Fraser of Allander Institute
15th April 15 2020
Over the last month or so the, in the face of a health emergency, the economy has been all but shutdown so as to minimise the fatal impact of the Coronavirus pandemic. In its place, the government has stepped in to try to prop up household incomes, both here in the UK and across the world.
Out of this crisis, there is likely to be a reappraising of how we provide certainty to those whose financial security is put at risk due to factors outwith their control. The Coronavirus is only one of the issues that have been affecting the financial security of many households in recent years. It is perhaps to our shame that it has taken a major pandemic, and for financial uncertainty to envelop a larger share of the population, to shift the prevailing view about what is an appropriate level of income for the state to provide.
Of course, a government’s resources are not infinite, and the voices clamouring to ‘balance the books’ will no doubt get louder as time goes on. But – as we discussed in our podcast with Harry Burns last week – there are emerging questions over what will be the ‘new-normal’ and whether a change in the social contract between individuals, business and the government is needed.
One idea that is being talked about again is that of a universal, or citizen’s, basic income. A previous article on our blog suggested that in the depths of this crisis we thought there were other ways to ensure people do not fall between the cracks, for example by softening eligibility criteria in Universal Credit to cover all who have lost their income and can’t get support from the other new government schemes. And indeed, the Coronavirus Job Retention Scheme, that keeps people attached to their employers, has clear advantages for the recovery. But what about implementing basic income as the basis of a new welfare state post Covid-19?
There is no doubt that such a system has merits. It is viewed as simple, easy to administer and stigma free, fixing at a stroke many of the shortcomings of Universal Credit. But whether it will be successful depends on what it is expected to achieve.
Basic income is a tricky topic to write about. We have seen those who seek to criticise or question aspects of a basic income labelled as some sort of ignorant cold-hearted luddite. Yet we do need to analyse how basic income would work in practice and how altering its design would impact on society. It deserves scrutiny, and only with that scrutiny would there be any chance of building the consensus that would be needed for implementation at scale.
One important determinant of impact, and where there are very different ideas among basic income supporters, is the level at which basic income is set.
There are those that propose we should have a basic income roughly comparable to the benefit levels currently available through the means-tested system for those out of work. By making it available to all individuals, with no eligibility rules or sanctions, it will provide certainty of a minimum income floor, but still provide reasonably good incentives to work. This is the type of scheme laid out by Reform Scotland in an article last week . The annual income that Reform Scotland propose is £5,000 for working age adults and £2,600 for children, with housing and disability related benefits remaining on top of this. The gross cost of this scheme is estimated at about £20 billion, roughly half the current Scottish Government’s budget.
Most will recognise that the proposed amounts are low and indeed would leave anyone solely relying on it in poverty. For comparison, the relative poverty line for a single person is £10,800 in Scotland. Note that even at this relatively low rate, the loss of the personal allowance, rise in tax rates and the tapered withdrawal of housing related benefits mean that work incentives will be affected in some situations. There may be other longer-term advantages – for example from people being able to use the income to retrain later in life – but with a rate set so low, this doesn’t seem likely to be a viable option for those without savings or other income to fall back on.
Other supporters of basic income see it as a way of ensuring that everyone has enough to live on without work, and would not accept severe poverty as a possible outcome of a basic income. Sufficient income is a subjective matter, but if we look at the Joseph Rowntree Foundation’s Minimum Income Standard (based on views of the public) then a single person would need just under £15,400 to meet this barometer of adequacy. With a payment at this level, funded by income tax, it does provide disincentives to work, both due to the fact that people do not need to work to survive, and also due to the increase in tax rates needed to make it fiscally sustainable. Even the £5,000 (for adults) and £2,600 (for children) rates proposed by Reform Scotland require abolition of the Personal Allowance and 8p on each tax band. A ‘sufficient’ basic income would require income tax increases – perhaps with other tax rises too – far in excess of this.
Others in support of basic income fall somewhere between the two scenarios outlined above as they seek to balance the costs and the benefits that basic income entails. In the absence of an external source of financing (for example a sovereign wealth fund) most agree that a basic income would need to be paid from tax receipts. As a general rule, if income tax financed, the higher the rate proposed, the greater the impact on poverty and reduction in inequality but the higher the cost and the greater the implications for work incentives – both for those who ‘gain’ from the policy and those that ‘lose’ due to higher tax rates (and indeed some people will ‘win’ and ‘lose’ simultaneously). This may be a price worth paying for the certainty that basic income supplies. But debates on basic income must be about how much is paid is, not just how it is paid.
Basic income could provide many answers to the issues facing the uncertain post Covid-19 world. But no-one should be fooled into thinking that it is a one-size-fits-all policy that will eradicate poverty, invigorate our labour market and improve the wellbeing of everyone in society. In fact, for basic income to achieve just one of those would probably involve trade-offs with the other two. Basic income deserves to be debated, but that debate must be open to its limitations as well as its advantages, and crucially be clear from the outset what it is we are trying to achieve.