Free Money or a Costly Experiment? Problems with a Universal Basic Income

Image Source: The New Yorker

In the preceding 2 decades, precarity has skyrocketed because there has been a rise in uncertainty amongst workers, specifically those on low incomes. In addition, many businesses have also suffered as a result of the catastrophic aftermath to the economy, due to Covid- 19. Many perceive the UBI to be the solution to correcting social security issues. This is because supporters of the UBI, fervently believe that it will provide employment, and reduce inequality and poverty. However, could this “revolutionary” rethinking of global economies be a disillusion? Many would concur with that, as the UBI in fact poses concerns in trying to resolve the country's problems with maintaining some of the core Government objectives as such we must analyse the conflicts which may occur from the implementation of a UBI.

Firstly, the UBI reduces the incentive to not work. This is because the UBI is not subjective to a person’s wealth and or employment status therefore everyone receives the same income. In some ways, the principles of the UBI could relate to the policies of communism. This is because countries that adopted the Marxist dogma, believed that every citizen should be paid the same basic rate regardless of their skill level. This caused massive disparities in productivity in the country. This is due to the fact that the fundamental issue as to why communism failed was a result of choosing equality over economic growth/efficiency. This interlinks with the UBI as those who choose to not actively seek jobs or those who choose to remain underemployed and continue to part-take in temporary/part-time, jobs will take advantage of what the UBI offers because it will stimulate overdependence on the UBI as what one receives annually of what could be £19,000 ( Pound equivalent), might be more than would one would receive if one was to undertake a minimum wage job or a part-time job. This, in fact, could potentially catalyse a lack of responsibility in those people who choose to relish with the UBI as it offers them all the financial security they need without having to work for it. Moreover, the UBI could actually increase the unemployment rate and could potentially decrease economic growth because a country’s productive capacity is not in full use due to a reduction in the labour supply. A decrease in the supply of labour will decrease the GDP, thus causing economic growth to slow down causing what the Government receives in tax revenues to diminish as well because of the reduced rate of total output. This in turn will lead to less Government spending in other, public areas of the economy such as the NHS, state schools or state-funded pensions - furthering the inequality gap and ultimately reducing prosperity.

Drawing upon my last point, the UBI not being subjective to a person’s current wealth status, could in fact create another problem for the UBI to work in the long run. This is due to the fact that, while the UBI is set out to “decrease inequality” it could in fact be argued that it, in some ways, may actually increase it. This is due to the notion that the UBI could inadvertently cause inflation: specifically demand-pull inflation. Demand-pull inflation occurs as a result of fiscal expansion due to the fact that the UBI is a form of Government expenditure. More spending within the economy leads to consumers’ welfare increasing ( as they have more disposable income). Thus causing borrowing to become more attractive which ultimately leads to more spending. Ultimately, the quantity demanded goods and services increases because of more consumption, therefore, causing the AD in the economy to increase, forcing suppliers to drive up their prices in order to mitigate the rise in the AD within the economy. This could further hinder one of the aims of reducing the inequality gap as some consumers may have salaries that will match the rate of inflation (causing the nominal value of their salaries to increase), whereas many, will not have salaries that match the rising rate of inflation, in particular the bottom 4% of the country, therefore, causing their salary and the UBI to decrease in its real value, thus causing greater disparity between the costs of living between the rich and the poor - supplementing the inequality gap within a country.

On top of that, the UBI is ridiculously expensive for Governments to maintain in the long -run. This is due to the reason that the UBI costs around £427 billion per annum, according to the Institute for Policy Research. This is a problem as the only way for the Government to acquire that amount of money is by significantly increasing tax rates on citizens. This will mean that increasing the tax bracket, would cause UK citizens to accept a rate that is higher than what it historically was. Moreover, it is evident that the UK has one of the highest tax brackets in Europe; “with income tax at 45% and sales tax at 20%,” which all help to contribute to public services such as transport and education. Therefore it is plausible to argue that the UBI would not succeed, in the way many believe it would, because we already have sufficient funds going towards many public services, such as the ones previously mentioned. Furthermore, an increase in tax particularly, in the form of an indirect tax, such as VAT, would probably cause the cost of living to dramatically increase. Doesn’t this defeat the whole purpose of the UBI? With higher costs of living consumer satisfaction and indeed consumer sovereignty will most definitely decrease, rebutting a key component of the UBI, which is happiness.

Fourthly, the UBI has not been extensively tested. Of the 195 countries on this planet, only Finland has conducted “a nationwide, randomised control trial of the UBI." The trial began in 2017 and lasted until December 2018. What the researchers hoped for did not come to be true. This was because the 2000 unemployed citizens that the UBI was given to, still managed to remain unemployed, contradicting what the UBI set out to do: decreasing unemployment. On the other hand, it can be mentioned that while the plan did not achieve what it was previously intended to, it can be argued that the happiness and overall health of the participants did in fact increase. The main reason for the failure of the UBI program in Finland was dependent on how it was conducted. This is because there “ was a change in social attitude in Finland wherein many politicians and their constituents began to view basic income as a way to encourage poor work ethic.” Thus causing the policy to be conducted quicker than expected. This caused the government to significantly reduce the desired 10,000 applicants to 2000. The significant reduction in the participation size was a result of the Finnish Government's reduction in the budget. This was due to the notion that the Government only had 20,000,000 Euros ( which is around £17,000,000). In addition, the original plan was designed to give out 1000 Euros to the ( original) 10,000 participants, however, due to budget the Government could not supply it. Moreover, other factors that determined what kind of participants were selected, depended on whether or not they received housing benefits, social security or unemployment benefits already. Many who participated only found their received amount of benefits to increase by a measly 5 Euros. Ultimately, the participants were not more likely to become employed and were further, not receiving a significant increase in their benefits with the addition of the UBI. Similar experiments have been conducted elsewhere for example in Kenya. Unlike Finland, Kenya sampled a significantly smaller group of around 120 people, however, the common finding in both trials was that the UBI is simply an unattainable proposal, set by Governments.

In addition, many who support the tenants behind the UBI, fail to acknowledge that there is not a lack of jobs to fulfil, instead, jobs are becoming more automated. An article in the BBC stated that “ Robot automation will take 800 million jobs by 2030”. This is sufficient evidence to prove my prior statement as there is not a lack of jobs, rather jobs are just changing. One of the key reasons for an increase in automation is that the costs of production for firms will significantly reduce in the long run, as purchasing more capital such as machines will eradicate the firm’s need to pay for labour moreover, by installing capital a firm’s productivity could increase as fewer workers are required to produce the same output, further reducing costs for consumers. This could lead to more structural unemployment as technological unemployment is an example of structural unemployment. Instead of using the UBI as the only solution to mitigate this issue, governments could hand out subsidies to firms that seem to be struggling with production costs, allowing them to spend less of their revenue on hiring staff or staff wages; the firms could invest their revenue elsewhere into the firm, such as in advertising. Not only would the subsidy help out individual firms, it could also increase the number of firms entering the market. This would cause the demand for jobs to significantly increase, reducing the number of people who are unemployed. Moreover, the increase in the number of firms entering the market further could reduce a decline in a particular industry - which further increases the demand for employment. Governments could also try to enforce programmes which re-skill workers to alleviate the chance of suffering from long-term unemployment.

In general, it can be said that the UBI is an ambitious policy, regardless of its foundations stemming from good intentions. The UBI aims to reduce poverty, unemployment and social inequality. However, trying to suggest that the UBI is the only solution to these crucial issues is quite far-fetched as it poses the risk of opportunity costs for Governments as the money could have been spent elsewhere on merit goods such as the NHS. Suggesting that only the UBI can correct these problems is wrong as we need to correct these social problems on a smaller scale, perhaps by more regulation of the labour market, to ensure that market failure is minimised which can help to reduce inequality. Moreover, the need for the UBI is unnecessary, particularly in the UK, as the Government already has proposals such as job seekers’ allowance, to aid the unemployed, a progressive tax system, to help reduce inequality and many more. Therefore, it seems superfluous for the UK Government to impose the UBI as there are already enough policies to aid those who require it. Furthermore, if imposed it will cost the Government significant amounts, which requires further tax raises to the working people of the UK, despite having to already pay some of the highest rates in Europe. Further implications of the UBI, include over-dependence on the proposal as the UBI can cover any expenditures for a person who is unwilling to find a job. This overdependence can cause voluntary unemployment to skyrocket as people are essentially given “free money” without having to work for it. This could cause further government setbacks such as what they receive in tax revenue decrease as those who may choose to take advantage of what the UBI offers will not be paying income tax, this could hinder the Government's budget because it will place them into a budget deficit. Overall, I believe that there isn’t a need for the UBI to be enforced as correcting social failures requires more than handing out “free money”.Alternatively, Governments should focus on getting to the root cause of society's social issues which can be done by regulating provisions which have already been enforced by the Government.