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Covid-19 and now the cost-of-living crisis has significantly impacted the economy by exacerbating inequalities, poverty and inflation which is at 10.5% and expected to increase. The current fiscal stimulus plan is a contractionary one to tackle the high inflation that the UK has been experiencing since the height of the pandemic. The cost of living crisis has also decreased the amount people can spend due to falls in real income, making it harder to pay for necessary goods and receipts. Benefits used to be specific to housing and unemployment, leading to a moral hazard of some people getting more in benefits than those working on a low wage. To avoid this, the government introduced Universal Credit to cap benefit payments and decrease the cost of supplying benefits. UBI should be cheaper as it aims to reduce associated admin costs by eliminating means testing. This essay will explore if a UBI is necessary to tackle the economic crises or if it would cause negative effects that worsen the economy.
The Universal Basic Income is a scheme that grants each adult a fixed monthly payment that aims to increase welfare regardless of how affluent they are. Essentially, the UBI is a way of redistributing income in society as taxes from richer people are used to fund the Universal Basic Income for everyone including the poorest decile who require it the most. As a result, the UBI’s main goal is to support those of the lowest income and the unemployed. For instance, if the UBI is £12,000 annually and you pay nothing or less than £12,000 in tax, you would have a higher income and this would help with urgent payments. This is especially important this quarter as energy and gas prices have soared partly due to the decreased supply as a result of the Russo-Ukrainian war. The government under Liz Truss implemented an energy price cap which will last until April 2023 and guarantees that the average household will pay no more than £2,500 for their energy by limiting the amount paid per unit, which the government under Rishi Sunak has changed to £3,000 from April 2023.
The amount paid in mortgage interest, however, is continuously increasing, burdening 28% of the population. Most young household owners or first-time buyers have no choice but to take out a mortgage, however, this mortgage tends to be large and can become hard to pay off in the future with rising interest rates. 37% of first-time buyers took out mortgages of between 30 and 35 years this year. Current predictions see 30-year home loans remaining high through 2022 with a forecasted mortgage rate of 5%. This is due to the Monetary Policy Committee successively increasing the bank rate to 3% in the past year which is the highest rate since the financial crisis of 2008. The UBI would be useful in this current state of the economy to help those who have loans.
Although this is the best-case scenario for having a UBI, in the long term, the effects of it could be more damaging than the positives. This is because a UBI is provided to everyone in the economy regardless of wealth. In the long term this may lead to an increase in consumer spending and could increase inflation which opposes Hunt’s contractionary fiscal policy. This problem can be counteracted by the increase in welfare payments such as unemployment benefits. These benefits will help the poorest and those who cannot work, whilst also avoiding the issue that arises with a UBI which is providing support to those who don’t need it. The use of welfare payments fulfils the intention of the UBI which is to provide more support to the unemployed.
On the one hand, unemployment benefits or the UBI both achieve the goal of helping the poorest in society, yet the drawback to both is counter-intuitive. The moral hazard of unemployment increases as people on minimum wage decide it is not necessary to work if the tax-free money that they would get from the government is higher.
Even if the economy is operating at full capacity, the natural rate of unemployment will still exist which can never be at zero due to frictional and structural unemployment. This means that workers may be unable to work or not willing to work. Figure 1 shows the difference between those who are supplying their labour and those in the labour force. Policymakers have to decide on ways that low-income people or unemployed people do not become discouraged to keep or enter a job, respectively.
However, it could be argued that the government should turn their attention to the supply side of the economy rather than focusing on UBI. The increase in tax revenue as a result of trying to bring inflation back to its target level, can fund interventionist supply-side policies. This can be done by more public spending on education and training. This would allow future workers to be higher-skilled and help reduce structural or frictional unemployment if workers find suitable long-term jobs and job satisfaction. Training would be necessary to enhance skills, networking opportunities and the chance to find high-paying jobs.
Shifting LRAS to the right and increasing the productivity of labour, ensures that people who needed a UBI would now be more likely to be independent in their financial security.
To understand if the UBI will lead to economic growth and when the best time to implement it is, we should explore the Finnish two-year UBI experiment which started in January 2017. The experiment was carried out with 2000 randomly-picked unemployed citizens between ages 25-58, whose employment benefit was converted to an unconditional payment of €560 a month (€6,720 a year). The payment was unconditional meaning that the amount was not reduced if they got a job or received a pay rise. This would be favourable for those who earn benefits in the UK as if you receive a pay increase, the amount you earn in these benefits usually goes down. However, with the UBI, there are no strings attached and ultimately people can still work whilst receiving this payment which would increase their overall spending power.
Additionally, the experiment compared the results between basic income recipients and a control group of 173,000 citizens who received unemployment benefits at the time. The idea was to see how the UBI was more advantageous to the economy than regular benefits. Between November 2017 and October 2018, people on UBI worked an average of 78 days, 6 more days than those in the control group. This was a small increase in employment that could be detected and clearly shows an improvement in the welfare of the basic income recipients.
A 2018 OECD survey shows the opposite and that taxation would need to be heavily increased by about 30% to implement it across the whole of Finland. In addition, the effect of the UBI would be counter-intuitive as overall, it increases the poverty rate from 11.4% to 14.1% and ‘of the 150,000 persons falling below the poverty line, 30,000 are children, and 50,000 early pensioners.’ It could be said that a UBI would exasperate the issues by increasing poverty and inequality, thus creating an opportunity cost for the Finnish government.
Most OECD countries have a scheme that means Universal Credit (payments received if out of work or on low income) is untaxed. Similarly, in the trial, UBI was untaxed; other benefits were kept the same so no one involved was at a disadvantage in the trial. Most people on universal credit were 18 - 50, similar to the age range in the Finnish trial. This means that the UBI would help these people on universal credit the most as they are the ones out of work or on a low income. This would become very costly to implement however because these benefits are untaxed and so creating a UBI at a level where the money being given is meaningful to the recipients would require a lot more tax revenue. As a result, there would be an increase in tax avoidance or workers would be less motivated to work knowing that a larger percentage of their income is being taxed.
In October 2022, 5.8 million people were on Universal Credit in the UK and the proportion of those people under the category of ‘no work requirement’ is steadily increasing.9 This may be because more people cannot physically find work due to covid or disabilities. Figure 3 below shows how the pandemic caused a spike in people on Universal Credit. The addition of the war in Ukraine and the cost-of-living crisis means it is now more than ever that people are in desperate need of support without any conditions attached. The increase in collection of tax revenue in recent months could be used towards a UBI scheme as a high priority along with education and public services to decrease the number of unemployed. Furthermore, 41% of people on Universal Credit were in employment in September 2022. This shows that nearly half the people who were being provided with this benefit were on a very low income. This proves that a UBI is necessary in this current state of the economy as so many more people who are unemployed and earning a low income but not eligible for Universal Credit could have an increased income to help them during the crisis.
UBI is funded by taxes which is an example of the Robin Hood effect as in a progressive tax system (income tax), the rich pay more, meaning funding the UBI with tax revenue is a way of redistributing income so the income inequality gap shrinks. In October 2022, it was announced that in April 2023 corporation tax will increase to 25% for large businesses with profits over £250,000 which will elevate the tax revenue gained from Corporation tax from 6% to 8% of total tax revenue. Moreover, the windfall tax on big energy companies would increase to 35% from January 2023. This is because the biggest energy companies’ revenues and profits are high after a surge in demand for energy following Russia’s invasion of Ukraine. This allowed them to escalate prices and as a result, the cost-of-living crisis has worsened. Having large companies pay more tax rather than leaving the burden of it to those on an average salary, would create a fairer distribution of income. Additionally, the UBI is unconditional and is still received by people regardless of their income or wealth or whether they are working or not. Positive externalities to businesses of people having a UBI are that they may feel more self-determined in their job and in developing skills as well as a higher sense of financial security for people who need it the most.
To conclude, a UBI would mean that recipients have the freedom to spend their extra income as they wish which could lead to poorer people escaping unemployment and moving through this cost-of-living crisis. However, it may cause many to quit working if they earn less or are taxed over the amount paid in UBI. Equity is out of the question as everyone is treated the same even if others may require more aid due to a higher MPC. That being said, a UBI would help households pay their expensive gas and energy bills due to a surge in inflation, but, only one UBI payment is not enough difference. I believe that a UBI is not essential at the moment because of the cost and challenge of implementation which is especially relevant now as the government needs to focus their tax increases on funding active welfare payment schemes such as the energy price guarantee and energy bill support scheme.