Is it Time for Universal Basic Income?

Sam Hannah

August 22, 2023

The Universal Basic Income (UBI) debate is one that has popped up at various points over the last 15 years, but none more so than during the COVID-19 pandemic and now in the current AI hysteria. Depending on the article or study you read, the economic and moral case for it is strong, but the costs are high and the changes to our current taxation and social security (benefits) system would be vast.

The benefits of a well-funded and truly universal basic income are wide-ranging. From reducing financial uncertainty, to removing the complex and stigmatic nature of the current benefits system, to even improving work incentives for the working population, many people believe that UBI could be the silver bullet to all of these issues.

The most pervasive reason that most of UBI’s proponents will tell you it’s a necessary evolution is because the current social security system is not performing as it should do, and the evidence of this is abundant.

Official food security statistics show that nearly half of all Universal Credit claimants (48.4%) are experiencing food insecurity, and on top of this, there continue to be millions of people who receive various forms of social security and meet work or activity requirements, but are still below the poverty line.

Furthermore, our current system causes unnecessary and harmful stress to too many people and the sanctions regime is punitive to the point where it becomes counterproductive, leading to a lower uptake and general unease for those who have (mostly) no choice but to utilise it.

Now that the need for reform of some description is clear, what versions of UBI have been proposed and what would make the most sense in terms of extra cost to the taxpayer and the overall effectiveness of it?

As the idea has evolved, most UBI proposals nowadays accept that the notions of entirely replacing the existing benefit and/or not raising taxes to cover the costs are simply not feasible. Alongside the flat cash payments that UBI promises, there would have to be a continuation of things like childcare, disability, and housing benefits, as monthly flat payments alone would not offer adequate support to those who rely on these other payments.

The recognition of this fact, however, hasn’t limited the number of UBI models out there, all comprising of varying degrees of conditionality, generosity, and added cost to the taxpayer.

The main debate surrounding the level at which a basic income should be set is whether it should be capped at current benefits levels (£13,400 per annum for a single adult household), or whether it should be raised to something like the Minimum Income Standard (£25,500 per annum for a single adult household).

This obviously moves the dial on the taxation side of the debate, given that one model would cost significantly more than the other, but either way there would need to be large-scale changes to the tax system.

Handily, a recent study conducted by the Fraser of Allander Institute, Manchester Metropolitan University, and IPPR Scotland analysed the costs and advantages of implementing a Citizen’s Basic Income in Scotland, either at the current benefit level or at the Minimum Income Standard level.

As the costs examined were specific to Scotland, it’s important to note that the expenses for a UK-wide version would be considerably higher. However, the estimated tax rate increases necessary to fund the program would likely be similar, were they to be applied to Scotland or the entire country.

A UBI set at the current benefit levels would bring significant benefits to those currently ineligible for support, particularly individuals on low incomes who are excluded from the existing system. However, for many recipients already claiming benefits, the gains would likely be more modest. Fraser of Allander and colleagues assessed the costs and impacts of this type of UBI in Scotland, requiring an additional £7 billion in net funding (after reducing existing benefits and eliminating the tax-free personal allowance).

This funding would be generated by increasing all tax rates by eight percentage points, and the result would be a 25% decline in overall poverty and a 33% reduction in child poverty in Scotland. However, achieving the broader objectives of significantly reducing food and wage insecurity and granting more choices for individuals to pursue education, care, or better employment opportunities seems less probable.

Alternatively, introducing a higher level of UBI, such as the Minimum Income Standard level, could potentially achieve these goals and almost eradicate poverty in Scotland, but it would come with an extremely high price tag. According to the study’s estimates, this approach would require an additional £38 billion in net funding (again, after adjusting existing benefits and eliminating the tax-free personal allowance).

If funded through income tax, 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 a very expensive policy, but it’s worth noting that the Minimum Income Standard exceeds the poverty line by a significant margin.

An alternative approach would be to set UBI rates around the poverty line, or even slightly higher, which would be less costly than the Minimum Income Standard-based version but still entail substantial expense.

Though we have focused on funding these proposals through income tax changes, in reality it would require a much more balanced tax response (such as wealth, carbon, and corporate tax adjustments). Whether the taxes raised to fund the additional cost were to come from income taxes or otherwise, it does beg the question of whether the political will is there for this to be implemented anytime soon.

The current cost of living crisis and the high tax burden we are facing would generally mean that there is very little wiggle room for politicians to implement further taxes to fund such a policy. However, these factors may actually work in the opposite fashion this time around.

With fewer and fewer incomes being stable and guaranteed, and the innovation of AI leading to talk of widespread automation across industries, the public may well decide that this is a necessary evolution of the social security system in order to maintain societal order in a time of strong economic headwinds. In which case, one would imagine that the burden of funding the policy wouldn’t fall mainly on individuals, but that other avenues of taxation would be explored in order to minimise the impact on working people.

On top of the political minefield that is tax and spend policy, another obstacle to implementing a nationwide UBI is the possible complications and disturbances that could arise from making significant alterations to the social security system. The implementation of Universal Credit has clearly illustrated the immense difficulties associated with such a transition, affecting not only those claiming benefits, but also the workforce and wider community.

Those who depend on social security often experience significant apprehension when faced with the prospect of transitioning between benefits or systems. The level of potential upheaval is, of course, contingent on the design of the UBI scheme, as discussed above, so integrating a modest and straightforward universal payment alongside the current benefit system could potentially pose fewer challenges than have previously been experienced, but the challenge certainly shouldn’t be underestimated.

I therefore conclude that the current benefits system could be reformed to provide similar advantages that most proponents of UBI point to when outlining its pros. The general consensus in UK research on the subject is that “affordable” schemes wouldn’t go far enough in addressing the fundamental issues that make up its raison d’etre, and schemes which would are currently deemed to be “unaffordable”.

However, these studies rarely take into account the lost income from tax avoidance (both corporate and otherwise) and potential new taxes which could well become the norm in the near future (wealth taxes, carbon taxes, windfall taxes, etc), meaning we could see large increases in tax revenue without further burdening the lower and middle classes.

We also could see a hand-forcing of sorts whereby governments cannot do anything else but provide guaranteed income to individuals if something like a global pandemic were to reoccur, or if AI really were to lead to mass automation of jobs across the board.

In any case, the current system, alongside being woefully inadequate, perpetuates harmful stereotypes of those who utilise it, causing a lack of uptake and more people falling through the gaps, and this is where I see the main difference being between a reformed social security system and UBI. Whether the political will to implement either of those things is there, however, remains to be seen.