Philip Booth is Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham, and Senior Academic Fellow at the Institute of Economic Affairs.
There is strong support for the idea of a universal basic income right across the political spectrum. Advocates include the Greens, who proposed the policy in their 2017 manifesto, and John McDonnell. Some Conservatives and libertarians have also supported the idea. Milton Friedman proposed a variant of the basic income (though he would have applied it to households and so, in fact, his proposal would have been closer to my proposed reforms outlined below). Sam Bowman, formally of the Adam Smith Institute, is a vocal advocate. And, in an IPPR survey 40 per cent of Conservative voters favoured a universal basic income.
The policy involves the state giving everybody an income regardless of their circumstances: it would be given to children, hedge fund managers, wives or husbands of hedge fund managers…and so on. As the Conservative Party looks for more radical policies and to attract the next generation, this is a proposal that should be firmly rejected.
Why a basic income?
It is often suggested, especially by the Left and the Greens, that the rise of robots will lead to employment becoming casual with many jobs being destroyed. Proponents of a basic income argue that we will become so productive that a basic income will be affordable – and will also be attractive, since it would provide an income base on which people could build. It would then not matter so much, the argument goes, whether income from work was transitory or unpredictable.
John Maynard Keynes, writing in 1930, said: “Thus for the first time since his creation man will be faced with his real, his permanent problem – how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won”, and predicted 15-hour working weeks. Indeed, he argued that working 15 hours would only be necessary to satiate our desire to do some toil, as our needs could be satisfied with much less work.
Keynes put a timescale of a hundred years or more on this change, but the experience of the 90 years since 1930 is that we work only a little less, whilst desiring to produce much more and live more comfortably. In other words, we find new goods and services to produce to satisfy new desires (including for better healthcare and a better standing of living during periods of morbidity). I suspect this trend will continue and, certainly, it would be imprudent to develop a whole system of social security designed to deal with the uncertain consequences of changing labour markets.
A stronger economic case for the basic income is that it is a single intervention which allows a great deal more freedom for its recipients whilst hugely simplifying a complex welfare system. In some versions of the plan, the basic income would be sufficient for people to procure education and healthcare, and thus provide much greater freedom of choice and efficiency of provision in relation to those services. Libertarian and Conservative supporters tend to be attracted by this argument.
And why not…?
The first problem with the basic income is philosophical. It is a radically individualistic concept which ignores the crucial economic role that households, families and other institutions play in the process of income distribution. It ignores how people choose to live in a free society.
People tend to arrange their lives by organising themselves in households and families. At some point in their life, everybody is a dependent and, at any particular time, around 75 per cent of people live in households which have more than one person.
Households redistribute income (or more likely goods and services in kind) between children and parents; between middle-aged people and the elderly, and between spouses or partners. Giving money to apparently poor people in well-off households is not the function of the state: it is the function of the family or household.
A huge number of people with little income to their name are not in poor households, but they would receive the basic income. This is why the Universal Basic Income would be extremely expensive.
John Kay has done calculations indicating that the provision of a realistic basic income would raise tax rates by about 27 percentage points of national income, of which about seven percentage points would relate to the reclassification of the personal allowance as government expenditure, as taxes and benefits went round and round in circles. We would be taxing families more so that more money can go out of the pockets of one of the members of a household, through a bureaucracy and be put back into the pocket of another individual in the household who probably holds a joint bank account with the first individual!
A further problem is that welfare tends to be calibrated by need. Such needs may be based on whether an individual has a disability or is in need of long-term care or whether people are old or young. Unless people insure to cover these contingent needs (a policy which has strong merit, but which should be pursued in any case), then the government is back in the realm of a discretionary supplementary welfare system which completely eliminates the main benefit of having a universal basic income.
How should we reform welfare and tax systems?
Of course, this is not to say that our benefits system should not be reformed and made simpler. There is a real problem with the way in which our tax and welfare systems interact, discriminating against both family formation and single-earner households.
This arises because welfare benefits are based on household income whilst tax is based on an individual’s income. We should (and do) allow all the transfers of income to take place within the family that naturally take place – between husband and wife, those of working age and elderly dependents, those of working age and children, and so on – before deciding whether to give a family welfare benefits. However, the interaction of this system with the tax system means that, when an earner joins together in a household with somebody with very little or no earnings (for example, as husband and wife), their tax bill remains more or less the same, but the benefits they receive can reduce dramatically.
The household should be the unit of assessment for both tax and welfare, with tax-free allowances dependent on the composition of the household. Families who earned below the household tax-free allowance would have incomes topped up. Those who earned above would be taxed. In other words, we should move to a tax system closer to that which exists in many continental countries.
Conservatives and libertarians should completely reject the idea of a universal basic income and, instead, look to a policy reform that reflects how people choose to live. Apparently poor people in rich households should not receive money from the state. At the same time, people should not be penalised for marrying or looking after their elderly parents in their own household. As Nigel Lawson freely concedes, the independent taxation of household members without transferability of tax allowances was a big mistake. A universal basic income would involve throwing out the baby with the bathwater.