16 March 2020

There is now a strong case for a temporary Universal Basic Income

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As the news continues to deteriorate, I’m warming to the idea of some sort of temporary universal basic income (UBI), or at least a one-off universal cash payment, to help tackle the economic fallout from coronavirus. My opening bid is a handout of £1,000, Hong-Kong-style but with UK characteristics. If the crisis is over quickly, that would be it. If not, go again.

Crucially, the usual objections to UBI seem to be much weaker in the current circumstances. Any universal scheme would be expensive, but this version may only need to be a temporary measure, hopefully lasting just a few months.

What’s more, not doing it could ultimately be far more costly. The UK economy is inevitably sliding into recession, if it is not in one already. A back-of-the-envelope calculation suggests that GDP could easily fall by as much in percentage terms in a single quarter (6%) as the peak-to-trough decline during the entire global financial crisis.  Emergency policies are therefore required to prevent a large but short-lived hit from turning into a prolonged depression.

The payments could also be set at a lower level than a permanent UBI. The aim would simply be to make sure that people can afford essentials during this crisis, rather than maintain their normal spending (which in many cases they might be unable, or unwilling, to do anyway).

A permanent UBI would not be well-targeted, meaning that many people who get it would not really need it. However, temporary payments during the current crisis would support those (such as the self-employed, those working in the gig economy, or renters) who might not be helped by more conventional measures (such as sick pay, or allowing homeowners to defer mortgage payments). It would complement other fiscal and monetary measures to support small businesses and make life a little easier for people having to take unpaid leave from large employers.

In principle, some people can fall back on Universal Credit instead, and I’m still sure it was right for the Budget to look to the usual working-age benefits as the first line of defence. But in practice, I’m regularly told that Universal Credit is hard to navigate and the system could break down if too many people tried to apply for means-tested benefits at once.

A permanent UBI could undermine the incentive to work. But this is a temporary crisis in which we might actually want some people to stop doing what they normally do, in order to protect the lives of others. A temporary UBI would acknowledge that. The usual ‘moral hazard’ arguments don’t seem as relevant when we are asking people to make huge sacrifices for the public good.

Admittedly, one objection to a UBI may now be stronger. The supply-side of the economy is already being hit hard by the coronavirus, meaning there are fewer goods and services to buy. This problem will only worsen if fewer people are able to work.

In these circumstances, cash handouts may simply push up prices, especially if financed by money printing. Given the exceptional demand for government bonds I think the cost of this scheme could be covered by conventional borrowing, but ‘helicopter money’ could be needed too.

The costs and potential inflation risks favour a cautious approach. But as a template, Hong Kong’s February Budget included a HK$10,000 cash handout (about £1,000) to all permanent residents over the age of 18. (This payment was financed from existing fiscal reserves.)

Perhaps we could do something similar here for anyone of working age and paying National Insurance Contributions. (The aim would be to replace employment income, not top up pensions.) I would also make it taxable – at a later date – so that some of the money would be clawed back from those whose income did not need to be topped up.

Initially this could be a one-off, but with the understanding that it would be repeated if necessary. This would still be hugely costly; there are about 42 million people in the UK labour force aged 16-64, so a £1,000 payment might cost £42 billion each time. That’s not a sum to be tossed about lightly. But, for context, it is significantly less than the £58 billion price tag on Labour’s 2019 pledge to compensate women affected by the changes in the state pension age.

These are of course extraordinary times, requiring extraordinary policy responses. The usual objections to a permanent system of universal basic income remain as valid as ever. But self-isolation is not a credible strategy without income support, and the existing patchwork of measures to plug individual gaps may not be enough.

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Julian Jessop is an independent economist.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.