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Free money for everyone?

Free money for everyone?

The idea that government should scrap welfare payments and give everyone a basic income is becoming increasingly popular

Is basic income a novel idea?

Not at all. In Utopia (1516), Thomas More proposed that every citizen should get a “citizen’s income”; in the 1790s, Thomas Paine argued that since private land ownership deprived the landless of their “natural inheritance”, everyone should receive a one-off payment of £15 at 21, to be funded by a once-in-a-generation tax on landowners. More recently, the idea that government should pay everyone an income irrespective of their circumstances – a universal basic income (UBI) – has been championed in Britain by Bertrand Russell (in 1918), and in the US, in the 1960s, by John Kenneth Galbraith and Martin Luther King. But apart from in Alaska (see box), the idea has faded from view in the ensuing decades.

And is it now back in favour?

Very much so, and not just as a theory. This year Finland will start paying s550 a month to a random sample of 10,000 adults, with a view to rolling out the scheme nationally if results are deemed positive. Holland is conducting a similar experiment. Earlier this month, Switzerland held a referendum on a proposal to have a UBI of CHF2,500 (£1,766) a year for every adult (it was roundly defeated). And shadow chancellor John McDonnell says Labour may include a UBI pilot in its next manifesto.

Why all the excitement?

One factor is a growing belief that current welfare systems are excessively cumbersome and costly. Implementing a basic income would, it’s argued, radically simplify welfare provision and reduce administrative overheads (notably those associated with means testing). It wouldn’t replace all existing benefits: those incapable of supporting themselves, such as the disabled, would go on getting additional support. But the ideal is to replace the highly complex system of work-related benefits with a far more straight-forward one guaranteeing the same level of provision to all.

But why do all citizens, even rich ones, have to receive it?

Because another of UBI’s purported advantages is that it eliminates the disincentive facing welfare recipients when they seek a return to work – namely, that they lose so much in benefit that it’s hardly worth doing so. Effectively, they’re being charged a huge tax on the pay they could earn: economist Guy Standing calculates that, in the UK, it’s equivalent to a marginal tax rate of 80%. Even under Iain Duncan Smith’s benefit reforms, which (if they can be made to work) are meant to tackle this problem, the likely rate is 65%. But since you get UBI regardless of how much you earn, this problem disappears. It also means that the millions who work for nothing – carers, volunteers, parents – would get some reward for their labours.

Could we actually afford it?

That’s the billion dollar question, and it all depends on what level the basic income is set at. A plan drawn up by the RSA (Royal Society for the encouragement of Arts, Manufactures and Commerce) has set it, for example, at £3,692 per year for adults aged between 25 and 65. (The over-65s, and those with young children, would get more.) All this, says the RSA, would barely require additional taxation, since most of the funding would come from replacing such benefits as income support, tax credits, child benefit and pensions. The trouble is that £3,692 is too paltry a sum, as many see it, to make it worthwhile, and would leave some now on benefits significantly worse off.

Then couldn’t the UBI be set higher?

Many suggest it should. The Swiss initiative, for example, setting the level at 2,500 Swiss francs a month, would have provided a decent income equivalent to £21,000 a year. However, the cost (as the Swiss voters seemed to agree) might well have proved prohibitive: CHF208bn a year, or 30% of GDP. Less ambitiously, Charles Murray of the right-wing American Enterprise Institute, has proposed giving every American over 21 a post-tax income of $10,000. But that, according to the Left-leaning Centre on Budget and Political Priorities, would cost some $3trn a year, which amounts to almost all the tax collected by the federal government.

So is a meaningful level of UBI essentially unaffordable?

It is enormously expensive: the economist James Tobin calculated that a UBI at 10% of the average income would require taxes to rise by ten percentage points (some have suggested funding it by hiking up consumption tax). The worry on the Right is that this could well make people worse off than before. But its champions on the Left argue that even so, redistributing a large amount of money from the most well off to the rest of the population may become a social necessity, in light of what they see as fundamental changes in the economy of developed nations.

And what changes are those?

Many left-wing economists, including Nobel Prize-winner Paul Krugman, argue that technological change and the financial crisis have brought about a tipping point in capitalism. One manifestation is that the power of capital relative to wages has increased; meaning that even though countries are becoming richer, most people’s incomes are declining in real terms. In the US, the real wage of the average man is calculated to have fallen by 19% between 1970 and 2010. Another manifestation is that more and more jobs are being replaced by technology and robots, resulting in huge increases in profitability but a continuing fall in consumer spending power. A robust UBI, funded by higher taxes on profits, would, it is argued, be an effective way of dealing with all this.

Would it get political traction?

It might do. For those on the Left, it has obvious appeal: it can be seen as a modern take on Thomas Paine’s plan for a “basic endowment”; only where his plan would have compensated people for loss of their “common” land, basic income would compensate them for something just as fundamental – their jobs. But even the business world may not be entirely averse: the idea of UBI already has advocates in Silicon Valley, where they have now taken to referring to it as a “digital dividend”.

The Alaskan experiment

One problem with a basic income is that it has never really had to face a reliable real-world test. But one long-term policy does come close: the yearly dividend that Alaska has paid to all its citizens – including children – since 1982. The dividend is financed by the state’s oil fund, which was established, in 1976, to preserve a portion of all incoming oil wealth for future generations so everyone gets a share. The dividend varies according to how well the fund does: the highest ever payment was $3,269 (which included a one-off supplement of $1,200), in 2008, but usually it’s between $1,000 and $2,000 (which, for a family of five, means an annual injection of between $5,000 and $10,000).
And the impact? Measured by income distribution, Alaska is consistently one the most equal US states, and it has among the lowest proportion of households living in extreme poverty. Of course, the dividend isn’t solely responsible for this, but studies have shown that equality has drastically improved since its introduction.

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