Universal Basic Income

Universal Basic Income (UBI) is a proposal to guarantee every citizen in a given country a basic level of income paid by the Government (by taxes and borrowing). For example, the UK Government could guarantee £1,000, every month, to every citizen over the age of 18, regardless of wealth or income. The payment would be non-taxable and sufficient to cover basic needs, such as mortgage payments and food bills.

The proponents of this system say that it provides a basic safety net to every citizen in the country. It would create a system where everybody would be able to choose what it is they do with more freedom, without being as constrained by the usual fears of unemployment. It would reduce the bureaucracy of the welfare state as it would replace a lot of the current complicated and politically challenged schemes currently in place. As our economy is likely to go through the “fourth industrial revolution” of automation – from robots in warehouses to AI medical diagnoses and prescriptions – the UBI will provide a safety net for the huge numbers of people who are about to become economically inactive. These are just a taster of the alleged benefits and a simple Google search will return thousands of articles and studies as this idea gains popularity around the world.

Another to add to that list is a UBI would provide this safety net and an economic stimulus in the era of the COVID shutdown and economic contraction.

For example, Spain is planning to implement a limited basic income scheme in response to the current crisis. The current left-wing Government plans to pay 1 million of the poorest families a basic income, costing around EUR4bn per year. However, there will be some means testing, so this may not reach the current pure definition of UBI.

In Finland, another version of this was trialled. There, a sample 2000 people on unemployment benefits instead were given a Basic Income. Although this again doesn’t fit the strict definition, it was seen as one of the first trials of the idea. The idea here was that the UBI would help the recipients find it easier to get back into work. Once it ended, it was not to have been considered a success as the recipients, although happier, were no more employed than they had been.

In the US, a Democratic Party challenger for the nomination, Andrew Yang, proposed a UBI for all US citizens of $1,000 per month. His argument was similar to those above, particularly focusing on the automation risks.

Now, although these schemes may seem a little far-fetched and a long way off, it is worth considering the current position of the UK and other Western nations in the current economy. The UK is currently paying a furlough scheme to large numbers of people who might have otherwise lost their jobs and income. Add this in with Universal Credit for those who do unfortunately become unemployed, and the Government is in effect paying an income to all those who may need one. The threat of being unemployed and without income is now not nearly as serious as it has been in previous   recessions.

The (admittedly large) elephant in the room for this scheme would be the cost. Estimates vary, but a writer in the Financial Times estimated that a £1,000 UBI in the UK would cost around £66bn per month, or £792bn per annum. In 2020, without the COVID crisis and financial response, the UK government would have spent around £821bn. Therefore, there would only be £29bn per year left to pay for the NHS, the police, defence and so on.

It could however borrow the sums needed, but of course this would have to be paid back. So the only remaining answer is to increase taxes.

Or is it? What if the Government used the Central Bank to fund this deficit, and maintained spending on all of the public services the British public have come to expect?

Well, as reported in the FT on the 9th April 2020, “The UK has become the first country to embrace the monetary financing of government” to bypass issuing debt to finance “unexpected costs such as the job retention scheme”. We have been assured by the Treasury that this is “temporary and short term”. In short, this means the Bank of England (our Central Bank), is depositing money into an account (called the Ways and Means facility) for the Government to spend on the income support schemes. This money has been created out of thin air.

In the US, we have seen a similar phenomenon. The Federal Reserve (the US Central Bank) is engaged in quantitative easing on a large scale, and the money supply in the economy has reached growth of 66% on an annualised basis according to an economist at First Trust – something he has stated has never happened before on this scale. Also in the US, the Treasury Department has just issued the $1,200 Economic Impact Payment payable to all taxpayers. This is free money to taxpayers from the Treasury to stimulate demand in the economy as a result of the COVID shutdown. Although the Central Bank is not financing this directly, the building blocks of a Universal Basic Income paid by the Treasury and financed through newly created money by a Central Bank could be emerging.

Now, these are unprecedented economic times and policy makers around the world have found themselves being forced to take extreme measures to provide support for the economy. It does seem however that the economic consensus of the last 40 years may have just ended, and we are entering a new financial reality.