The COVID-19 pandemic has spurred renewed interest in the possibilities of a Universal Basic Income to address the key problems of income insecurity, poverty and income inequality that the pandemic exacerbated. In-work poverty has been growing in the last 20 years, a combination of job insecurity and precarious working conditions with high costs of housing, childcare and transport, and a less generous social security system. Income inequality has risen: changes to the tax and social security systems in the last decade have been regressive and in some cases financially punitive, with the lowest-income households estimated to have lost 17% of their living standards (income and public services) by 2020.
What is Basic Income and what is its potential?
A Universal Basic Income has been proposed by some academics, think tanks and policy organisations as a way to address these problems. Basic Income (BI) is claimed to contribute towards income security and financial autonomy for individuals through a fixed, unconditional and individual regular stipend. As a guaranteed income, a BI scheme would work to reduce poverty and income inequality.
Success criteria for a BI scheme
Basic Income is generally put forward as a policy to ensure income security, and to reduce poverty and inequality at the individual level. BI’s unconditionality has led to it being supported by some campaigners for the rights of individuals with protected characteristics. Therefore, BI schemes can be judged on the extent to which they:
- Reduce income inequality (both inter and intra-household) and poverty;
- Create losers, and how severe their losses are, particularly among those already disadvantaged under the current tax/benefit system;
- Affect income inequality and employment incentives for individuals with protected characteristics (both within households and society as a whole).
Modelling BI – the trade-offs
When modelling Basic Income scenarios, there is a myriad of decisions to be made regarding its level of entitlement, interaction with other benefits, whether it should be taxed, and its funding sources, to name a few. Deciding on the level of BI that everyone will receive each month will have a direct impact on expenditure and, assuming it enters their means test, an indirect on the spending on any remaining means-testing benefits. Equally, if it is to be funded in a revenue neutral way, deciding to fund BI by say, increasing personal income tax rates by a given amount, will determine how generous the BI entitlement can be.
Our Basic Income project was designed as an example to showcase the flexibility of the tax-benefit microsimulation model for the UK, UKMOD, which offers a quick and simple way to analyse the distributional impact of schemes like BI on poverty, inequality and their fiscal impact. UKMOD is a free and publicly available programme developed by the Centre for Microsimulation and Policy Analysis (CeMPA) at the University of Essex with funding from the Nuffield Foundation.
In this piece we focus on the trade-offs that modelling a BI scheme entail.
How do we pay for it?
Part of any discussion about Universal Basic Income is the question of how do we pay for it. An obvious trade-off is the one between offering an adequate BI (which covers living costs) and controlling costs (which may determine whether BI is politically feasible and/or publicly acceptable).
If our aim is for BI to cover living costs, estimated at £16,000 p.a. minimum according to the Minimum Income Standard, then the public spending required is massive: our modelling showed that the public deficit increases by half a trillion.
If we want to preserve our current fiscal balance, that would require personal income tax (PIT) rates to go up by 42 percentages points (to 62%, 82% and 87% for basic, higher and additional rate tax payers in England and Wales and similar rises in Scotland). UKMOD simulates only taxes on earnings like PIT and national insurance contributions, but we could decide on another source of revenue to cover the funding gap, for example, a tax of 50% on capital gains.
Another way to keep fiscal balance and cost control would be to fund BI through feasible tax rates (i.e. a rise of 3 percentage points). But as we found in our modelling, that would only make possible a £4,000 BI entitlement – not enough to live on. It would also mean that some people would be worse off, especially lone parents.
Keeping it simple or targeted support?
One of the reasons the current social security system is complicated is because people’s lives are complicated; people’s needs are different depending on circumstances and life stages.
As proponents of BI argue, a big advantage of BI is that it is simple for people to understand and know what to expect, and simple to administer. But an important issue when considering a BI scheme is support with additional costs like disability, housing and child-rearing. What we and others who modelled BI schemes have found, is that means-tested benefits need to be kept to avoid the poorest losing out from Basic Income.
The wider policy context – what are we asking UBI to pay for?
A final but important point is that discussions on the adequate BI design and entitlement level should be anchored on the wider policy context, namely, what kind of public services are available and whether they are free/affordable. These will determine whether a certain level of BI is adequate to cover living costs, encapsuled in the question: what are we asking UBI to pay for?
Things to consider would be:
- Is there affordable social housing (which would mean lower housing costs)?
- Is there a universal and free (or affordable) childcare system and a social care system that adequately and affordably supports disabled and older people and meets their needs?
If the answer to the above is yes, then disability, children and housing benefits might not be necessary, and a BI scheme would not need to cover them.
On the contrary, if we have a UBI system in place but no public services like free healthcare and education, then most people would be worse off than in the current system. Furthermore, when public services aren’t there, it is usually women whose opportunities are limited by attempts to make up for the missing services through unpaid work. So women would be the ones most disadvantaged if UBI were to replace public services.
Guaranteeing an individual unconditional source of income to everyone also has the potential to reduce income inequality within households, in addition to reducing inequality across groups in society. But this intra-household income inequality reduction can only happen in a context where we have good free universal public services that redistribute unpaid care labour from families (mostly women) to the wider society, and relieve women from some of this care work. The risk otherwise is the reinforcement of women’s gender role of main-carers.
It is difficult to separate the discussion of what is an adequate level of BI from the effect of other forms of public spending and taxation. But what the above means is that a low level of BI is feasible while still achieving the aims of poverty and inequality reduction, provided other needs are well covered, but that has to be done through high-quality free universal public services.
By Sara Reis (Women’s Budget Group)
More details: https://www.microsimulation.ac.uk/ukmod/case-study-implementing-a-basic-income/
Experiment with UBI schemes using our free online tax-benefit calculator
To further explore the implications of different Basic Income schemes, and to design and test your own reform scenarios, visit https://isercempaweb.essex.ac.uk/UKMOD/ukubi2020, and experiment with our free online tax-benefit calculator for the whole UK population, part of UKMOD Explore.