Here is an answer to the question: "Assess the view that the UK Government should use fiscal policy to provide a guaranteed minimum income as a strategy to reduce inequality."
In recent years talk of a guaranteed minimum income, more commonly known as a Universal Basic Income (UBI), has risen enormously. In the wake of the Global Financial Crisis, many now look to our struggling welfare systems and unpopular austerity measures in despair. Drastic measures are now being called for. Indeed a guaranteed minimum income is one of those, and yet it has supporters such as Mark Zuckerberg, Stephen Hawking and Bernie Sanders as some of its many advocates. The idea is exactly as it sounds: each and every citizen will gain a certain income per week or month, with no strings attached.
In addition to the financial crisis, the cry for a universal basic income has largely grown due to the ‘hollowing out’ effect of technology that has propelled inequality to unprecedented heights. Primarily, middle-income jobs that are more administrative have been eroded, while the more physically-demanding, lower-income tasks are by and large yet to be automated. And it is why proponents of UBI believe a cash injection into the poorest sections of society could do so much for overall living standards. For one it could stimulate entrepreneurship, because workers will finally have enough in their pocket to make proper investment. Another possibility could be more volunteering in local communities, where workers won’t have to balance three jobs at once with no time for anything else. In an age of consumerism gone mad, there seems few other options but to provide everyone with a small sum on the side in an attempt to temper aggregate demand. It might allow the average gig economy worker to not work late evenings anymore so he can see his children, or the new mother to take a few more weeks leave before rushing back to work.
UBI has in fact already been tested. In January 2017, Finland launched a two-year pilot scheme where 2,000 unemployed people have been given 560 euros (around £475) per month. One lucky beneficiary, Juha Jarvinen, 39, spoke to the BBC about how it transformed his life: “I feel like a free man. I got out of jail and slavery … I felt I am back in society and I have my humanity back”. His situation had been desperate after all. He was running a small business making wooden window frames before it went bust in the 2008 financial crash, and since then he’d hardly recovered. Now though, he’s started up a new business making drums, and it brings in around 1000 euros a month, on top of his UBI. Indeed proponents of UBI will insist for the vast majority that’s how the money is really used.
The argument for UBI is also based upon what society would look like in years to come should it not go ahead. In ten to twenty years, the number of workers being displaced by automation looks set to increase. Their redundant skills with an underfunded benefits system unable to retrain them will then increase brain drain and hysteresis. With GDP growth then suffering, capital investment will dwindle yet further, and tragedies such as the fire at Grenfell Tower last June where cheap materials proved vastly inadequate will only occur more often. But with UBI, the burden on our existing welfare state will be greatly relieved, as families will no longer drain our health care and range of benefits like before. The estimated cost of UBI will therefore have to be contextualised on two counts – not only through it relieving public services but also through the lack of maintenance costs that the benefits system still endures. A world of UBI might seem impossible right now. In fact the same was said before the minimum wage, and even the NHS – where it seemed ridiculous to give the rich something they could already afford. Doubters of UBI should not get too confident.
Indeed they shouldn’t – the pace of economic progress and political upheaval suggests exactly that. But it might also suggest that an argument that floated around for decades might just have passed its sell-by date, because the labour market is not as it was. Only around fifty years ago, the workplace was a male-dominated arena, workers had one job for life and technology was still in its early stages. With all the complexities we therefore face, the notion that we must wipe the slate clean with a universal basic income that caters equally for such diverse circumstances is too simplistic. Already, despite its rigorous means-testing that one would hope should send the money where it’s most in need, we have a failing benefits system that’s desperately underfunded. Thus to provide equally for the families with elderly relatives or young children and those without would only seek to widen inequality by diluting whatever help available to the most deserving. Billionaires would even get a little more.
On the most discounted rate of £75 a week per citizen in the UK, the policy would total to £120 billion, 5% of GDP and to balance the books experts say the marginal rate of income tax would have to hit 75% - far exceeding the next highest tax rate of 60.2% in Denmark. Granted, the current benefits system has its inefficiencies: each year according to the National Audit Office around £230m is spent on sanctioning that saves an estimated £130m, leaving around £100m of government money wasted. But by comparison to UBI the scale of current funding worries are next to nothing. The incentives to work with UBI in place would be almost non-existent, and the long term effects of dependency and emigration of skilful labour could take generations to recover again.
The social benefits claimed by UBI proponents are also misguided. While cutting working hours or even becoming redundant might sound liberating, income won’t be the only loss. People also gain purpose, status, skills, networks and friendships through work. Delinking both income and work, while rewarding people for staying at home is simply a catalyst for social decay. With high unemployment, crime, drugs and broken families will continue to grow and with it so too will pressure on public services. Politically, the idea is also quite a dangerous one. UBI as a utopian thought-experiment sounds so awe-inspiring that real discussion about the future of jobs could well be postponed. The growing clamour in more populous countries with larger inequality could also take on a more populist stance, where leaders on the left will sell it as if it’s a flawless cure for all ills.
To say that UBI is not the answer is not to reject the legitimate concerns of vulnerable workers though. Other solutions must instead be looked at, such as higher marginal rates of taxation. Inevitably, the question is always whether the rich will tolerate it, and on the scale that’s required the answer seems not. In Canada, where UBI was trialled, the majority of respondents in a poll of 1,500 who were open to UBI still were unwilling to pay higher tax to finance the program. The cut from 50 to 45% income taxation in the UK in 2013 after the HMRC estimated the former would probably raise no more revenue also suggests returning to that figure or even beyond would be unwise – equally so if it is used to fund UBI. Bumping the 40% rate to 45% for £46k+ earners is a safer bet but also runs the risk of the same unintended consequences, stifling entrepreneurship that UBI sought to improve and potentially teasing the rich to venture abroad for lower rates.
A rise in VAT tax from 25 to 30% has also been discussed as an alternative, to reduce aggregate demand slightly and help reign in the UK’s long-hours culture – in fact research shows Britons work on average 43.6 hours a week, above the European average of 40.3 and France’s limit of just 35. Alternatively, the government could put greater emphasis on demerit goods such as fast food and sugary drinks, in an attempt to contain the obesity epidemic, thereby at least providing some social benefit.
Complications also arise here, as the inelastic demand for many of these goods would call for a greater level of tax and with that greater potential for backlash. More importantly, much of the consumption of these goods is because they are cheap, and taxing them would be regressive, thus widening inequality rather than reducing it. The same goes for a VAT tax, since the poor spend a higher proportion of their income than the rich.
Other possibilities must be considered, perhaps looking at one of the root causes of growing inequality: technology. With conglomerates such as the ‘FAANG’s (Facebook, Amazon, Apple, Netflix and Google) concentrating such a large section of wealth, and start-ups in general locating in cities because of higher multiplier effects, the government could launch training schemes specifically for entrepreneurship in rural areas, for example. Collaborating with the tech firms that are based rurally could help springboard that project. The patent box initiative, allowing lower rates of corporation tax for certain inventions, could also reserve rights to part of the wealth should the firm become the next tech giant.
Another step towards reducing inequality could be introducing what’s known as Universal Basic Assets (UBA), which identifies a fundamental set of resources every citizen should have access to – such as financial security, housing, health care and education – in order to achieve economic prosperity. When divided into three categories: private, public and open, it’s clear that public assets such as public education and health care are hugely important, and through encouraging more capital flows through distributive initiatives, such as cooperatives and employee-stock-owned companies, greater funding can be put aside. The Government could also give people ownership of their data, so they can use it as an asset which they – not Facebook or Google, for example – can leverage, and capture economic value. Critics might say it will discourage entrepreneurship, but ultimately it merely seeks to redistribute new assets to the workers who are fulfilling these firms, and not the original asset holders.
In many ways, the great debate about Universal Basic Income and its alternatives, and its powers to reduce inequality is a worthwhile one whatever stance one takes. As inequality reaches new heights though, the hype around UBI and other suggestions like it have received precious little rigorous examination. Finland’s small-scale experiment of 2,000 unemployed citizens answers few questions, and nor does a similar trial in Ontario, Canada. Nevertheless the number and scale of pilots is starting to see an uptick. Y Combinator’s 5-year trial for 3,000 Americans and Scotland’s investment of over £250m into projects in Edinburgh and Glasgow are just some showing promise.
So perhaps the verdict on whether UBI really does work still awaits us. But lessons can also be learnt from what we know now. The first is that there is much reform still to be done with the benefits system – be it improving conditionality, sanctioning, providing support for people re-skill, or schemes to improve less-affluent workers’ capabilities with technology. Indeed the labour market as a whole could do with better regulation over zero-hours contracts and greater job security, perhaps by handing incentives to employers to minimise turnover. Whatever the solution to reduce inequality and poverty might be, it mustn’t be oversimplified, as is the danger with shouts for a UBI like it’s a silver bullet. But neither must it be ignored.
© 2021 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.