Basic Income: a feasible route to income security?
by Malcolm Torry
The pandemic has inflicted serious damage on the economy, on employment, and on household disposable incomes. The UK Government’s job retention and income maintenance schemes have mitigated some of the damage, and the increasing availability of vaccines will slowly bring the pandemic under control, allowing lockdowns to cease and the economy to return to something like normal. But it will take months, possibly years, for the economy to recover, and maybe even longer for household disposable incomes to return to anything like adequacy. Globalisation, automation, and the pandemic will all have reduced the security of both employment and household disposable incomes, perhaps permanently.
An important contributor to income insecurity is the insecurity of both in-work and out-of-work means-tested benefits. Just two of the problems: the sanctions regime causes significant demotivating psychological damage; and Universal Credit payments can vary considerably from month to month, and can suddenly stop, meaning that a new application has to be made. Unpredictable income can cause significant anxiety. This, plus the knowledge that any change in employment patterns or earned incomes can throw a benefit claim into chaos, means that there will always be a strong incentive not to seek new sources of income, to the detriment of individuals, households, the economy, and the public finances.
A significant layer of totally secure income would clearly have the opposite effect, reducing anxiety and encouraging people to seek new earnings opportunities.
Options for increasing income security
How can income security be increased? Research published in January by the Institute for Social and Economic Research looked at three options for increasing income security in the UK.
The first was to make permanent the £20 increase in Universal Credit rates, but this doesn’t actually result in any increase in secure income, as it would be subject to sanctions and means-testing, as outlined above. The second was increasing Child Benefit, which is a completely reliable source of income for households with children. The disadvantage here is that it gives nothing to people without children. Either of these changes would be simple to implement, though either on their own would cost significant additional public revenue.
The third option we looked at was Basic Income. As the employment market has become more precarious and fragmented during the past few decades, a Basic Income (sometimes called Universal Basic Income or Citizen’s Income) – unconditional income for every individual – has looked increasingly attractive, and a lively global debate is now taking place about it. The number of experiments is increasing, and increasing numbers of governments and political parties around the world are taking a positive interest. But is it feasible? If not, then we ought to stop talking about it. This is the question addressed by the rest of this article.
Criteria for a feasible Basic Income
In order to answer the feasibility question, and before any illustrative Basic Income schemes are tested, we have to set some feasibility criteria. For the purposes of the research, the criteria chosen were as follows:
- As few changes as possible to be made to the current tax and benefits system, consistent with the other aims in view
- Revenue neutrality, which is taken to be a net cost or saving of no more than £2bn per annum for the scheme as a whole
- The avoidance of significant household net disposable income losses, particularly for low-income households, and in particular an aim of no more than 2 per cent of low-income households experiencing household net disposable income losses of more than 5 per cent
- The basic rate of income tax to rise by no more than 2 percentage points, the higher rate by no more than 3 percentage points, and the top rate by no more than 4 percentage points
- Reductions in inequality and in all poverty indices
- Substantial numbers of households taken off means-tested benefits, or brought within striking distance of coming off them
How do you test for feasibility?
Financial feasibility can be tested using microsimulation: a computer programme into which are coded the tax and benefits regulations of a country. Financial data from a statistically significant sample of the population can be passed through the programme to generate a range of statistics. The programme can then be rewritten to include a Basic Income, and tax and benefits levels and thresholds can be changed, and the new statistics generated can then be compared with those for the current system to discover the effects of the policy change. A trial and error method then has to be used to test a wide variety of illustrative Basic Income schemes in order to find one that fits the feasibility criteria.
A feasible Basic Income scheme
The scheme that emerged when this was done in January is as follows:
The scheme is funded by
- Reducing the Income Tax Personal Allowance from £12,570 to £2,340 per annum
- Reducing to zero the various savings allowances
- Reducing the National Insurance Primary Earnings Threshold to £45 per week
- Charging National Insurance Contributions at 12 per cent on all earned income above the Primary Earnings Threshold
- Setting income tax rates as follows: the basic rate is raised from 20 to 22 per cent, the higher rate from 40 to 43 per cent, and the highest rate from 45 to 49 per cent
Basic Income is taken into account in the same way as other income when means-tested benefits are calculated, except that in relation to Housing Benefit and Council Tax Benefit only half of each Basic Income is taken into account in order to reduce sufficiently the number of low-income household disposable income losses.
The Basic Income levels, income tax rates, and the net cost of the scheme are as follows:
|Basic Income levels, tax rates, and net cost of scheme|
|Citizen’s Pension per week (existing state pensions remain in payment)||£35|
|Working age adult Basic Income per week (25-65 years old)||£60|
|Young adult Basic Income per week (20-24 years old)||£50|
|Education age Basic Income per week (16-19 years old, but not young people still in full-time education)||£25|
|(Child Benefit is increased by £10 per week)||£10|
|Income tax, basic rate (on £2,340 – £50,250)||22%|
|Income tax, higher rate (on £50,251 – £150,000)||43%|
|Income tax, top rate (on £150,000 – )||49%|
|Net cost of scheme||£1.8bn pa|
All of the feasibility criteria are met by the scheme, which would result in a secure monthly income of £260 for individual adults of working age and £520 for a couple. The research shows that the Basic Income scheme outlined here would be effective in increasing income security, reducing poverty and inequality, and removing many households from means-testing.
Questions frequently asked
It is one thing to show that a feasible Basic Income scheme is available that would significantly increase income security, reduce poverty and inequality, and take a lot of households off means-tested benefits. It is another to answer the questions that are often asked about it.
Why should we give the Basic Income to people who don’t need it?
Might an income-tested benefit – a Guaranteed Minimum Income – be a better idea? A Guaranteed Minimum Income would function in much the same way as Universal Credit but without the sanctions, and so would be a long way from being a secure income. A Basic Income would be by far the better option simply because it would be entirely secure – it would just keep on coming, month after month. To give it to everyone would be highly efficient; it would increase social cohesion; and it would impose no bureaucratic interference on anyone, and would impose no stigma whatsoever. A Basic Income would deliver the advantages that only completely unconditional incomes can offer.
And what’s the problem? Those who didn’t need it would be paying more additional tax than they would be receiving in their Basic Income, so they would not be making any money out of the scheme.
And would people stop working?
Precisely the opposite would happen. Every household taken off means-tested benefits would experience an immediate increase in motivation, and they would use their new secure incomes as solid platforms on which to base new income-generating activity; and every household brought within striking distance of coming off means-tested benefits would come off them in order to take the opportunities that their new layer of secure income would offer them.
The situation that we face, particularly following the pandemic, makes it essential to improve the security of incomes. The obvious way to do it is to implement a Basic Income.
For the full research results, see Malcolm Torry, Three income maintenance options for 2021, Institute for Social and Economic Research, January 2021.
Additional material on Basic Income can be found here
Dr Malcolm Torry is General Manager of the Basic Income Earth Network (BIEN) and a visiting fellow at the Institute for Policy Research at the University of Bath.
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