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Universal Basic Income: what is it and what could it do?

September 28th 2020

Ahead of this week’s Senedd debate on Universal Basic Income, the Bevan Foundation explores what UBI is and its risks and potential for Wales.

A picture of money

Universal Basic Income has gained significant interest and popularity in recent months. As with many schemes that affect people’s income, the design and value of the proposals really matter.

This note explores the concept and sets out some of the key questions that need to be asked about how it might work and what it might do in Wales?

1.      What is UBI?

UBI would mean that everyone in society received a cash payment regardless of their means and without any conditions on eligibility or how the money is used.

2.     How is it different to social security?

The principle of a basic income is already established in the UK’s social security system.   Children and older people receive near-universal payments in the form of Child Benefit and State Pension. The social security system also supports people of working age in some circumstances e.g. people who cannot work because they are disabled, carers, unemployed or have a low income.

The big difference is that UBI would be a flat rate payment for everyone, irrespective of circumstances.  It would provide payments to people who are currently outside the social security system, including people who do not meet the UK social security system’s tests of eligibility e.g. on disability or because they have a higher income.

3.     How much would UBI be?

The value of UBI is critically important to its possible impact. There are different views about the value of UBI which reflect whether it is seen as an income supplement or an income replacement.

Some people propose a relatively low value UBI e.g. from as little as £50 p.m.  At this level, UBI is not sufficient to live on, and so for people without another income there would need to be some sort of means-tested top up or income protection.  It’s a moot point whether introducing means-tested benefits on top of UBI simply re-invents the current social security system.

At higher levels, UBI would be sufficient to meet people’s basic needs and it could therefore replace current benefits. Research by the Fraser of Allander Institute, IPPR Scotland and Manchester Metropolitan University explored two replacement UBI rates:

  • Current social security rates of £57.90 p.w. for 20 to 24 year olds, £73.10 p.w. for those aged over 25 but under state pension age, £85.54 p.w. for those aged under 19 and £163 p.w. for those of state pension age.
  • The Minimum Income Standard of £120.40 p.w. for 0-15 year olds, £213.95 p.w. for people aged 16 to state pension age, and £195.90 p.w. for state pension age and older.

4.  Who would UBI apply to?

There are differing views about who UBI would apply to.  Some people see UBI replacing all current social security payments, including state pensions. Other people see it as replacing only working-age benefits, with state pensions and child benefit continuing unchanged.   The coverage of UBI makes a big difference to its cost.

The advantage of everyone receiving UBI is that it would stop people falling through gaps in the current safety net. This disadvantage is that people who may not need it would still receive it.

5.  Would UBI reduce poverty?

How successful UBI would be at reducing poverty and narrowing income inequalities very much depends on its level and the arrangements for covering households with additional costs.

A UBI at the Minimum Income Standard of £213 a week would have a significant impact on poverty. A study of UBI in Scotland found it would reduce child poverty by 25 percentage points and reduce poverty amongst the population as a whole by more than 17 percentage points. Even so, a residual level of poverty would remain. Similar results might be expected in Wales.

A UBI at lower levels would not reduce poverty.  A UBI of £73.10 a week without any additional help with living costs would increase poverty in the UK by between 8 and 10 percentage points for children and 2 to 3 percentage points for working-age adults.  This is a major difficulty with UBI.

Whatever the level of UBI, if it is paid to everyone people with medium to high salaries could continue to earn a decent income on top of their UBI.  The effect of UBI could therefore be regressive unless it is accompanied by higher rates of income tax including taxing UBI.

6.     How would UBI meet variations in people’s needs?

Different types of household have different needs. For example single people have higher costs than couples, who are able to share costs and pool resources. Disabled people also have higher living costs, because of additional requirements such as special foods, equipment or housing costs.  And housing costs vary significantly within Wales, from high cost areas such as Cardiff to lower-cost places in the south Wales valleys.

A UBI is unlikely to meet the costs of people with high needs, even with a relatively high rate of UBI.  Some people propose that UBI should be topped-up when people have high costs, introducing an element of means-testing into the system.

Without a top up to UBI, inequality amongst disabled people, large families and people in high cost areas would be penalised. We have already seen the impact of the benefit cap on people with high housing costs or large households.

7.    Would UBI reduce gender inequalities?

UBI would probably have a mixed impact on gender inequalities.

On the one hand, UBI would provide people who currently have no personal income (e.g. because they are carers) with some resources. This would increase their financial independence and personal autonomy.

On the other hand, UBI could reduce women’s engagement in employment because caring is assumed to be women’s role and women receive lower rewards in the labour market. Gender inequality would therefore increase.

8.     How would UBI affect people’s working life?

UBI could provide a useful mechanism to support people facing a challenging labour market, for example with the advancement of automation. UBI could also ensure that those who are currently undertaking unpaid or undervalued work in society (e.g. carers) are provided with an income for their work. It may also encourage people to volunteer in their communities given that they would be guaranteed an income.

Most studies show UBI has only limited effects overall on people’s engagement with the labour market.  However, the effects vary for different groups. In particular, women with children and older people have been found to slightly reduce their participation in employment with UBI.

9.    How much would UBI cost?

Estimating the exact cost of UBI varies depending on which model is adopted.

Research undertaken in Scotland estimated that introducing UBI at a lower rate would cost £26.7bn whilst a high rate UBI would cost £57.8bn.

We estimate that a UBI at £213 a week for people of working age in Wales would cost £21 billion a year. There would be savings of around £5bn on existing working age benefits and on some administration costs.

In terms of poverty reduction, it is estimated that using UBI to reduce poverty would cost £85,000 per person rising to £235,000 per child at the higher rate.

10.    Are there alternatives to UBI?

Yes.  Instead of spending money on giving money to everyone, much smaller sums could transform the current benefit system. Reforming social security would cost a fifth of the cost of UBI to lift an adult out of poverty and a twentieth of the cost of UBI per child lifted out of poverty at £10,000 per child). The total cost of reforming Universal Credit (e.g. by increasing the basic allowance by £40, scrapping the benefit cap and the two child limit) would cost £1bn in Scotland.

Similarly, the sums spent on giving a payment to everyone to use as they wish could instead be used to employ people to undertake socially- or environmentally-useful work e.g. providing better social care, restoring nature or reducing class sizes. Some people have suggested that the cost of UBI would be so great that essential public services would have to be cut.

11. Has UBI been introduced elsewhere?

UBI has not been implemented fully anywhere in the world. There have been a number of trials, perhaps most famously in Finland, with others underway in countries ranging from Germany to Uganda.  Spain has recently introduced a minimum income scheme however, it appears to have more in common with the UK’s social security system than the version of UBI discussed in this note.

A form of UBI is in place in Alaska where profits from the oil trade are shared with citizens annually through the Alaska Permanent Fund. The level of this payment however, is not sufficient to replace people’s income and therefore acts as a supplement.

12. Does the Welsh Government have the powers to introduce UBI?

The Welsh Government does not have the power to introduce UBI. To introduce a UBI it is likely that powers over the social security system and substantial powers over the taxation system would need to be devolved to the Welsh Parliament.

 

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