Is Universal Basic Income a good idea?

27th May 2021

Universal Basic Income (UBI) could be designed to reduce poverty, improve income security and boost well-being, but could be expensive and challenging to introduce. Many of its goals could be achieved through changes to the existing social security system and addressing the underlying causes of insecurity in the labour and housing markets.

Universal Basic Income (UBI, Citizens’ Basic Income – CBI, or simply Basic Income) is an idea whose time appears to have come. The Welsh Government has committed to trialling it, the Scottish Government has invested in the feasibility of pilots, several English cities are keen to test it out and a number of political parties included UBI trials in their manifestos. But is it really the right basis on which to build a post-pandemic society? What problems is it trying to solve? Is it the only or the best solution to those issues?

What exactly is Universal Basic Income?

There are many models but at its heart it is a regular cash payment every individual receives, without any reference to their other income or wealth and without any conditions. Payment amounts can vary according to broad demographic characteristics, such as a different payment for working-age adults, children and pensioners.

It is important to distinguish UBI from a Minimum Income Guarantee, which at its most basic is simply a set of policies designed to ensure no one falls below a set income level.

What problems are intended to be solved by UBI?

Some argue that Universal Basic Income is part of a radical rethinking of our economy and society, that provides a level of economic security to everyone and destigmatises the social security system. It is also seen as a potential solution to insecurity in the labour market.

The social security problems which UBI could help to address include -

  • Coverage. Too many people locked out of the support they need, due to:

Policy design - for example, deficiencies in maternity and paternity pay, support whilst training, and low-earning workers without Statutory Sick Pay.

Non-take up - due to stigma, lack of awareness, mistakes, the difficulty or unpleasantness of the system.

Dropping out of the system - because of conditions or treatment.

Sanctions - losing part or all of your benefits because you are deemed not to have met the conditions of receipt.

Delays, errors and problems with benefits - which can result in people having to go for long periods of time with little or no income.

  • Adequacy. High poverty rates for some groups even when they receive social security and are meeting work or activity requirements, demonstrate its current inadequacy. Official food insecurity statistics show 4 in 10 Universal Credit claimants can’t even afford food. Providing a high enough universal payment could ensure everyone has the resources to meet basic standards of living, preventing poverty or destitution.
  • Uncertainty. Many people, particularly those on low incomes, emphasise the importance of having predictable and stable payments. Yet people often experience variable and unpredictable fluctuations in benefit payments.
  • Complexity. Any system which tailors support to individual circumstances will entail some complexity. Introducing ever more means-testing and conditions attached to various benefits requires more complex systems and processes.
  • Dignity, respect and well-being. Not all benefit claimants experience problems or feel they are treated poorly. But some find the culture of our social security system suspicious, disrespectful and undignified. There is evidence of the negative impact of these experiences on people’s mental health. Over many years, the ramping up of conditionality and means testing has been accompanied by a narrative of ‘scroungers and skivers’, a presumption that there are large numbers of people trying to game the system, and a drive to reduce claimant numbers.

Some advocates also argue that UBI could improve work incentives, if it was either not withdrawn at all as people earned more or was withdrawn at a lower rate than in the current benefit system. (Although others worry that the incentive to enter work at all might be reduced if people could rely on a high enough income outside it, discussed further below).

Alongside problems in our social security system, many advocates also see UBI as a response to increasing insecurity in our labour market. Too often low-paid jobs are unpredictable and insecure. Workers don’t know what shifts or hours they will be working from one week to the next or how long the job will last. People cycle in and out of low-paid, temporary jobs, never able to rely on a steady income. UBI could provide a fixed income stream to offset this earnings volatility. In addition, some argue that UBI would free people to choose whether to take paid work or care for others, train or do other activities, and would recognise the value to society of such activities. In this scenario, it might bring wider benefits through better job matches and people holding out for better quality work, creating pressure on employers to pay more and achieve greater productivity. There are also wider debates about the extent to which automation may lead to significantly fewer jobs or climate change may necessitate such major economic changes that there will be a new norms of people doing much less paid work. For some, UBI is a necessary accompaniment to such radical economic changes.

Finally, there are a range of other arguments put forward for UBI which do not relate to poverty, social security or labour market insecurity, such as the idea it would reduce the level of state involvement in people’s lives. In this piece, we focus on the arguments relating to poverty and insecurity. There are, of course, versions of UBI which would significantly increase poverty by reducing the support provided to those on low incomes, but we assume these would not be proposed by those aiming to reduce poverty.

UBI: costs and impacts

Most UBI proposals now include two features, in contrast to some earlier proposals which intended to replace all benefits with UBI or introduce UBI without accompanying tax changes. Alongside flat payments, there would continue to be a system of benefits linked to costs. A system of flat payments alone could not offer adequate support with varying costs of housing, childcare or disability. This means that there would continue to be a degree of complexity and means-testing even if UBI was introduced (sometimes known as UBI+), and that efforts to improve the existing system must continue. Second, UBI would replace parts of the tax system as well as social security. Most likely, the tax-free personal allowance would be removed, so people would pay tax on the entirety of their earned income. Depending on the design, many on lower- to middle-incomes would more than recoup this in the universal payment.

Costs and poverty impacts

A key design question is obviously the level at which UBI is set. Would it be based below, at, or just above current benefit levels? Or provide much higher payments, for instance at the level of JRF’s Minimum Income Standard?* This would be the main determinant of both the cost of UBI and its immediate impact on poverty levels.

A recent study by the Fraser of Allander Institute, Manchester Metropolitan University and IPPR Scotland, examined the costs and benefits of a Citizen’s Basic Income in Scotland at current benefit or at Minimum Income Standard level. These costs relate to introducing the scheme in Scotland; those for a UK-wide version would be much higher. However, estimates of necessary tax rate increases would be similar whether in Scotland or across the whole country.

A UBI based on current benefit levels would bring clear gains for those who are currently ineligible, where they are on a low income but are shut out, or fall out, of the existing system; it would probably bring smaller gains for many of those successfully claiming current benefits. Fraser of Allander et al estimates the costs and impacts of introducing this kind of UBI in Scotland. This scheme would require £7 billion in net additional funding (after existing benefits have been reduced and the tax-free personal allowance eliminated), paid for by increasing all tax rates by eight percentage points. UBI at this level would deliver lower levels of poverty and greater income security (reducing the number of people in poverty in Scotland by a quarter and child poverty by a third). However, it seems unlikely to achieve wider goals of significantly reducing insecurity and allowing more people to choose whether to care, train, or hold out for better jobs.

Introducing a higher level of UBI, for instance at Minimum Income Standard level, would potentially achieve these benefits and almost eradicate poverty in Scotland, but would be extremely expensive. Fraser of Allander et al estimates this would require £38 billion in net additional funding (again, after existing benefits have been reduced and the tax-free personal allowance eliminated). If funded through income tax it would require tax rates to start at 58p for the first £1 earned and rise to 85p for the higher and top rates. The Minimum Income Standard is significantly higher than the poverty line. An alternative would be to set UBI rates at or around the poverty line. This would be less costly than a version based on the Minimum Income Standard but still very expensive.

The specific design of UBI significantly impacts the distribution of winners and losers, and increases or decreases in poverty amongst different groups. Some proposals result in higher poverty for some groups than under the current social security system. One version with UBI payments based mainly on current benefit levels (funded by increasing tax rates by three percentage points and abolishing the tax-free personal allowance and National Insurance thresholds) would reduce poverty overall but lead to higher poverty rates for children and lone parents. Around 20% of people in the poorest fifth would lose more than 5% of their income (despite the scheme being highly redistributive overall).

Other proposals avoid big losses for people on low incomes. Malcolm Torry proposed a UBI payment of £60 per week, funded by raising the basic, higher and top rates of tax by two, three and four percentage points respectively (and substantially reducing – though not eliminating - the tax-free personal allowance and National Insurance threshold). This reduces the number of people in poverty by 16% and children in poverty by 13%, while fewer than 2% of the poorest fifth of households lose more than 5% of their income. Compass proposed a scheme that reduces working-age poverty by a fifth and child poverty by a third, with only around 1% of people in the bottom fifth losing more than 5% of their income. It raises existing tax rates by three percentage points, abolishes the tax-free personal allowance and National Insurance thresholds, and introduces a starter tax rate of 15% on the first £11,850 of earnings. However, that leaves a funding gap of £28 billion.

These models provide only illustrative examples of how UBI might be funded by income tax. In reality, such radical changes might require a more balanced tax response (such as wealth or carbon taxes) but there is no doubt that significant tax rises would be necessary.

Employment and work incentives

Would giving people an income regardless of work lead to many more people deciding not to take paid employment, valuing the unpaid work of carers and contributions to society other than paid jobs? If so, would that damage or improve our economy and society? Alternatively, UBI could increase work incentives by reducing the rate at which income from it was reduced as someone earned more. For example, Universal Credit is reduced by 63p in every pound earned above a set level; under some versions of UBI this would change to someone losing only 20p for every pound earned.

Economic models estimate employment effects purely through a financial lens. Work incentives are calculated according to the net financial gain from taking a job or increasing earnings. Most modelling suggests that UBI (accompanied by higher taxes on earnings to pay for it) would have a complex mix of impacts. Some groups see increased work incentives because their benefits are reduced by less as they move into work or earn more. Others have lower work incentives due to unearned income and higher tax rates. Under the version of UBI modelled by Fraser of Allander et al, the overall result was that UBI reduced financial incentives to work and so could lead to a lower labour supply and a smaller economy. By contrast, Martinelli and Pearce found that several UBI schemes strengthened work incentives on average for low- and middle-income households.

A change on the scale of UBI would be likely to affect other aspects of our economy, for instance how wages were set. It is hard to predict how individuals and businesses might react to such changes. In addition, in the real world we don’t make decisions purely on the basis assumed in economic modelling. There is limited evidence about how people respond to UBI in practice. So far, trials suggest that providing an unconditional payment may not have the negative employment effects found in some modelling. Finland is the only country to have carried out a nationwide, randomised control trial of UBI. The evaluation found that people receiving basic income were more likely to be in work than those in the control group. This is not conclusive, due to the introduction of other unemployment policies at the same time, although the signs from other smaller trials have also been positive, such as those in Stockton (USA) and the Netherlands. However, these trials have not examined the potential employment effects of changes to tax rates or other measures to fund such a system.

Health and well-being

One of the potential benefits of UBI is the removal of stress caused by means-tests, conditionality and uncertainty about whether support will be withdrawn, coupled with destigmatisation of social security support. This could lead to better mental and physical health. It is easy to see the well-being advantages of a system providing a reliable income, uncoupled from complex conditions, shorn of the fear of failing and the feeling of being seen as a scrounger or having to continually prove your eligibility. The limited evidence from trials backs up this theory. In Finland, people on basic income reported higher life satisfaction, better health and lower levels of depression and loneliness.

So, is UBI a good idea or not?

Some versions of UBI could reduce poverty and improve recipients’ mental health and well-being. But it would be expensive. It would require significant increases in tax rates, which people may be reluctant to accept, even if many of those on low- to middle-incomes would be better off overall once receipt of their UBI payment is accounted for. The principle of offering payments without conditions might well also meet resistance among the public.

Public attitudes towards welfare have been softening in recent years, with increasing support for raising benefit levels. There has also been rising willingness to pay more tax to fund more public spending. However, when asked what kind of public spending additional taxes should be spent on, very few people prioritise social security. When asked directly about UBI, some studies show a sizeable minority of the public are receptive to the idea, at least of a pilot, but with no majority in favour and significant concerns about cost and use of the money, even among supporters; other studies suggest around half may be in favour. JRF polling in Scotland found a majority in favour of the Minimum Income Guarantee and significant minorities receptive to the idea of UBI, but no majority for that, or for increasing unemployment benefits. Willingness to personally pay more tax to fund UBI may well also be much lower than such polling implies. YouGov polling in 2020 examined whether the British public would be willing to pay more in tax to deal with the costs of the pandemic. It found that the public did support tax rises, but not for themselves. Only a quarter would back a tax rise that affected everyone.

A second barrier to introducing UBI nationally is the potential complexity and disruption of introducing large-scale changes to the social security and tax systems. The roll-out of Universal Credit has shown just how challenging such a change can be, for claimants, staff and civil society. Many of those who rely on social security feel extremely fearful about transferring from one benefit to another, or from one system to another. The extent of potential disruption does depend on the details of the scheme. The addition of a small simple new universal payment while maintaining the rest of the existing benefit system around it might be less challenging.

Is this really necessary? Is it the only way to solve the problems in our social security system and labour market?

It is undoubtedly true that our social security system is failing to protect people from destitution and hardship. We need better coverage and to invest more in the system. But a multitude of changes to the existing system would go a long way to achieving those goals, without the expense and disruption of a new system. We could remove the benefit cap, the two-child limit and the five-week wait; extend sick pay to all; boost support for those at most risk of poverty; run national take up campaigns and reform council tax. A range of other measures, such as these, could be taken to fulfil other goals or principles of UBI. None of these individual changes would eradicate poverty, as a generous UBI system would. They would all require money and political will. But pursuing such improvements could transform the system for a fraction of the cost and difficulty of that kind associated with UBI.

Our current system fails to ensure that all those within it are treated with dignity and respect. It causes unnecessary and harmful stress for too many people and the sanctions regime is unnecessarily punitive. Again, however, we could roll back the complexity and harshness of conditionality and refocus the current system on maximising take up, valuing caring and supporting people to move into high-quality work.

Changing the public and media narrative is necessary to achieving greater and more sustainable investment in our social security system, whether that is to improve the existing system or put a new UBI in place. The question is whether couching the debate in terms of introducing UBI will be more or less effective in building that support compared to focusing more specifically on the different elements that are needed, such as greater understanding of the purpose of social security, greater empathy for those relying on it, the need for adequate support and dignity.

And what about the underlying issue of insecurity in work (and housing for that matter)? Our social security system needs to do more to counter the volatility in earned income that many low-earning workers face. For some, Universal Credit is exaggerating that volatility rather than counterbalancing it. This is a difficult policy challenge, but UBI is not the only way to solve it. Smaller changes could achieve significant improvements such as strengthening more universal elements of the system (like Child Benefit) and contributory benefits; more infrequent reassessments of eligibility for some benefits; run-ons when circumstances change, and disregard when incomes rise or fall by small amounts. Clearer incentives to move into work and increase earnings could be achieved by allowing people to earn more before they started to lose benefits and reducing the ‘taper rate’ so benefits reduce more slowly. All of these would require additional investment, so the argument about funding still needs to be won, but they would probably be less expensive and might be less challenging to achieve than UBI.

Addressing insecurity also requires wider changes to our economy and society – no social security system can or should do the whole job. We must redesign the labour market to offer greater security as well as better pay, training and treatment at work. We need more low-cost rented homes and better rights for private sector renters so that people on low incomes can be freed from the constant fear of homelessness.

UBI is not a silver bullet that would immediately and straightforwardly solve poverty. It could not replace the whole social security system. It is beyond doubt that a UBI that radically reduced poverty levels would require enormous increases in public spending and be a very significant redistribution across society. A smaller, less radical but potentially more immediately achievable, partial UBI payment could achieve some valuable outcomes but would fall short of some of the bigger aims of UBI. There are more targeted ways of achieving similar outcomes, although these might not bring some of the wider impacts of a very generous UBI.

The debate about ambitious interventions to reduce poverty is welcome, underlining the growing consensus that the current social security system is inadequate and does not provide the effective public service we need to protect people from poverty. A social security system that provides adequate support, reduces poverty and removes the indignities and stigma associated with the present system is a vital part of ending the injustice of poverty in the UK. A Minimum Income Guarantee could provide a positive framework within which to make progress. Whatever form it takes, it will require significant investment, for which we must build public support.

*The Minimum Income Standard (MIS) is funded by the Joseph Rowntree Foundation and carried out by Loughborough University. It involves research which produces budgets for different household types, based on what members of the public think you need for a minimum acceptable standard of living in the UK.