Financing a UBI from existing benefits

by Guest Contributor | Mar 10, 2017 | Opinion

Written by: Rahul Basu

It is often argued that the existing system of benefits is riddled with flaws, and a universal basic income would be preferable. Arguments made include the high cost of administration, the errors of exclusion (target group not receiving the benefit), the errors of inclusion (people wrongly receiving the benefit), corruption, and the cost of access for the beneficiary, which includes time, effort, and suffering degradation at the hand of bureaucracy. What this explanation doesn’t specify is under what conditions is targeting preferable, and when is universalization better?

Let’s take a simple model to examine some scenarios. Assume that a country has 1,000 residents and a per capita income of $50,000. It pays a benefit to 200 people, 20% of its population. The benefit (say free food) for each person is $5,000, 10% of the average income of the country. This would cost 2% of the GDP:

For the moment, let’s assume no administration costs or costs of access. Let’s also assume that 80 people (40% of the target group) do not receive the benefits, and instead the same number of people outside the target group wrongly receive the benefit. And everyone receives the full amount or nothing at all. Therefore, the scheme is correctly benefiting only 120 people (12% of the population (40% x 20% or 120/1,000)), and only $600,000 or 60% of the money is well spent (1.2% of GDP (60% x 2% or $0.6 million / $1.0 million)).

Suppose we withdraw this benefit and universalize it. Then each person in the country will receive a benefit of $1,000 or 2% of average income ($1 million / 1,000 or $1 million / $50 million). If we examine individual scenarios, we can draw up the following table:

A few things jump out. More beneficiaries have lost (120) compared to those who have gained (80). The total amount going to the beneficiary group is now $200,000, a reduction of $400,000. Further, no beneficiary is receiving the full $5,000. And while 80 individuals correctly suffer a reduction in undeserved benefits, another 720 outside the beneficiary group are receiving $1,000.

The other aspect to consider is political. While everyone is receiving the same amount, 720 of the 800 net beneficiaries of the UBI are probably not strongly concerned by a 2% increase in income. However, the losers, while only 200, are more highly motivated to defend the benefit, as it is proportionately a greater loss. Further, the 120 rightful beneficiaries are likely to have below average income. This is the central political challenge in universalizing existing benefits.

Under what scenario would the errors be large enough for universalization to make sense? One basic threshold could be set at where the total money going to the target beneficiary group does not diminish. Under what circumstances does this occur?

Let the target group be T% of the population and the proportion correctly included under the benefit is C% of the target group. In this situation, when T% = C%, the total amount received by beneficiaries will be the same under the benefit and universalization. In other words, the proportion of the target group to the population is the same as the proportion of those receiving benefits to the target group.

Let’s examine our earlier example of a benefit of 10% of average income to 20% of the population. If only 20% of the target group is receiving the benefit (20% of 200 = 40), then universalization will keep the total amount received by the target group constant.

This is a fairly strong condition. If 30% of the population benefits, universalization makes sense if less than 30% of the benefit amount is actually received by the beneficiaries. In other words, 70% is stolen, or the cost of access is high. Such poor implementation is unlikely to be found in any developed economy for a significant benefit. It may be possible to find such benefits in developing countries where the corruption may be high, and cost of access may be significant for some groups.

The essential result doesn’t change even if we assume that beneficiaries receive a part of the benefit (due to corruption or cost of access issues). In order to achieve the same total amount received by beneficiaries under universalization, the ratio of net amount received by beneficiaries to the total entitlement / spend should be equal or less than the ratio of beneficiaries to the population.

To take a simplified real life example, the Economic Survey of the Government of India discusses the desirability and feasibility of a UBI in depth. Appendix 2 of Chapter 9 estimates for the flagship Public Distribution Scheme (PDS), 36% was lost to corruption, 36% to the non-beneficiary group and 28% to the target group. It further estimates that 60% of the target group are receiving benefits, and that the target group is 40% of the population. Only 28% of the budget is being received by the target group of 40% of the population. Clearly, a UBI (which eliminates corruption as well), would ensure that 40% of the budget is received by 40% of the population that needs it most, which would be an improvement on the status quo. This assumes the budget is kept proportionate and numerous other considerations have been set aside (the entire food supply chain for example).

While these are examples, they bring out clearly the extreme inefficiency and corruption required to make substituting a benefit for a UBI a net positive for the target beneficiaries. There are other considerations of course.

Iran replaced its enormous fuel subsidy, which was largely benefiting the rich and industry, with a UBI of a lower aggregate amount. Similar subsidies that have been captured by the rich can be a fertile ground for such structures. The carbon tax + dividend proposal is one on similar lines. By not pricing carbon emissions, the rich are being provided a benefit by the state. A carbon tax eliminates the benefit, while the dividend universalizes it.

Advocates for replacing targeted benefits with a UBI have a high standard to meet, and must demonstrate that there is a net benefit from universalization of existing benefits.

About the author: Rahul Basu is a member of the Goenchi Mati Movement, which asks for minerals to be treated as a shared inheritance. Mining is the sale of the family gold. For fair mining, there must be zero loss mining, saving all mineral money in a permanent fund, and distribute the real income only as Citizens’ Dividend.