Intuition is wrong when it comes to calculating the true cost of basic income – the UK can easily afford it.
By: Karl Widerquist —
Universal Basic Income (UBI) – a policy that would provide a regular, cash income to every citizen without means test or work requirement – is surprisingly inexpensive. The United Kingdom could introduce a full UBI (one large enough to live on) for just £67 billion per year or 3.4% of Gross Domestic Product (GDP), according to a study Georg Arendt and I recently completed.
Attention to UBI in the United Kingdom has increased substantially as the Scottish Parliament discusses experimenting with it and as policymakers discuss it as a temporary measure to boost the economy during the Covid-19 outbreak. While a pilot project can examine some of the effects of UBI, this kind of study is necessary to determine how much it is likely to cost.
The cost of UBI is often exaggerated because many authors focus on its ‘gross cost’: the size of the UBI times the population.
The gross cost of UBI is not a cost in any meaningful sense, because it ignores the great extent to which the new taxes people pay to support UBI are cancelled out by new money they receive in UBI.
The real cost of UBI is the ‘net cost’ – the amount people receive or pay after subtracting the amount they pay themselves. The net cost of a full UBI for the UK is only about one-third its gross cost.
Our study is based on data from the 2014/15 UK Family Resource Survey. It uses microsimulation analysis from the European Union’s EUROMOD Tax-Benefit Model to subtract out the amount people pay themselves and determine the cost of a roughly poverty-level UBI of £7,706 per adult and £3,853 per child.
Key findings of the study include:
- The cost of a full UBI for the United Kingdom is £67 billion per year or about 3.4% of GDP.
- This figure is the net cost – the real cost – of a UBI scheme of £7,706 for adults and £3,853 for children. This assumes a 50% income tax rate for net beneficiaries integrated into the UK tax-and-benefit system in a way that ensures the majority of UK citizens benefit from the transition and no one in the bottom 20% of the distribution of income is financially harmed by the loss of programmes replaced by the UBI. Although net beneficiaries’ tax rate increases, they receive more in UBI than they pay in additional taxes.
- This UBI scheme adds only 39% to the cost of the UK’s existing benefits system (not including the spending on the National Health Service), and an 8.7% increase in the UK’s total government spending (£67/£771 billion).
- This UBI scheme is a net financial benefit to most households in the lower 70% of the UK income distribution, making it an effective wage subsidy (or tax cut) for millions of workers and their families.
- The average benefit over the existing system for each net-beneficiary family is £4,056.
- Under this scheme, the percent of UK families with incomes below the current official poverty line would drop from 16% to 4% and poverty among children and the elderly would all but disappear.
- The net cost of this UBI scheme – the gross cost minus the amount people pay to themselves (£155 billion), and ignoring the costs and benefits of integrating the UBI into the existing tax and benefit system – is about one-third (35.4%) of its often-mentioned but not very meaningful gross cost (£438 billion).
- Also subtracting the cost of existing programmes that can be replaced by UBI without financially harming anyone in the bottom 20% of the income distribution makes the net cost only about 15% of the programme’s gross cost.
- This UBI system eliminates absolute poverty (e.g. as it is measured in the United States) from the UK.
- According to a 2015 piece in the Guardian, the UK currently spends over £93 billion per year on corporate subsidies and tax breaks. If so, the UK could entirely fund a UBI by eliminating corporate subsidies and tax loopholes. No increase in individual taxes would be necessary, and the government would still have £26 billion available for corporate subsidies.
- Countries with similar per capita income and similar tax-and-benefit systems should expect the cost of UBI to be a similar percentage of their GDP.
Those remaining in poverty under the scheme would be much closer to the poverty line than they are now and would have enough to get by in combination with other government payments and services.
Therefore, we conclude that a UBI of this size would eliminate absolute poverty in the United Kingdom, a powerful result for less money than Parliament currently spends on corporate subsidies and tax breaks.