3 August 2018

There is a much better welfare fix than Universal Basic Income


Universal Basic Income is all the rage at the moment. So much so that John McDonnell recently revealed that Labour intend to include a pilot UBI scheme in their next manifesto. Nobody doubts the current welfare system is riddled with flaws and inefficiencies, but offering an unconditional income to every British citizen is not the panacea some would have you believe.

The idea of a UBI has been floating around for some years now; the premise is simple enough –  everyone gets a set amount of cash every year regardless of their income or assets. While the policy started off as a fringe movement in academic circles, it is now being given serious consideration by governments around the world and has been trialled in a number of places.  The evidence so far is inconclusive. Granted, the Finnish government recently decided to end its UBI experiment after two years, but in truth their scheme was not universal (it only involved a small sample of claimants), nor was the amount involved enough to live on, meaning it didn’t really qualify as basic income either.

If we look at a hypothetical case for a UBI in Britain, it is important to keep in mind that many of the problems in the current welfare system stem from the tax system. Part of the historic problem with the British welfare system, which the Government is trying to address through Universal Credit, has been the cliff-edge effect. Many people on benefits have had little incentive to go into work, because their effective marginal tax rate for doing so was an eye-watering 82%. In that context, choosing not to find a job seemed more like common sense than fecklessness on the part of welfare recipients.

One of the great problems with rolling out Universal Credit has been grappling with the complexity of combining a thicket of different benefits into one system. This is where the sheer simplicity of Universal Basic Income seems pretty appealing. The issue with a universal handout if it becomes a political reality, it could easily turn into a competition for votes based on who is offering a bigger carrot.

For a far more sensible, but still simple approach, we should turn to that great free market economist, Milton Friedman.  Friedman advocated a system of Negative Income Tax, which would both incentivise work and help those most in need.

The system would work as follows. If the threshold is set at £12,000, there is a positive tax for every pound over that amount, and a negative tax for every pound under that amount. If an individual’s income is below this threshold, they will receive 50% of the difference as a cash payment.

For example, an individual earning £6,000 in a year will receive £3,000 as a cash benefit, bringing their total income up to £9,000. If this person increases their income to £7,000, they will receive £2,500 from the negative tax, bringing their total income to £9,500. If an individual has no income, they will receive £6,000. Under NIT, an individual is always going to be better off in work. While there is still a basic safety net for the unemployed, those who do work are always going to be in a better position than if they had chosen not to.

While both the UBI and NIT aim to simplify the welfare state by removing or streamlining other benefits (with some exceptions for things like disability support) and reducing the administration
cost, the essential difference between the two is the point at which benefits are ‘clawed back’ from those who are not in need. Under the UBI system, everyone receives the benefit and then the
current tax system will deal with those who aren’t really in need. This is dealing with the issue after the fact and provides a needless administrative burden – along with requiring vast amounts of cash to make the transfers possible. Under a NIT system, only those who are in need of the benefit will receive it through a system of negative taxation.

As Friedman succinctly put it in 1968, getting off gradually doesn’t pay. This is the problem faced by many on benefits today and highlights a significant benefit of a NIT system: welfare recipients can move into employment without being punished for doing so. If the best way for people to move out of poverty is through work, then the welfare system should reflect and encourage this.

Cian Hussey is a research intern at the Centre for Policy Studies