About ten months ago, I put an argument for a convertible tax allowance on the blog – here is the link. The New Economics Foundation has just floated a very similar idea, in a report called Nothing Personal. The main difference between their proposal and mine is that they are proposing not an optional conversion, but a universal one. That would have the advantage of ensuring coverage, but it would also have two large disadvantages. One is that it would call for much more extensive direct administration, because it doesn’t use the existing PAYE system in the same way. The other is that the personal allowance would be reduced to zero, requiring declaration of every penny earned.
In the comments to a previous posting, Andrew Hatton asks when the idea of first unifying benefits was seriously considered by a UK Government. I started to respond within the comments, and then thought it might stand as an entry on its own.
It might reasonably be argued that governments in these islands have always thought in terms of unified systems. The Tudor poor law of 1536, inspired by the model of Ypres, created national law for responding to poverty. The statutes of 1598 and 1601 – the “Old Poor Law” – instituted a national scheme, at least in principle. The 1834 Poor Law Amendment Act – the “New Poor Law” – was designed to implement a uniform regime within that scheme, treating for example older people and unemployed people on the same terms. The Beveridge scheme was supposed to create a unified national administration based on insurance – popularly described as a system to cover people ‘from the cradle to the grave’. National Assistance initially included income and welfare services for every group not covered by insurance. And Supplementary Benefit, its successor, incorporated a range of provisions into a single means-tested benefit: income, unemployment, disability, rent, mortgages, sickness, old age, residential care for older people and child support among them. Universal Credit is not a great, original idea; it revisits the portmanteau benefits of the past.
Marina Hyde, writing in the Guardian, puts her finger on one of the key problems with Universal Credit. “The most dangerous type of politician”, she comments, is “the sort who thinks that very complicated things are actually very simple.” And I wrote something similar in the Guardian myself shortly after Universal Credit was first mooted.
Benefits deal with millions of people, and recipients’ lives are diverse and complicated. If universal credit responds to their needs, it will also be diverse and complicated – and therefore expensive. If it does not, it will cause hardship – and it will look unfair.
There have been, of course, other types of unifying scheme, and currently the one which is most discussed is Universal Basic Income – an idea which has been around since the eighteenth century. Some of the models for UBI are utopian, but if we take UBI to mean an all-singing, all dancing answer to every human problem, it will fail for the same reason that all the other combined schemes fail: people’s lives are too complicated to be covered neatly and simply in a uniform way. It’s more important to focus on the idea that Basic Income is meant to be basic – a springboard, an element of income that can be mixed with other income – and forget the idea that it will then be possible to junk everything else about the benefit system, because it won’t be.
I’ve written several background papers for a series of seminars on Universal Basic Income, and the first of them has been put online by Citizens Basic Income Network Scotland. The series will include specific discussions about employment, rights and equalities, housing, care and implementation; I was asked to do papers for three of them (rights, housing and care). (The seminar series is organised by the Scottish Universities Insight Institute at Strathclyde University; details are available on request.) In due course, after the seminars are finished, I’ll be revising the papers for an integrated presentation.
I’m still sceptical. While I’ve always been sympathetic to arguments for more universal benefits and services, there are lots of key problems that need to be thought through before a scheme could be introduced. Too many of the published schemes either wave those problems aside or try to manage them by making poor people worse off. As things stand, the best possible schemes would not offer anything like an adequate, secure income.
The decision to terminate the Basic Income Experiment in Ontario is a sort of finding, too. The design of related experiments has usually been based on short term economic or behavioural effects – because that, after all, is all one can hope to pick up from an experiment for two or three years. However, the arguments around Basic Income, on both sides, are about something different – about social and cultural change. That kind of change can take a generation or more, and it’s simply not going to appear in the way that economists usually model such effects. I’ve previously drawn the parallel with the introduction of old age pensions, where the effects in the UK weren’t fully resolved in sixty years. It’s not possible, more than a hundred years after the introduction of pensions, to be certain what the implications were for older people at the time – and people considering retirement would have been right to be uncertain. The costs of the 1908 scheme led the UK government to threaten retrenchment, and after massive post-war cuts in other services (the “Geddes axe”, applied 1921-22, cut spending worth 10% of GDP), in 1925 pensions were fundamentally reformed to raise money through contributions instead. Most older people were retiring by the 1940s, but many people who were retiring in the 1970s were still deferring their pension claims.
The decision in Ontario comes shortly after a (somewhat less brutal) decision in Finland not to extend their experiments. The message coming over is clear and strong: Basic Income is pushing at the limits of what politicians are prepared to consider.
What does this imply for Basic Income? First, politicians won’t leave Basic Income alone – they just can’t stop themselves from tampering. Look at Child Benefit, which was working really well before the Coalition government decided to create special conditions for wealthy people. If Basic Income comes, it won’t be forever.
Second, there’s no such thing as an unconditional benefit. Issues which may seem relatively minor now, such as the treatment of migrants, prisoners or religious communities, are going to surface eventually. Some of the conditions are more liberal, some are less intrusive, but there will be conditions – tax exemptions to “send a message”, rewards for virtue, or whatever. People advocating for Basic Income have to argue for conditions to be kept to a practical minimum. That’s hard to do when politicians and the press will convert it into “benefits for paedophiles” or “benefits for members of ISIS”, with specific instances. Be prepared.
And that leads to the third point: whatever people use their Basic Income for, they’d be unwise to bank their long-term security or future life-plan on it. How long would it take before the system is so strongly embedded that the future becomes certain? I can’t be sure, but it’s not going to happen in a three year experiment.
Many advocates of Basic Income will be disappointed at the decision in Finland to discontinue the experiments. The decision seems to have far more to do with a change in the political climate than with any concern about how Basic Income operates; but moral judgments about rewards or disincentives are not the sort of issue that can be resolved with a proof of concept.
The experiments were always likely to be inconclusive. There are things that tests can show – for example, whether there are issues in the mechanisms of payment – and things they can’t, such as the impact of basic income over a person’s life cycle. If anyone imagined that two years of Basic Income would resolve arguments about work incentives, they haven’t been paying attention. In the first place, Basic Income is designed to be neutral as to whether or not people work; in the second place, previous income experiments have generally shown incentive effects to be feeble (and the economists who are convinced there have to be such effects have had to work hard to isolate them). There’s a more substantial problem. We know, from the introduction of pensions after 1908, that pensions have materially changed the way that older people engage in the labour market; but we also know that the effects took seventy or eighty years fully to materialise. What that demonstrates, in economic terms, is that not that labour supply is something that responds directly to economic stimuli, but rather that, over time, the curves are liable to shift, reflecting changing patterns of behaviour, norms, expectations and the economic context. (Two world wars and a health service might have had something to do with it, too.) A two year programme can’t possibly replicate or predict such effects.
I’ve not seen any evidence to support the view that Basic Income materially changes work incentives; while there is reason to think that some people will take the opportunity to disengage from work, there will be others who will be encouraged into casual work or self-employment. The principal concerns I have about BI are quite different – related to the distributive implications and the relationship to existing benefits. Those issues won’t clearly be addressed by experiments, either.
Martin Ravallion has put together several arguments against ‘straw men’ used to criticise Basic Income (he calls it BIG, for Basic Income Guarantee). The points he particularly tackles are assertions that
- BIG is too expensive
- There are better ways to eliminate poverty
- Targeting is good enough
- A BIG would destroy work incentives
- BIG diverts attention from health and education.
Most of his arguments are good ones. Expense is a matter of how we choose to organise ourselves; targeting doesn’t work; Basic Income is neutral about work incentives. However, not all the arguments are as strong.
The first problem is his assumption that BIG is there to eliminate poverty; most basic income schemes are providing a limited foundation income, not an adequate one. There are good arguments for considering what Basic Income can do for women, for example, which are about something else. Ravallion is also right to say that “A BIG should be among the options to be considered by any developing country in a package of antipoverty policies ” The situation in developed countries is different, in so far as Basic Income is seen as substituting for an existing benefits system. In the case of the UK Basic Income wouldn’t favour the poor – the effect of eliminating benefits would mean that the Basic Income would exclusively help people who do not currently receive benefits, most of whom are on higher incomes. Nearly all the schemes I’ve seen leave some poor people worse off.
The second problem is the assumption that what gets paid for education can be treated as part of the income package – it can’t be. The money spent on BI would have an opportunity cost (as he acknowledges); many of us would like more to be spent on other things (such as child care, disability benefits, public services, infrastructure, environmental protection) which either favour particular categories of recipient, or can’t be attributed as personal income.
Lots of the objections to Basic Income are ill-founded – there are other “straw men” he might have picked on. One is the argument that the whole thing is likely to be unexpectedly complicated. We know from the administration of universal, categorial benefits like Child benefit that it doesn’t need to be. A second, which overlaps with that, is the accusation that the idea is “untried” – it has been, just not comprehensively. The third is the argument that it would call for a penal rate of taxation. Taxation is done by convention, some countries have much higher rates of income than others, and income tax is not the only way that governments can raise funds.
Having said all this, there are bogus arguments and straw men being set up in favour of Basic Income, too. Among them are the arguments that
- We need Basic Income because there will be no work to do. There will always be more work to do, and presently we have major shortages of activities that we just aren’t ready to pay for – among them social care, the maintenance of the public environment, security, child care, and many others.
- There’s no harm in some people living off others. This is Philippe van Parijs’s argument for supporting ‘surfers’. It greatly underestimates the capacity for resentment and hostility – especially when people who deny the legitimacy of the community that is funding them use violence and intimidation to impose their values on others.
- We won’t need tax thresholds if there’s a Basic Income. Yes, we will. Taxing every penny people make threatens to become an administrative nightmare.
- We won’t need existing benefits if there’s a Basic Income. Yes, we will. Benefits don’t just provide people with a basic income. Among them are income smoothing, housing finance, economic management, support for special needs, and many others.
The “Experiments” that are being tried out won’t, and can’t, settle these issues. When old age pensions were introduced, it took more than sixty years before we could get a clear idea of the impact on how they had changed people’s lives. The Scottish experiments should reassure us about practicality, but I’m doubtful that they can tell us much about long-term shifts in behaviour.
The Institute for Global Prosperity has produced a report proposing the introduction of a range of universal basic services. The principle is the same as the principle of the National Health Service, education in schools, or the road network: providing universal services would offer a foundation for everyone in the society. The fields in which they are proposing basic services are shelter, food, transport and “information”, which includes phone, television and the internet.
The schemes are not all worked out in the same way. The proposals that would be genuinely universal are for public transport (extending the equivalent of pensioners’ bus passes to everyone) and communications. The food service they propose is essentially a residual network for poorer families, replacing food banks and soup kitchens; the model for housing is an extension of existing social housing stock. Neither would be universal.
They also compare the costs of their scheme with Universal Basic Income. It’s not a completely fair comparison, because the provision they are proposing for housing and food is not provision for everyone; if they were genuinely offering either of those on a universal basis, the costings would look a lot different. It is fair, however, to remind people of the alternative to Universal Basic Income. People need an income so as to buy goods and services on the private market; it may be possible to take those services out of the market altogether.
Both the universal schemes they propose, and the underlying arguments, are interesting and thought-provoking. I’m persuaded by the ideas of the universal bus pass and a universal infrastructure for the internet; I think others may need more work; but it’s a debate that’s well worth engaging in.
Luke Martinelli’s assessment of Basic Income is a serious, wide-ranging consideration of several of the arguments: among them, affordability, distributive effects, work incentives and political feasibility. There is more to say about administration, implementation and the relationship to existing benefits, but no-one ever covers everything.
He characterises the opposition to UBI as saying that “an affordable UBI would
be inadequate, and an adequate UBI would be unaffordable.” That’s not the whole story, either. I put the case like this in a video interview:
“If you limit the level of benefit you are still dependent on other benefits, so you’ll get all the problems of the tapers, the poverty trap, the intrusion into people’s lives and the complexity. If you increase the cost, then you can float people off those benefits – but what will you have achieved if you do that? … those people who were formerly on benefits will find themselves on the equivalent in Basic Income, and you’ll have spent nearly all the money to the benefit of people who weren’t on benefits – to people who are better off. So you have really got to decide, is it worth putting large amounts of money into a scheme which isn’t going to benefit the people you most want to help?”
This is a partly-baked idea, based on reform of the Personal Tax Allowance. It would allow people to take the allowance in cash rather than by setting it against their liability for tax. The current allowance of £11500 is worth £2300 (that is, 20% of the allowance) to everyone who pays income tax. If it was possible to convert it to a cash payment, it could benefit many more people.
In round numbers, there are about 65 million people in the United Kingdom. 30 million (24 million people of working age, 6 million pensioners) of them get the personal tax allowance. For most of these taxpayers, tax and allowances are calculated at source, so the benefit is invisible. The cost to the Treasury is something in the region of £70 billion.
If 30 million people receive the allowance, 35 million don’t. 15 million of them are 19 or under, so there are roughly 20 million adults (both pensioners and people of working age) who don’t currently get the benefit of the Personal Tax Allowance. The proposal is simple: to make it possible for those people to elect to receive the equivalent cash value of the allowance (that is, £2300 pa, just under £200 per month).
The idea may be off the wall, but it’s not outlandish: it asks for nothing better than what is already received by the other 60% of the adult population. The only net beneficiaries would be people with incomes lower than the tax threshold. About 6 million of them are people over 65 on lower pensions, 7 million are adults of working age receiving benefits, and the remaining 7 million are either people on low pay or non-workers. There is no obstacle to people in work receiving the same option – there would be no net cost, apart from the mechanical administration of the payment – but there is no financial advantage for people who are already in receipt of secure incomes to make the switch.
The basic model should be easy to operate. A tax year runs roughly from April to March. Records of tax allowances are already kept for everyone with a National Insurance number. People who wanted to convert their tax allowance into a cash payment would need to make their election in good time before the tax year – the obvious deadline is the time of the submission of tax returns by the end of January. A person who made that election would then have a tax allowance for the forthcoming year of zero. No further administrative test is necessary.
Many Basic Income schemes have suggested that the Personal Tax Allowance should simply be abolished. I think it’s important that there should be a choice, for three reasons. First, PAYE works, and it works for millions of people. Getting rid of it would complicate people’s lives and breed resentment; it would also more than double the administrative burden. Second, there are some people, especially self-employed workers, for whom a zero tax allowance would be difficult to manage or live with. Third, choice matters in its own right. If the choice proved popular among workers, it could pave the way for other, more ambitious schemes; we can cross that bridge if we come to it.
This scheme could all get more complicated, but it’s important to avoid that. Changing back and forth between PAYE and cash payment, week by week or month by month, would be complicated and could be error-prone. Disregarding the payment in means-tested benefits would be inequitable, because if the benefit is allocated continuously for at least a tax year, some people would have the payment and others wouldn’t; and if it’s not allocated continuously, there would have to be a complex set of mechanisms to cope. People who owe back tax typically get an adjustment in their tax allowance; if people do not have a full personal tax allowance they should not be eligible.
In principle this scheme could cost up to £46 billion (20 million times £2300), but there are reasons why it wouldn’t. First, anyone who is currently getting more than the tax threshold in the course of a year already receives the equivalent benefit. Most people would remain on PAYE – the main reason for electing for a change would be to secure a more stable income. Most people who become unemployed pass through unemployment: about half the people who drop out of the PAYE system return within six months. They will typically keep their tax allowance in PAYE. So not everyone who receives benefits will be getting a converted allowance. Second, those who earn but are below the tax threshold already receive part of the equivalent benefit. Third, most important, the cash payment will have to be offset against benefits for about half the relevant population – that is, pensioners and adults of working age on means-tested benefits. I’m not going to pretend that the interactions with benefits are straightforward – far too many pensioners who are entitled to Pension Credit don’t actually get it – but it should all mean that the net cost is likely to be in the region of half the maximum, something over £20 billion. That’s still not cheap, but it’s both practical and much less expensive than many alternative proposals that have been canvassed.
This is a proposal, then, for a relatively small, limited benefit that would be unconditional and easy to administer. It would mainly work in favour of people who are not well protected in the current system: people on unstable incomes, students, people who are not receiving benefits, people with home responsibilities. The argument for a scheme like this is that it would make a difference, not that it would answer every problem. It would not settle the problems of the benefits system, and it is not big enough to make any very large difference to poverty. However, money from one source can be mixed together with money from other sources, and a small benefit like this would make sense alongside other benefits. It would offer a limited but stable source of supplementary income to many people on insecure incomes, and it would offer some support to people who currently have none. What set me off on this week was a challenge made by Kathy Mohan to Theresa May in the street: “I can’t live on £100 a month”. She’s right; she can’t. We need to make sure that part of the benefits system, at least, is stable, secure, guaranteed and permanent.
The cost is the main reservation. It’s much less than the cost of many Basic Income schemes, and it’s better targeted – getting money to just the people that Basic Incomes are supposed to reach, and doing it without making any of them worse off. But there is always an opportunity cost. I’ve not run the figures, but I suspect putting the same money into Child Benefit would have a much greater impact on poverty than this proposal, which offers more to pensioners with moderate incomes, students and women with home responsibility. On the other hand, it probably compares favorably in distributive terms to current proposals for supporting university students and FE, which will cost over £14bn, but have other arguments running for them. It’s all a question of priorities. Nor is this the only half-baked scheme I’ve canvassed on this blog. Think of this as the glimmer of an idea, rather than a personal recommendation.
I also have to admit to a certain apprehension about putting potentially dangerous ideas into the public domain. One of my first supervisors, Della Nevitt, once scribbled a back of an envelope calculation in the Ministry for Housing and Local Government and it mushroomed into the Rate Rebate, Rent Rebate and Housing Benefit schemes, the last one in its day described as the greatest administrative fiasco in the history of the welfare state. I need to think more about this, and it’s possible that other people can see a lurking catastrophe in the idea I’ve not thought about yet. I’d be grateful for comments.
From one point of view, I ‘won’ a debate in the Chartered Institute of Housing’s conference on Tuesday, when I was sounding a sceptical note about the idea of Universal Basic Income. There’s a clip on Youtube where I and others outline the arguments. After hearing the case, people were much more critical of the idea. There’s a short (and not very balanced) report on a CIH blog here. If you read it, you might get the impression I had swayed people with my fiery rhetoric and compelling oratorical powers. But the truth is that the case was largely won for me before I opened my mouth. At the outset the CIH Chair asked people to vote electronically. The first question was whether or not people were generally in favour of the idea; 75%, of an audience of about 200 said they were. Then he asked if they would still support it if they had to pay more in tax, and approval fell to 51%. Laughter in the hall. Job done.