is that a UBI is necessary because artificial intelligence and robots will cause mass unemployment. I would support a basic income if this occurs but it clearly isn’t going to happen any time soon. I will therefore concentrate on the first two arguments above.

Both those arguments are challenged if a UBI is costlier than its supporters assume. The reason is clear with regards to the second argument mentioned above, but also applies to the real freedom argument. This is because the level of sustainable UBI will in fact be lower than expected and therefore the real freedom offered would in fact be less valuable than expected.

We can split the arguments against a UBI into arguments about fiscal cost and arguments about its likely economic effects. Of course, in practice the two are largely interlinked and I will argue that UBI supporters are probably too optimistic about the latter which makes their cost predictions easier. In approaching this issue I’m happy to ignore the set-up costs of a UBI as these would be a one-off cost, but the likely ongoing costs both fiscal and wider do concern me, as I will outline below.

One problem with assessing detailed basic income proposals is the variety. Each advocate can present different changes to other taxes and benefits to pay for a UBI at their preferred level. Essentially you can tack on whatever tax and benefit changes you want to your basic income scheme to make a total package of changes that will broadly cover the cost of the scheme. However, there will be losers from such changes and often the complexity in the benefit system are there because it is hard to get money to the people who really need it without also giving it to people who don’t. John Kay makes this point well in his blog on the subject, making the point that there will be losers and they are likely to be very sympathetic cases and therefore effective campaigners.

Kay’s blog covers quite effectively the costs and savings of the likely benefit changes, where he charitably assumed that a Green Party proposal was correctly costed so I will focus on the administrative savings argument and the wider economic impacts of a UBI.

So how much would a UBI save or cost?

Free money? On administrative savings

There is one way in which a UBI would generate funds that could benefit everyone without costing anything, which is that the low administrative costs compared to a contingent (non-universal) benefits system. Of course, a lot of the spending is on wages for state workers, who would need to do other work instead (or live on the UBI) but I will take it as read that this is a straightforward saving.

However, the administrative savings wouldn’t be very significant. A pro-UBI Green party paper estimates these savings to be £8bn per year in the UK. Split between 65 million people this amounts to £123 each per year. Hardly a huge amount to write home about.

The Green Party proposal, for example, says that they use £8bn figure rather than the £10bn allegedly quoted in a Citizens Income Trust report to account for this difference. I have failed to find the document quoted and the closest I’ve found to the one described claims a £5bn net saving. Five billion (which I believe is a very optimistic estimate of the overall cost given that those with certain special needs would still need to be assessed) shared out would amount to £77 per person per year.

I believe extra payments for those with special needs would need to remain in place and the administrative costs are undoubtedly concentrated on these. I therefore worry that the more optimistic assumptions about cost savings include taking away such payments which could have a catastrophic effect on people with, for example, expensive disabilities.

A UBI supporter could reply that I’m being unfair by assuming that all members of society would obtain the UBI. This is because other progressive tax changes would mean that only those with low incomes would be net beneficiaries—a much smaller number. So, if we assume the UBI is only shared between 9 million people (roughly the amount of people out of work in the UK at present) then it would rise to £556 per person. If shared between those currently receiving jobseekers allowance this would be an increase of £10 per person per week compared to what they receive at present. This assumes, of course, that the number of those receiving the benefit doesn’t rise substantially (see below on wider economic changes).

Other changes in public finances

The costs of the scheme therefore are mostly found by changing other benefits and/or raising taxes rather than making administrative savings. There will be losers and this is what needs to be assessed.

These wider changes can be done independently of a UBI of course. Another trick in Basic Income papers is the claim that tax revenues would rise due to the basic income. But this means that the state is giving money to people and then taking it back straight away. What matters of course is the net change to people’s income.

An OECD report models an affordable UBI that would be too low to assist in reducing poverty in OECD countries. UBI supporter Karl Widerquist (in his “Back of the Envelope Calculations”) challenges their methodology by insisting that it is wrong to require budget-neutrality when assessing UBI systems. A pro-Negative Income Tax paper by Wiederspan, Rhodes and Shaefer makes a similar argument. These papers rightly point out that net distributive outcomes are what really matter, and anti-UBI writers should take this approach just as UBI supporters should. However, the “back of the envelope” assumptions from these authors would have significant wider economic ramifications as I will outline in more detail below.

Furthermore, as a UBI is less targeted than the programmes it would replace, those with specific requirements (such as disabilities or lots of children) are very likely to lose out, unless the UBI is set so high that it would have very substantial costs. Basically, you can set the UBI low and it won’t cost too much or have economic disincentives or you can set it high and achieve all social goals but with really very concerning fiscal and economic costs.

Wider economic changes

Things get interesting not in the immediate change to public finances but in the wider economic changes a UBI would produce. Put simply, there would be major upheaval as some businesses and industries find they are no longer viable, others become much more successful and further industries boom.

Using current household income data and benefit payment levels, as Widerquist does, to calculate the costs of a UBI is therefore questionable, particularly where the UBI is assumed to be very high and therefore to have a significant impact on people’s employment choices.

Will people leave work?

The most obvious change is that some people who are working may decide to stop and others who are looking for work may cease to do so. Most assessments of the fiscal cost of UBI assume people will still earn the same amounts of income after the system is introduced, which probably wouldn’t be the case.

Supporters of Basic Income trial schemes seize on studies that show that people do not stop working or engage in socially useful activities such as caring instead. However, I would add some caveats to these findings. Firstly, small-scale trials may not replicate an entire society switching to the system, in particular because of the extra attention researchers give to those involved. This attention may improve their personal outcomes in a way that receiving money and no attention may not. Furthermore, if everyone in society is eligible for the income then this may erode the general work-ethic in a way that would not apply in a UBI trial.

Of course, it is all speculation how people would behave differently with a UBI. However, it is part of the point of the system that some people would leave full-time work to do other things. UBI supporters often suggest that people would be able to do useful things such as learning, caring and building up businesses. All of which would certainly be valuable and I would be happy to support assistance to enable them to do so.

However, some people are what I have elsewhere termed leisure-lovers because they wish to maximise their time spent on low-cost activities and therefore seek to work the lowest amount of time to cover their needs. These people are the ones that will make a UBI more expensive overall as they would spend less time (if any) in paid employment under a UBI.

I can think of many examples of people who would count as leisure lovers:

·        Door-to-door proselytisers for their religion

·        Avid readers

·        Amateur historians

·        Rock musicians

·        Artists

·        Fitness freaks

·        Poets

·        Sport enthusiasts

·        Novelists

·        People who like to travel

·        Computer game-obsessives

·        Some may wish to set up a church of their preferred kind (someone seems to have done this in their garden shed near where I live!)

I’m quite sure a non-trivial number of people would follow interests such as these if a UBI made this possible. The rest of society may consider the benefits of these activities to be minimal. If someone sets up a new church or spends their time writing bad poetry will this really help society?

A further and related point is that some people may well choose to retire earlier if they are not forced to wait until a certain age to receive their ‘pension.’  The state pension age is often the trigger for retirement as it then becomes affordable to stop working, but this may cease to apply.

On a personal note, I think I count as a leisure-lover and would therefore benefit from the UBI scheme I am arguing against. I prefer to spend my time reading, researching, teaching and writing than working a 9-5 job. I hope that my doing these things is socially useful, but I imagine many people would consider that it would be more useful if I was engaged in full-time paid work instead.

The existence of such leisure-lovers is a problem for UBI supporters because they threaten to increase the costs of the scheme without providing the alleged benefits. The direct costs would be that this would mean that more money would be getting paid out to recipients and less money would be collected in taxes. This could quickly blow a hole in the calculations. However, this would also have wider economic effects, as I will also discuss below.

Tax Credits

Most proposals for a UBI involve it replacing tax credits (also known as employment subsidies and called the Earned Income Tax Credit in the USA). Some on the left are very opposed to tax credits because they see it as subsidising employer profit rather than employee wages. However, there is every reason to believe that these are good for employment rates and workers.

The extent to which the employee and employer benefit from the credit will vary from case to case. In some cases, the employee will get all the benefit, while in others the employer will capture the lion share. However, note that the latter cases could include some whole industries that would not be competitive in wealthier countries without tax credits.

Some on the right would say it would be better for such industries to die off while others on the left would claim that such industries should be protected or subsidised to keep them going even though it is cheaper to produce such items abroad. However, in the first case the upheaval would be much more damaging and possibly costly than the continuation of earnings subsidies. In the latter case, if the state is saving an industry by paying it money or forcing consumers to pay more for its goods then how is this any better than providing tax credits?

This section has moved away from the UBI, but the point is that the UBI will tend to help industries that find it easier to recruit, whereas tax credits help industries that struggle to compete internationally and help keep consumer prices down. I imagine there would be more computer-game start-ups but fewer manufacturing plants. Maybe this is a good thing – computer-games are a profitable and growing industry. However, it seems like a more diversified economy is a much safer bet than a more ethereal one.

Price rises

One advantage of a UBI is that it will improve the worker bargaining position, which is a good thing. I would support doing that through the provision of a job guarantee scheme (see below) which would also have a similar effect.

However, a consequence of improving worker bargaining is that it will likely lead to price rises for consumers. In addition, as highlighted regarding tax credits, it may also undermine some exporting industries as well.

A UBI would also (in some cases intentionally) lead some people to choose to leave the labour market. If more people do so this would reduce the pool of workers available and again put pressure on wage rises.

The correspondingly higher wages can also result in a reduction in employment in some sectors and/or price rises. Unemployment might not be considered a problem given that people will have a guaranteed income, but this will then increase the direct and indirect costs of the scheme. Of course, it could be that all those laid off will become entrepreneurs, but what if they don’t? What if they give up on paid work entirely and there is a smaller pool of workers available as a result?

Now, there would be a compensatory price reduction in some areas. It might become cheaper to acquire items that people enjoy producing; artisanal products might become cheaper and people would quite possibly enjoy their work more. These are good things for those people, but the rest of society will end up paying more for most of their goods and services with a UBI.

If the price of labour, goods and services do rise, as I have suggested they would, then this will also mean that more government expenditure will be spent on goods and services, putting pressure on

Summary of my claims

I have claimed above that a more dynamic assessment of the complex consequences of a UBI would likely show that there would be a lot of additional costs. These would counterbalance the gains—if prices rise then the basic income loses effectiveness and so would either need to be raised or would be less effective at reducing poverty than advertised.

Of course, perhaps a basic income would lead to significant productivity advances and corresponding rises in income. However, if the point is that people are free to earn less than they would otherwise then it seems that overall lower productivity would result.

What matters in the final analysis is the distribution of the benefits and costs of the system. This is hard to work out even ignoring the dynamic economic consequences I have raised above.

It is wrong to assume that a UBI would be a fantastic panacea. The devil would be in the detail and its (difficult to predict) overall economic effect. It would benefit some people, of course, such as those who want to pursue uneconomic or risky dreams and ventures. Mainly, it would benefit those with strong a preference for uneconomic activities—a group we can refer to as leisure lovers (of which I am almost certainly one so I’m arguing against a system from which I would benefit). It would almost certainly help the low-paid, though I would contend that other proposals such as mine would be more effective in this regard.

Alternatives to a basic income

The alternative to a basic income is obviously not to have a basic income (as is the case everywhere at present). But that isn’t to say there aren’t other policy proposals out there which could make a difference to people’s lives.

I would obviously point towards my own novel tax and benefit system, the CLIPH-rate tax. However, other alternatives include the following:

·        A Participation income – proposed by Anthony Atkinson, this is similar to the basic income but dependent upon engaging in approved activities. (My CLIPH-rate tax proposal similarly allows hour credits for participation in a range of activities such as caring and study and not just paid employment.)

·        Tax credits to encourage people into work and to encourage employers to create more jobs (discussed above).

·        A job guarantee scheme which ensures that anyone willing to work can do so and get paid. This is included in my CLIPH-rate tax proposal as people capable of working need to have access to hour credits to receive income without corresponding tax-rises.

All these proposals also have costs and therefore require higher taxes or other public finance savings to pay for them. However, because they seek to encourage people to engage in socially useful activity they would not have as big an impact on the wider economy as a UBI would.

Overall, the UBI isn’t the perfect panacea some of its fervent advocates assume it to be. Some people would lose out from it and society would face an expensive bill if many people take the option to follow their personal interests or retire earlier as a result of the system.