Report details policy costs of implementing universal basic income

March 13, 2017 by Andy Dunne, University of Bath

There are compelling arguments that replacing a country's benefit system with a universal basic income (UBI) could reduce poverty and bureaucracy, but there are significant trade-offs to be weighed up in view of the goals policy-makers pursue, according to a new working paper from the Institute for Policy Research (IPR).

Over 68 pages, the IPR working paper, released today Monday 13 March, provides some of the most detailed analysis yet of trade-offs that need be acknowledged in designing any such scheme, providing policy-makers new evidence of the diverse effects and alternative ways in which UBI might be realised.

Modelling different systems for universal basic income

It makes several contributions to a growing body of literature on the topic, modelling a wide variety of scenarios: partial and full coverage; different levels of payment; and alternative compensatory changes to the wider benefits system.

Among its key findings for the UK, the working paper highlights that:

  • A UBI pitched at the level of existing benefits (£72 a week for working age adults, with payments lower for children and higher for pensioners) would cost £288 billion in additional tax revenues, without compensatory changes to the tax and benefit system.
  • To make such a scheme revenue neutral would require the elimination of all major wage replacement benefits, children's benefits and state pensions as well as the elimination of the personal income tax allowance and National Insurance lower and upper earnings thresholds, and an increase in income tax of 4% across all tax bands.
  • Even so, such a scheme would have a fairly limited impact on poverty reduction and would leave large numbers of disadvantaged households poorer; inequality levels would actually rise. Making additional payment to disabled people (to compensate for the loss of supplements and premiums in the existing system) would have more favourable distributional impacts, but would require income taxes to rise by a further 4%.
  • A less generous level of payment, equivalent to the value of the personal income tax allowance (PITA), paid to everyone and accompanied by the elimination of the PITA as well as Child Benefit, would reduce child poverty levels by one third – but at the net fiscal cost of £36 billion.
  • A 'Young Adult's Income', paid to everyone aged 18-25 and replacing Income Support, Jobseeker's Allowance and Employment and Support Allowance for that age group, would cost £23 billion and reduce poverty levels by around 10%.

Lead author of the new IPR paper, Dr Luke Martinelli, explains: "Against a backdrop where universal basic income has shot up the policy agenda for many countries, this working paper provides a detailed overview of the tax implications and distributional effects of any such scheme.

"There is clearly an appetite in many quarters for UBI, and the potential that it has to alleviate poverty and improve living standards, but this is a particularly complex policy area and there is a lack of empirical evidence on the effects of UBI. Our hope is that this paper will help to inform current political thinking on the topic by highlighting some of the likely practicalities and realities at play.

"For example, one unavoidable reality we show is that UBI schemes appear to either have unacceptable distributional consequences or they simply cost too much. An alternative – to retain the existing structure of means-tested benefits – ensures a more favourable compromise between the goals of meeting need and controlling cost, but does so at the cost of administrative complexity and adverse work incentive effects."

The case for and against a universal basic income

The notion of a universal – a monthly salary, paid directly to all citizens, irrespective of whether they are in work or job hunting – is one that has gained worldwide attention in the past year. Most notably, a two-year pilot scheme, launched in Finland in January, is now guaranteeing a monthly income of roughly £600 to 2,000 Finns, with funds continuing to flow whether participants are in work or not.

There has been widespread interest in the Finnish UBI pilot, not least from Scotland, Canada, Iceland, Uganda, and Brazil. Other pilots have been trialled in Namibia and India, whilst a similar scheme has been in operation in Alaska – where annual cash payments to all residents have been offered as a dividend from oil revenues – since the 1980s.

The arguments behind UBI suggest that it would encourage more jobless people to look for work when freed from welfare dependency, and cut down on the weight of bureaucracy involved in means-testing or administering cumbersome social security systems. Combined, proponents suggest, such benefits would save the taxpayer money in the long run and improve living standards overall. Yet critics point to an overly generous, overly expensive and fiscally impractical system that is yet to have been shown to work.

Explore further: As robots take jobs, Europeans mull free money for all

More information: The Fiscal and Distributional Implications of Alternative Universal Basic Income Schemes in the UK: www.bath.ac.uk/ipr/policy-brie … hemes-in-the-uk.html

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