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Scottish Economy

Election 2021 Issue brief: Universal Basic Income

In the election debate on Tuesday evening, the topic of Universal Basic Income came up in the discussion. It’s an issue that can unite people across the political divides and yet divide those within the same ideological camps.

Those who support a basic income see it as a way of transforming society. They believe that the current system is not giving sufficient income security for enough people in society and that the system of conditional means-tested social security does not provide adequate support with appropriate dignity. There is no doubt that there are many issues at the moment that mean that many people do not have enough financial security, and poverty is too prevalent. But not everyone is convinced that a basic income is the right way forward, not least because the universal nature of it implies giving money to those higher up the income distribution who have adequate financial security already.

It is an emotive issue, with pros, cons and a whole heap of uncertainties about the impact it would have in the real world. But one of the key questions is how would it be paid for and what impact would such a fiscally neutral scheme have.  A basic income requires large amounts of redistribution. That is the whole point for some proponents of the scheme. But what are the implications of this?

Last year, the Fraser of Allander Institute in collaboration with Manchester Metropolitan University and IPPR Scotland tried to answer this by looking at the impact of a fiscally neutral universal basic income scheme on the tax and benefit system and the outcomes in terms of poverty, inequality, and the wider economy.

Here are some of our key findings:

Radical redistribution

We modelled two version of a CBI, one that tried to replicate the main means-tested standard allowances available in the current social security system (but of course extended these universally) and the second was a higher, much more generous payment, set at the Joseph Rowntree Foundation’s Minimum Income Standard.

With the low-level CBI, we modelled that this would reduce the number of people in poverty by 280,000 (5.4 percentage points) and the number of children in poverty by 90,000 (9 percentage points).

The high-level CBI would have much larger impacts with 910,000 people taken out of poverty (17.3 percentage points) and 250,000 children (25 percentage points) which comes close to completely eradicating child poverty.

These do imply that a basic income could be transformative. But at what cost?

The price tag

The cost of the lower basic income was estimated to be £27 billion. The cost of the higher-level basic income was estimated to be £58 billion.

If Scotland had full powers over social security (much of which are currently reserved) part of the cost could be offset by abolishing much of the current social security system, including the state pension. Residual costs would be around £7 billion for the low level around £40 billion for the high level.

If we look at how much income tax would need to change in Scotland to fund this, this would mean 8 points on every band, with the tax free personal allowance abolished. That would mean that the first £1 of income earnt would mean a 27p paid in tax rising to 54p in for the top rate. For the high level CBI, the tax schedule would start at 58p for the first £1 of income earned, and rise to 85p per for the higher and top rate.

This is clearly an expensive policy. A more targeted policy, where only those on a low enough income qualifies for the payment could could be equally as redistributive and a lot cheaper, but would require some sort of means test, which we know means that take-up falls below 100% for various reasons, including the stigma of claiming it.

This is the trade off between universal and targeted policy. The first will have better take up, but be more expensive. The latter will be less expensive, but not everyone will claim.

Wider impacts – good, bad or unrealistic?

What other impacts could it have? We looked at modelling the wider economic impact of a fiscally neutral basic income, and found that the tax rises required to pay for the policy could lead to some contraction in the size of economy. For some this is a price worth paying. Others worry that the long term impact on the economy would be too damaging for competitiveness, jobs, and the tax base.

There is no precedent in terms of how the economy and society would respond. Existing studies have tended to be limited to local pilots (rather than at a national scale) or focus upon one aspect of a CBI, e.g. the introduction of a universal benefit but they do not test how people respond to the taxation required to fund the policy.

How people respond to the funding mechanism is arguably as important as their response to the basic income itself.

Those who call for a CBI want to see radical change to an economic system that is not working well enough for everyone. The financial security it would give households could potentially improve wellbeing, and give more people choices about work, study and time spent at home doing ‘unpaid’ work. There could be productivity benefits for those who can train for better jobs, or feel more in control of their financial situation, hence reducing stress.

But to do this, basic income would have to be at a level sufficient to live off without paid- work, and that probably entails something akin to the high-level basic income that we modelled. To reiterate, this would require a starting income tax rate, from the first £1 of income earnt, of 58% and a top rate of 85%. Of course, some people may accept this as a price worth paying, but many would baulk at that level of income tax levied on their take home pay.

Other options?

More recently, IPPR Scotland have suggested a Minimum Income Guarantee, that is available to all, but only when income from falls underneath a specified floor. That would be much more affordable than an equivalent amount from a universal basic income, but does not have the benefit from universality of simplicity and lack of stigma. A social security system, such as Universal Credit, but with sanctions removed is also a possible route to securing incomes but again without the benefits of universality (and of course universal credit remains reserved so sanctions cannot be removed by a Scottish Government).

This is a debate that will no doubt continue, and basic income of course does have its merits. But it is important that this debate recognises the costs as well as the potential benefits from such a scheme.

Our full report that discusses all this in much more detail is available here.

 

Authors

Emma is a Knowledge Exchange Fellow at the Fraser of Allander Institute