The New Big Idea – the Universal Basic Income

Suddenly, the idea that all citizens should be paid a basic income by the state is becoming topical across the world. While we associate this idea with the political left – the French Socialist Party candidate in the forthcoming presidential elections, Benoît Hamon, has made it the cornerstone of his programme – it also has traction on the right as being the way to rein in the increasingly unaffordable welfare state. How would it work? And how would it affect government finances, economic growth and employment?

The Universal Basic Income (UBI)

Thomas More, John Stuart Mill and, more recently, Joseph Stiglitz and Thomas Piketty have championed it. It’s the idea of an income unconditionally granted to all by the state on an individual basis without any means testing or obligation to look for work.


And it already exists. If you are lucky enough to be a native-born son of one of the oil-rich Gulf States like Kuwait, Qatar or Abu Dhabi, working for a living is a lifestyle choice. If you don’t want to work, the state will pay you an income anyway. (Don’t apply if you’re an immigrant or a non-citizen Berber). But these countries have extraordinary incomes thanks to the black gold beneath their sands. Surely, it would be absurd to try to replicate this idea in an advanced country like France?

Step forward, Monsieur Hamon

M Hamon is keen on the idea and also wishes to place a tax on robots. In the first instance he would only pay around €750 per month to 18-25 year olds. But in due course it would be rolled out for all.

In an interview with Le Monde last month[i] M Hamon said: “According to all serious studies, there are hundreds of thousands of unskilled or low-skilled jobs that are beginning to be destroyed in Western economies. We must manage this transition and make the most of this amazing opportunity that the digital revolution offers us to work less and live better.”

Who else is interested?

The Labour Party, for a start. And it’s good to know that they are still interested in new ideas. On 04 February John McDonnell MP set up a “working group” to investigate the UBI which will report back on its conclusions before the next general election. The working group will be led by Guy Standing, one of his economic advisers and a founding member of Basic Income Earth Network (BIEN) established in 1986 to encourage discussion on the topic around Europe.


According to the BIEN website the idea is gaining momentum in countries as diverse as Finland, Taiwan and Canada. The Swiss even had a referendum on the issue on 05 June last year – with a proposed UBI of CHF2500 per month! They rejected it.

India

Just last week the chief economist to Prime Minister Modi’s government, Arvind Subramanian, floated the idea of replacing India’s byzantine welfare system for its most underprivileged citizens with a UBI scheme for all[ii]. He proposed that the Indian government pay the equivalent of US$10 a month to all adult citizens. He reckons that will cut the number of citizens living below the poverty line from 20 percent of the population to 0.5 percent.

Such a UBI scheme would cost India 6-7 percent of GDP, whereas the existing (inefficient and corrupt) 950 state welfare programmes costs India 5 percent of GDP. The current welfare programmes are mostly price subsidy schemes for essentials like water and fertiliser. Much of these subsidies end up in the hands of the not-poor-but-canny (sound familiar?).

In India central government tax revenues amount to just 11 percent of GDP. So the UBI in India would cost more than half of the state budget. One concern is whether India’s banking system could cope with the challenge. But as I have recently explained, every smartphone is potentially a digital wallet.

The coming robot revolution and prospectively rising unemployment

Last week I wrote about the deepening pit of debt which the UK Government has proven entirely unable to reduce. I explained that cutting back budgets in welfare and healthcare is politically toxic and that raising taxes is economically harmful. The way forward is to transform public services through innovation.

According to a recent report from the think-tank Reform[iii], robots (not necessarily androids but rather internet-accessed expert systems) could replace almost 250,000 public sector workers over the next 15 years, saving the government billions of pounds. Chat bots powered by artificial intelligence could displace around 130,000 civil servants, roughly 90% of the total, by 2030, saving £2.6 billion a year.

A further 90,000 NHS administrative posts and 24,000 doctors’ receptionists could be automated, saving more than £1.7 billion. Even nursing roles in hospitals, such as administering non-intravenous medication, could be accomplished by machines.

Last summer I wrote about Babylon Health in an article about robot doctors. Such robots are already functioning as a useful filtering device for basic healthcare needs; but eventually, with the next wave of artificial intelligence, robot doctors will attain sufficient expertise to undertake diagnoses. Reform’s report also highlights the scope for increased automation in policing through crowd-monitoring drones and facial recognition technology.

Chat bots powered by artificial intelligence could displace around 130,000 civil servants, roughly 90% of the total, by 2030, saving £2.6 billion a year.

Reform thinks that public services should become more flexible by embracing the Uber-style gig economy. So we can expect the head count to fall in public services just as it has fallen in manufacturing and service industries such as finance. That’s all very well, but what are all these qualified ex-nurses, clinicians, policemen and taxmen going to do with the rest of their lives? There is a strong possibility that the coming wave of robotisation stroke artificial intelligence is going to put a lot of people out of work.

Of course, many economists argue that, just as blacksmiths became assembly line workers at the beginning of the 20^th century, other job opportunities will open up. I am not so sure. There is at least a possibility that we are about to enter an era of dramatically higher unemployment – certainly one in which people spend a much greater proportion of their working lives re-training, self-developing or just resting between jobs.

Unless the model is changed, such people will become clients of the welfare state. And the cost of the welfare state right now is totally out of control. UBI could be the solution.

How would it work?

A wide variety of basic income models have been put forward. They differ, according the amounts of the Basic Income, the source of funding, the nature and size of reductions in other transfers that might accompany it, and so on.

Impact on the labour market

Proponents of UBI claim that it would actually make the labour market more flexible. In most European countries operating a welfare state model, like Britain, there is the problem that the move from unemployment into employment involves a massive increase in a worker’s marginal tax rate such that they are often dis-incentivised from taking up a job offer. (“It’s just not worth it”).

UBI could foster an environment in which people do not fear the risks of retraining to change careers and therefore the pool of fresh available talent and skills would grow. There would no longer be a stigma against people who are “out-of-work” – they would be regarded as people in transition from one activity to another.


Opponents think that UBI would be a license for the “job-shy” to stay at home and smoke for the rest of their days. And there probably would be a few such people. But the vast majority of people would still aspire to an income level above that of UBI which can only be attained by returning – with appropriate skills and motivation – to fulfilling work.

If even highly trained professionals such as clinicians and forensic scientists will be obliged to join the gig economy, accessing work via their laptops at home, UBI would ensure for them greater stability of income. Students would be less likely to accumulate huge debts (many of which are never repaid) for tuition fees and living expenses because they would have an income while studying.

In fact many restrictions on labour market mobility could be relaxed without risk of exploitation. People would have more incentive to move to where the work is: the existing social housing model tends to trap people in the same location for life. And there is a strong correlation between labour market mobility and economic growth.

Other benefits

Many arguments have been put forward in favour of UBI, including the more equal sharing of the benefits of technical progress, the dignity of the poor, the fight against exploitation, rural depopulation (a major issue in France), and closing the North-South divide. It would promote adult education (now known in the UK as life-long learning) and the autonomy of the individual. The feminist argument is that it would liberate vulnerable women from the tyranny of their husbands! It may also turn out to be a much more efficient method of helping the needy than the increasingly complex and bureaucratic welfare state we know.

From a fiscal planning point of view it would render government spending budgets sublimely predictable. In fact, most of the Treasury could be robotised too. Most importantly, it would restore the lost principle of responsibility to private life. The state will protect you; but life is what you make it.

Impact on public finances

This would depend on how much of the traditional welfare state and healthcare provision is dismantled under a UBI programme. At one extreme, the UBI would be set at the level of the Living Wage for those in employment, but all other transfer payments – Job Seekers’ Allowance, housing benefit, free bus passes, disability allowances and even state retirement pensions – would simply be scrapped. Healthcare might be subject to payments into a mandatory health insurance scheme. Less radically, UBI might be set at a minimum (maybe equivalent to a part-time job on the Minimum Wage) and needy citizens would still be eligible for a range of top-up benefits.

And it would also depend on who is eligible – many would regard it as absurd to pay UBI to the wealthy. So there would probably be a cut-off point according to an individual’s net worth. Of course, assessment of an individual’s net worth by the state would be a new departure in the UK where wealth taxes have never been strongly favoured.

From a fiscal planning point of view it would render government spending budgets sublimely predictable.

Let us assume that there are about 45 million people aged over 18 in the UK, that five million of those are above the cut-off point in terms of net worth (say, £3-4 million?), and that they would be paid a UBI of £13,000 a year (roughly equivalent to working a 35-hour week on the Minimum Wage). That would cost the UK government £520 billion. That is a gargantuan amount of money.

But consider that the combined costs of pensions and welfare in the current 2016/17 fiscal year is about £270 billion[iv]. The remaining £250 billion could only be funded by abandoning the cherished British shibboleth of free healthcare at the point of demand. In other countries this would not be such an ideological obstacle. £13,000 is roughly equal to the personal allowance[v] (though high earners don’t enjoy it). Clearly, the well-off would have to pay more tax.

On the other hand, the cost savings would be staggering. No Job Centres, no Ministry of Work and Pensions at all. Most of the existing civil service would be let free to rest and re-train on the UBI.

Objections

Last year my colleague Felipe R Costa wrote in these pages that UBI would destroy our economy. Felipe’s principal objection to UBI was that it devalues work[vi]. While we agree on the iniquity of central bankers, it seems that we don’t agree on the nature of “work”. What is work? (That is not a new question – Marx, amongst others, asked it.)

Yelling into a phone on a trading floor; working for nothing in a charity shop; composing a string quartet; singing in a choir; caring for a baby or an elderly relative; excavating a Roman villa on an archaeological dig; writing an article about UBI… These are all forms of work.

Our pre-industrial forebears regarded “work” as whatever you needed to do at the time, rather than the activity for which we are paid by patrons or “clients”. What is required in the age of robots is a change of culture, values and metrics. And it’s already underway.

The idea merits serious consideration.

[i] See: http://www.lemonde.fr/election-presidentielle-2017/article/2017/01/04/benoit-hamon-le-revenu-universel-est-la-nouvelle-protection-sociale_5057339_4854003.html

[ii] See The Economist, 04 February 2017, pages 8 and 66.

[iii] Work in progress: Towards a leaner, smarter public-sector workforce, by Kate Laycock, Emilie Sundorph and Alexander Hitchcock. Available at: http://www.reform.uk/publication/work-in-progress/

[iv] See: http://www.ukpublicspending.co.uk/government_expenditure.html

[v] This is the amount of income citizens in the UK are allowed to earn before being subject to income tax. In the current tax year it is £11,000.

[vi] I suspect that Felipe (like M Hamon) envisages that citizens get either UBI or employment income; whereas I am conjecturing you get both and that you are taxed on all salaries, investment income and pensions but without allowances.