Universal basic income – a new idea whose time has passed

By Ray Perman, Director

The news that two Scottish local authorities – Fife and Glasgow – are investigating the feasibility of introducing pilot schemes for a universal basic income has caught the zeitgeist.

Prof. Adam Tomkins, the Conservative MSP, tweeted approvingly (although with a reservation about whether councils had the power to do this). Labour shadow chancellor John McDonnell is said to be interested in the concept. The Green Party and the Lib-Dems have been making approving noises and the SNP Spring conference passed a motion in favour.

The idea is that every man, woman and child, would be paid a basic income from the state, regardless of their circumstances – their existing income or wealth, or whether they worked or not. The claimed advantages are a reduction in inequality and poverty and an increase in independence and self-respect.

People currently trapped in low-paid jobs would gain the freedom to change employment, perhaps to something more stimulating, if less financially rewarding. Or they could enter training, education, caring or volunteering. The simplicity of the system would mean that we could abolish or dramatically reform the over-complex and expensive existing welfare system.

There could be other benefits. The national think-tank Nesta, has suggested that by giving people the economic underpinning to retrain and reskill, a universal basic income could prepare us for the coming robot revolution, when many current jobs will performed by machines.

Several countries are considering pilot schemes, with Finland the most advanced, although its scheme has more of the characteristics of welfare simplification rather than a true universal basic income. However, not everyone is enthusiastic: a proposal to introduce a universal monthly income of 2,500 francs (about £1,750) in Switzerland was crushingly rejected in a referendum because no-one could satisfactorily explain how it would be paid for.

And that is the major drawback. Neither Glasgow nor Fife has suggested how their proposed pilots might be funded and of the myriad of reports extoling the social and moral virtues of a universal basic income, very few consider the economic downsides.

The easiest way would be to fund it entirely from the existing welfare budget, but that has two fundamental flaws. The first is that since most people do not currently receive benefits, but would receive universal basic income, the budget is going to be spread much more thinly. Many people currently receiving welfare payments would get less. Inequality could be increased rather than reduced.

The second problem is that substantial though the welfare budget is, it is not big enough to ensure an income for everyone high enough to make them financially secure. Independence and self-reliance would be impossible if the income is not sufficient to live on.

A more radical proposal is that welfare savings are topped up by higher taxes on wages and salaries earned over and above the universal basic income.  A report by Compass, funded by the Joseph Rowntree Foundation, is one of the few which models the costs and benefits of possible schemes and its findings do not make encouraging reading.

The pluses could be considerable – substantial and measurable reductions in inequality and poverty for those in the poorest households and, harder to quantify but meaningful nonetheless, increases in the incentives to work, better matching of employees to jobs and a rise in wellbeing.

The costs, however, represent a big barrier. Compass models two hybrid schemes, which would give only a minimal income (£61-71 per week for an adult) and so would have to retain many of the current welfare payments. Less than a quarter of the £177-209 billion cost of introducing the scheme in the UK cold be recouped from lower welfare spending. The rest would have to be financed by increasing taxes – abolishing the personal allowance and increasing all rates of income tax by 3-5% (plus extra National Insurance Contributions).

A full-blown universal income would be even more expensive, involving rises of 10%, taking the basic rate of income tax to 30% and the higher and top rates to 50%.

Politically those increases are unthinkable. They would take us back to the 1970s. Since then the direction of income taxes has been relentlessly downwards, paid for in part by increases in regressive indirect taxes. No party (including the SNP) has so far been prepared to suggest increasing the basic rate by even 1%, let alone the very much higher figures which would be needed to pay for a genuine universal basic income.

Until they are – and can get elected – the universal basic income remains a utopian dream.