Universal proposition: basic income could be expensive but manageable

19 Nov 21

Introducing Universal Basic Income payments could be affordable, but more work is needed to establish whether the costs of transition are worth it, says Jeffrey Matsu.

During the past 18 months, as governments around the world have responded to the coronavirus pandemic, the fiscal taps have been opened in ways previously thought unimaginable.

Now, as governments begin to draw up their roadmaps to post-pandemic recovery, ensuring the health and sustainability of public finances will come to the fore. Value for money is likely to be a particularly urgent focus.

Identifying who to help, and through which public services, has never been a straightforward task. Could the concept of a government programme in which every adult citizen receives a set amount of money regularly – known as universal basic income – solve the complexity and inefficiencies of the current welfare system?

Most current programmes to transfer cash directly to households, such as pensions and unemployment benefit, are means-tested.

This means recipients must meet criteria linked to employment or income to receive the cash.

The system often results in huge administrative costs, poor targeting mechanisms and social stigma, preventing the payments from having maximum effect.

By doing away with means testing, UBI would remove these costs.

According to the UK’s House of Commons Library, a weekly UBI of £100 for each person over the age of 16 and £50 per child would cost the Treasury £314bn a year.

To put this into context, total spending on benefits in the UK in 2019-20 was about £225bn.

Opponents to UBI claim that such a draw on public finances would burden the taxpayer, increase government debt and suck resources away from other priorities, such as affordable housing and healthcare.

Proponents argue that this expense is manageable by using the scheme to replace all other benefit programmes.

Currently, public social expenditure in the UK amounts to around 20% of GDP, so the money to fund UBI could be found by cuts to overlapping services.

Recent research has identified new financing methods with low disruption to the economy and significant distributional gains.

A study in the London School of Economics’ Public Policy Review suggests that a 45% flat tax rate could simultaneously simplify the tax system and allow for a yearly UBI of £11,000.

This would result in a reduction in income of around 15% for the poorest third of the population. But, when viewed against a predicted doubling of disposable income for the bottom 10% of the population, it may be considered a worthwhile compromise.

Despite much theoretical discussion, there is little empirical evidence on UBI. The limited qualitative results from the few countries that have introduced UBI (such as Iran) or small-scale pilot schemes (Finland), appear to show improved wellbeing and reductions in poverty and inequality, with no negative effect on the labour market.

Decisions around UBI are heavily influenced by political considerations and context, making a single definition of success difficult.

Implementing UBI is likely to be expensive and resource-intensive, but it could be made affordable if appropriate savings were made through the replacement of all social benefits or the introduction of major tax reforms.

In advanced global economies, where the reduction of poverty and inequality are main policy drivers, a wholesale replacement of social safety nets by UBI may have the effect of decreasing the income of those it aims to help, while increasing the net income gains of those not targeted.

UBI will require large-scale changes to social benefits and tax systems – a process that is both costly and time-consuming. Right now, it may be better to experiment further with pilot programmes to learn the best way of scaling up implementation and delivery to ensure the very best value for money.

Image credit | Ikon


  • Jeffrey Matsu

    Jeffrey Matsu is chief economist at CIPFA. With extensive experience in connecting policy with practice through evidence-based research, he works with partner governments, accountancy bodies and the public sector around the world to advance public finance and support better public services.

    Previously, Jeff was responsible for market analysis and thought leadership at the Royal Institution of Chartered Surveyors and co-led the economy theme at the UK Collaborative Centre for Housing Evidence.

    He was also a senior economist at Morgan Stanley and served on the research staff at the Board of Governors of the Federal Reserve System in Washington DC.

    Jeff holds degrees in economics from the University of Washington and Johns Hopkins University.

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