Originally published by Open Democracy. 14 August 2020, under the title, “Basic income could virtually eliminate poverty in the United Kingdom at a cost of £67 billion per year”
Universal Basic Income (UBI) – a policy that would provide a regular, cash income to every citizen without means test or work requirement – is surprisingly inexpensive. The United Kingdom could introduce a full UBI (one large enough to live on) for just £67 billion per year or 3.4% of Gross Domestic Product (GDP), according to a study Georg Arendt and I recently completed.
Attention to UBI in the United Kingdom has increased substantially as the Scottish Parliament discusses experimenting with it and as policymakers discuss it as a temporary measure to boost the economy during the Covid-19 outbreak. While a pilot project can examine some of the effects of UBI, this kind of study is necessary to determine how much it is likely to cost.
The cost of UBI is often exaggerated because many authors focus on its ‘gross cost’: the size of the UBI times the population. The gross cost of UBI is not a cost in any meaningful sense, because it ignores the great extent to which the new taxes people pay to support UBI are cancelled out by new money they receive in UBI. The real cost of UBI is the ‘net cost’ – the amount people receive or pay after subtracting the amount they pay themselves. The net cost of a full UBI for the UK is only about one-third its gross cost.
Our study is based on data from the 2014/15 UK Family Resource Survey. It uses microsimulation analysis from the European Union’s EUROMOD Tax-Benefit Model to subtract out the amount people pay themselves and determine the cost of a roughly poverty-level UBI of £7,706 per adult and £3,853 per child.
Key findings of the study include:
The cost of a full UBI for the United Kingdom is £67 billion per year or about 3.4% of GDP.
This figure is the net cost – the real cost – of a UBI scheme of £7,706 for adults and £3,853 for children. This assumes a 50% income tax rate for net beneficiaries integrated into the UK tax-and-benefit system in a way that ensures the majority of UK citizens benefit from the transition and no one in the bottom 20% of the distribution of income is financially harmed by the loss of programmes replaced by the UBI. Although net beneficiaries’ tax rate increases, they receive more in UBI than they pay in additional taxes.
This UBI scheme adds only 39% to the cost of the UK’s existing benefits system (not including the spending on the National Health Service), and an 8.7% increase in the UK’s total government spending (£67/£771 billion).
This UBI scheme is a net financial benefit to most households in the lower 70% of the UK income distribution, making it an effective wage subsidy (or tax cut) for millions of workers and their families.
The average benefit over the existing system for each net-beneficiary family is £4,056.
Under this scheme, the percent of UK families with incomes below the current official poverty line would drop from 16% to 4% and poverty among children and the elderly would all but disappear.
The net cost of this UBI scheme – the gross cost minus the amount people pay to themselves (£155 billion), and ignoring the costs and benefits of integrating the UBI into the existing tax and benefit system – is about one-third (35.4%) of its often-mentioned but not very meaningful gross cost (£438 billion).
Also subtracting the cost of existing programmes that can be replaced by UBI without financially harming anyone in the bottom 20% of the income distribution makes the net cost only about 15% of the programme’s gross cost.
This UBI system eliminates absolute poverty (e.g. as it is measured in the United States) from the UK.
According to a 2015 piece in the Guardian, the UK currently spends over £93 billion per year on corporate subsidies and tax breaks. If so, the UK could entirely fund a UBI by eliminating corporate subsidies and tax loopholes. No increase in individual taxes would be necessary, and the government would still have £26 billion available for corporate subsidies.
Countries with similar per capita income and similar tax-and-benefit systems should expect the cost of UBI to be a similar percentage of their GDP.
Those remaining in poverty under the scheme would be much closer to the poverty line than they are now and would have enough to get by in combination with other government payments and services. Therefore, we conclude that a UBI of this size would eliminate absolute poverty in the United Kingdom, a powerful result for less money than Parliament currently spends on corporate subsidies and tax breaks.
I was recently asked four questions about Alaska’s Permanent Fund Dividend, and I think the answers provide a pretty good overview of what people who are interested in UBI need to know about the fund.
1. When was the Alaska policy passed?
The enabling legislation was introduced gradually from 1976 to the early 80s and was altered before it could be it could be introduced because of a court challenge. So, it’s best to focus on when the first dividend was distributed. That was 1982.
2. How many benefits does it provide people?
See this table. Note that it is for every man, woman, and child, so each family receives several times this amount. It usually varies between $1,000 and $2,000 per year. It would be much larger if it hadn’t been for the Governor’s and the legislature’s cuts a few years ago.
3. What was the history behind the policy?
Oil money really began to flow in 1976, just as Governor Jay Hammond took office. He used the power of his office from 1976 to 1982 to make deals with the legislature to create first the fund and then the dividend. The fund idea was popular, but the dividend wasn’t until it was introduced. Hammond had a few allies in the legislature, but it was very much his single-minded pursuit of the dividend that made it happen. He did it because he knew oil revenue would be temporary and he wanted to make sure every Alaskan benefited from it. Mexico, for example, has exported a lot of oil, but it’s hard to say whether the poorest people have benefit from it. All Alaskans–including homeless people–have benefited from Alaska’s oil exports, via the fund.
But the fund and therefore the dividend are about 1/8 to 1/4 the size Hammond wanted. So, the dividend could be 8 times what it has been in the table, and it could be even larger without the recent cuts. Imagine that—$4,000 to perhaps $12,000 year for every man, woman, and child.
Almost as soon as it was introduced it became the most popular government policy in Alaska, and was considered untouchable until about 4 years ago when Alaska’s oil revenue began to collapse, and politicians who had failed to plan for that day began raiding the fund to avoid reintroducing the state income tax or raising other taxes. Had they kept the income tax, and saved all or most of their oil money–as Hammond wanted–the state wouldn’t face a fiscal crisis as oil revenue declines, and they’d feel less temped to drill in the Arctic Wildlife Refuge.
4. Has it proved to be effective?
Yes, if an impoverished family of four receives $8,000, that’s not enough to live on for a year, but it’s enough to make an enormous difference. In the first 20 or 30 year of the program, Alaska was one of the most economically equal states and the growing PDF was probably one of the reasons. It’s helped Alaska maintain a much lower poverty rate and poverty gap than it would otherwise have. -Karl Widerquist, on my front porch in New Orleans, Louisianan, 20 August 20, 2020
For more information about the fund see these two articles:
Karl Widerquist, 2012. “Alaska’s Permanent Fund Dividend: Basic Income in Practice,” Democratic Imperatives: Innovations in Rights, Participation, and Economic Citizenship. Report of the Task Force on Democracy, Economic Security, and Social Justice in a Volatile Word, American Political Science Association (ed.). Washington, DC: The American Political Science Association (April), p. 64
The World Bank has published a substantial report titled Exploring Universal Basic Income: A guide to navigating concepts, evidence, and practices
Universal basic income (UBI) is emerging as one of the most hotly debated issues in development and social protection policy. But what are the features of UBI? What is it meant to achieve? How do we know, and what don’t we know, about its performance? What does it take to implement it in practice? Drawing from global evidence, literature, and survey data, this volume provides a framework to elucidate issues and trade-offs in UBI with a view to help inform choices around its appropriateness and feasibility in different contexts. Specifically, the book examines how UBI differs from or complements other social assistance programs in terms of objectives, coverage, incidence, adequacy, incentives, effects on poverty and inequality, financing, political economy, and implementation. It also reviews past and current country experiences, surveys the full range of existing policy proposals, provides original results from micro–tax benefit simulations, and sets out a range of considerations around the analytics and practice of UBI.
The report employs throughout a definition of Universal Basic Income that matches BIEN’s definition of Basic Income. Consistency of definition is a commendable characteristic of the report as a whole.
The only caveat is that chapter 4 assumes that a UBI would replace existing social assistance provision. Under these circumstances it is not surprising that in some countries poverty and inequality would increase if the UBI were to be implemented. The authors do not simulate the option of leaving existing social assistance provision in place and reducing it by the extent of the UBI. In the context of a progressive tax system, such schemes would not increase poverty or inequality.
The EU Commission has said from the 25th September 2020 signatures can be collected from EU residents in connection with a new European Citizens Initiative. If the European UBI family succeeds in gathering 1 000 000 signatures, divided among a minimum of seven countries, then ECI delegates will be able to present a proposal to the European Commission which, if approved, would hopefully convince EU governments to start paying Basic Incomes to all of their citizens.
Bulgaria suffers from a number of problems, and in particular population loss and economically active citizens leave the country for better opportunities elsewhere. Angel Petrov writes:
The population decline carries long-term economic costs. Over time, a shrinking workforce becomes unattractive to investors and unable to subsidise the pension and healthcare needs of an ageing population.
All government ‘aid’ described below is highly bureaucratised and full of conditions, and in addition the funds are often paid late due to the complicated and sluggish administrative processes citizens are subjected to. The aid consists of:
Cash payments of €192 only for families with 14 year old children for the duration of the state of emergency (2 or 3 months)
over 2 months the unemployment fund will pay 60% of the income of the employees from sectors most heavily influenced by the COVID-19 crisis for up to three months. In addition to employers in sectors where operations have been suspended as a result of the social distancing measures (tourism, sports, culture, etc.), any other employer that can prove a 20% y/y drop in revenue in March is also eligible for the 60% salary subsidy.
The measure has been extended until 30th of September 2020.
This is the main stimulus. However, the working population has doubts that the administrative process will be efficient enough (it is expected that most companies will receive the aid in October and November 2020). Furthermore, many small and medium businesses don’t have the means to pay 40% of the salaries. Some critics see this policy as supporting big companies which will absorb the unemployment caused by the lack of help for small and medium companies.
To date (1st August 2020) 129 million leva (64,5 million EUR) have been distributed to 8400 employers, that is 13% of the 1 billion leva (511 million EUR) allocated by the government. Close to 35% from these people have taken aid only for one month.
On the 10th of April the Bulgarian Central Bank enacted a moratorium on debt repayments. Overall the number of people who have debts in Bulgaria is almost 3 million. By the 10th of May, 102 000 have applied for temporary cancellation on payments (usually 6 months) towards their loans, and 80 300 have been approved. Changes in these numbers are expected.
The processes are not transparent, efficient and timely
The measures are conditional and selective and not universal
Most of the governments support is expressed in loans rather than direct payments
In conclusion the measures so far have the potential to create another wave of workforce immigration towards Western countries, weakening further the economic future of Bulgaria because:
The case for a UBI emergency pilot in Bulgaria
The unnecessary agony of the Bulgarian nature and people can be prevented, and UBI is a key step that can be collectively taken to compensate over three generations who have given their talents, energy and time towards creating shared wealth spreading beyond the country borders. It’s time for common dividends to be distributed to their rightful owners.
Bulgarian UBI advocates are working hard to unite the people around the idea that once social and economic stability is achieved through unconditional payments of around 1000lv (500 EUR) Bulgarians will have the time and capacity to build a new system that meets their needs and corresponds to a consensus based on democratic values. Due to the inflexibility of the national currency (it is tied to the euro), the dominant proposal on how to implement Basic Income in Bulgaria at the moment is by restructuring the tax system and national budget in a way that will pay the UBI bill with the collection of Value Added Taxes and Excise Taxes paid by the sellers. The idea is for every Bulgarian citizen with an active address registration to own a bank card issued by the Bulgarian Central Bank which will serve people as a payment method to be used to receive a Basic Income that would meet basic needs like rent, utility bills, food, clothes etc.
A UBI emergency pilot hosted in Bulgaria would not a utopia, and the EU could rescue its reputation by supporting it. It is an opportunity to trial universal basic income on a national level using the Bulgarian state financial infrastructure to distribute funds to the people.
The EU Commission would also have a vested interest in embracing the project, as the positive results would increase cohesion and trust, and would give hope to other states that the European experiment is not another way to practice concentration of power.
It’s time for evolution not only for Bulgaria but also for the EU. UBI is a win-win solution and will literally bring Bulgaria back to life. People outside long to return to their roots and work for the wellbeing of their parents and the next generations. The EU owes this to the people of Bulgaria and Bulgarians owe it to themselves, their ancestors, the children, and the European natural environment that happens to be surrounded by Bulgarian borders. We have too much to gain and nothing to lose.
The Canadian Sayout newsletter has printed an article about Basic Income:
… At present government is paying out vast sums of money. In effect, we have a new and large-scale experiment by government in directly providing people with incomes. This gives us some indication of how a guaranteed income plan could work. Such a plan would be universal. And, as is now being demonstrated, it actually can be done.
A guaranteed, universal, and livable income programme would be transformative for our society. It would directly address income inequality. It would diminish and possibly eliminate poverty once and for all. …
The author, Robyn Peterson, has clarified his use of terms in the article:
a proper BI should be unconditional with the same amount being paid to every citizen or legal resident. This would avoid the somewhat cumbersome issue of establishing who should benefit and by how much, with a progressive income tax system evening things out.
The article by Widerquist and Arndt can be read here; and a pdf can be downloaded here.
Widerquist and Arndt use microsimulation analysis to estimate that the net cost of a poverty-level Basic Income for the United Kingdom (£7,706 per annum for adults and £3,853 for children) is about £67 billion per year or 3.4% of GDP. The paper makes a useful contribution to the current debate about financially feasible Basic Income schemes for the UK.
The authors correctly recognise that their scheme is ‘not optimised for political feasibility’. This is true. British benefits policy is quite path dependent—that is, it tends to continue in its existing direction—mainly because of the extreme complexity of the tax and benefits systems. Change is normally incremental, and this will be particularly true during the next few decades because of the difficulties that the Government has experienced attempting to combine a handful of means-tested benefits into the new means-tested ‘Universal Credit’. Only a Basic Income that made a very small number of changes to the existing systems would be likely to be considered for implementation during the next few decades, whatever the political ideology of the Government. Widerquist’s and Arndt’s scheme makes multiple major changes all across the systems, and so would be unlikely to be considered for implementation.
There are particular aspects of the scheme that would make the scheme even less politically feasible. The authors are commendably honest about the political infeasibility of their suggested 50 per cent basic rate of Income Tax. Equally politically impossible would be the abolition of National Insurance Contributions and National Insurance benefits such as the Retirement Pension, even if that would be replaced by a new Basic Income for elderly people. National Insurance is a concept deeply embedded in the British psyche, and any government that tampered with it would suffer the consequences. It is not insignificant that when the new Single Tier State Pension, which is very close to a Citizen’s Pension, was implemented, a National Insurance Contribution record conditionality was retained. Under the circumstances, the only option is to retain the National Insurance system: although making it fairer, for instance by charging contributions at the same rate across the entire earnings range, rather than at a reduced rate for higher earners, might be politically feasible.
The authors propose a ‘hold harmless’ mechanism to ensure that low income households that would otherwise have suffered losses on the implementation of the proposed scheme would not in fact do so. The losses occur because the authors have decided to abolish all existing means-tested benefits except for Housing Benefit and various disability benefits. The problem is that they have not specified how the ‘hold harmless’ proposal would be administered. The only feasible way of achieving such a mechanism would be to reintroduce a means-tested benefit that would mirror the benefits that had been abolished. It might be objected that simply recording each household’s disposable income at the point at which the scheme was implemented would be sufficient: but that would only tell the administrators how much to pay on the day after implementation. If would not protect households from subsequent differences between the old system and the new once household circumstances started to change. Only a means-tested benefit could do that. The UK Government has found it difficult enough to combine a few existing means-tested benefits into a single new one. To abolish most existing benefits and then to implement a wholly new one with a particular aim, all at the same time as implementing Basic Incomes and changing the tax system, would be administratively and therefore politically impossible.
The paper contains a useful discussion of the difference between the gross cost and net cost of a Basic Income scheme, and quite rightly points out that rather too many commentators fail to understand the importance of the difference. The authors calculate that the net cost of their scheme would be £67bn per annum. This might be only 3.4 per cent of GDP, but it would still have to be found from somewhere. Suggestions are made at the end of the paper, one of which is that the whole £67bn should be paid by the top 30 per cent of earners. No government would want to alienate that group of voters to that extent, rendering the proposal politically feasibility. We are therefore left with sharing the burden across the earnings range, although not necessarily via an additional Income Tax. What the authors don’t seem to realise is that wherever the money was found it would impact household living standards. For instance, let us suppose that additional consumption taxes or a new carbon tax were to be employed to fill the gap. In either case prices would rise, household disposable incomes would be affected, and the statistics given in the paper for poverty levels and household gains and losses would no longer be correct. Only a Basic Income scheme that fully specifies the funding method, and that calculates the reductions in the Income Tax Personal Allowance, increases in Income Tax rate changes, and other changes, that would achieve a net cost of zero, can be sure that statistics on poverty levels, household gains and losses, etc., generated by microsimulation would be those that would be seen when the scheme was implemented. A scheme with a net cost above zero leaves us entirely in doubt as to the effects of the scheme. This means that in the case of the scheme researched for this paper none of the outcome statistics can be believed.
There are two ways of approaching the question of the financial feasibility of Basic Income schemes: 1. to research the effects of a particular scheme and then decide whether it would be feasible, or 2. to set feasibility criteria and then seek a scheme that would fit those criteria. The second of those approaches is the one that follows scientific method and is therefore the method that ought to recommend itself to social science researchers. The paper under review employs the first of the two methods. As far as the author of this review knows, only his own research follows the second method—a fact that never surprises him because the second method can take days of testing of alternative schemes before a scheme that fits the criteria can be found, and there is always the possibility that no scheme will be found that is anywhere near to being feasible. Widerquist and Arndt reference a 2019 paper that employs the second of the two methods. The most recent such research can be found here.
Widerquist and Arndt are to be commended for contributing to the UK’s strong research tradition on the financial feasibility of Basic Income schemes. If further research were to take account of the hesitations discussed in this review, and were to employ the second of the two methods outlined in the previous paragraph, then their future research would make an even bigger contribution.
