Expert comment

Covid-19 and the case for a universal basic income.

Expert comment

Covid-19 and the case for a universal basic income.

Dr Richard McManus explores the possibility of implementing a universal basic income.

A universal basic income (UBI) refers to a periodic, monetary payment from a government to county citizens independent of financial circumstances or employment status. In this respect, it is similar to a pension which is paid to everyone in the economy (or at least all adults) independent of age.

UBI has recently received significant political and academic attention to the extent that a national referendum has been held in Switzerland and several pilot projects have been introduced (Canada, Finland) or are planned/proposed.

Covid-19 has both strengthened the case both for and against a UBI. On the one hand, were a UBI in place much of policies enacted by western governments would not have been required as the social safety-net would already be in place in the economy. Furthermore, in response to the pandemic, the US government have agreed to pay every adult  $1,200 (approximately £1,000) with an extra $500 (approximately £400) for each child under 17 they have, representing something close to a UBI (although those with incomes above $75,00 or £61,000 do not receive this).

This policy is similar to a UBI in the sense that the same payment is given to all households. This is in contrast to the UK who have agreed to support 80% of incomes up to £2,500 each month, meaning the support is proportion to income levels prior to the virus. 

On the other hand, the policies enacted in response to the coronavirus are unprecedented in their size and scope. These include the payments discussed above, loan guarantees and substantial (and natural) support for health care systems. These will lead to substantial increases in the level of government debt in these countries, which puts a strain on the economy as future taxes will need to rise and/or government spending fall. This strain makes UBI schemes less affordable and requires either more trade-offs to achieve the same level of UBI or a lower overall UBI.

As of March 2019, UK government debt is £1.8 trillion, representing over 85% of the total production in the economy. This resulted in over £41 billion of annual expenditure to service the interest on this debt in 2019/20. Were there no government debt, and this spending distributed to adults in the UK, each working-age adult could receive nearly £1,000, however, this period is one of historically low-interest rates. 

The biggest obstacle to a UBI in the UK – and more broadly in western economies – is the current tax system and levels of spending.

Despite nearly a decade of a Conservative government elected on a manifesto of removing the government deficit in their first term, government debt has increased throughout this period. The highest tax revenue collected in the UK was 36.7% of total income in 1982; spending by the government has not been below this level since 2002. There appears to be a cap on how much revenue it is possible to collect in our current structure and spending for over two decades has exceeded this. 

A sizeable UBI could be possible in the UK but will require compromise and trade-off. These trade-offs have become further amplified through the impact of further government borrowing as a result of COVID19.

One hopes that another impact of the virus is that there can be a more concerted effort to discuss important issues in a non-partisan way after this crisis has averted, including fiscal sustainability and redistribution policy. 

Dr Richard McManus is Director of Research Development for the Christ Church Business School.