Universal Basic Income – revisited

In normal times, a welfare system based on handing out cash to almost everybody, whether they need it or not, would be far too expensive, poorly targeted, and distortionary. I’m therefore still opposed to a permanent ‘Universal Basic Income’ (UBI). But these are not, of course, normal times. There is a much stronger case for some temporary form of unconditional cash payments to individuals or households, solely for the duration of this extraordinary crisis.

The aim of economic policy is no longer to prevent a recession: a collapse in regular activity is inevitable and even desirable, to minimise the loss of life from coronavirus. Instead, the aim is protect the most vulnerable and prevent a temporary shock from becoming a prolonged depression. The economy therefore needs to be put into a state of ‘suspended animation’, preserving businesses and jobs, with life support provided by the government until the crisis passes.

In my view, the Treasury and Bank of England have been doing an excellent job, with effective coordination of fiscal and monetary policy and well-targeted measures to help specific groups. In particular, it has been right to build on the existing system of means-tested benefits as the first line of defence to support people’s incomes. It would be relatively straightforward to enhance Universal Credit further, as Iain Duncan Smith has proposed. Some form of employment support is coming soon too, probably a combination of cuts in payrolls taxes and a new set of wage subsidies to help businesses to continue paying wages. If we can, we should stop there.

Nonetheless, there is a still a danger that some people will fall through the cracks. Universal Credit can be hard to navigate, and any system of means-tested benefits could break down if too many people tried to apply at once. The existing system still does little for the self-employed, in particular, even after the recent improvements. This is where some additional (and unconditional) cash payment might come in.

To be clear, the case for a permanent Universal Basic Income is still very weak. As I’ve noted myself, every serious analysis has concluded that the payments will not make a real difference to the lives of those who actually need them – unless they are set at such a high level that the scheme would be unaffordable. And practically every trial of UBI in other countries has already been abandoned.

But this time it really is different, as I have already argued more recently here and here. Most importantly, any new scheme would only be a temporary measure. The payments could also be set at a lower level than a permanent UBI. The aim would simply be to make sure that people can afford the bare essentials during this crisis, rather than maintain their normal spending.

Another important criticism of a permanent UBI is that it could undermine the incentive to work. But today we actually want some people to stop doing what they normally do. A temporary UBI would acknowledge that. The usual ‘moral hazard’ arguments don’t seem as relevant when we are asking people to make huge sacrifices for the public good.

Admittedly, one usual objection to a UBI may now be stronger. This crisis isn’t just a shock to demand. The potential supply of goods and services has also been severely reduced. In these circumstances, large cash handouts may simply push up prices (especially if financed by money printing). Protecting all incomes would therefore risk causing a surge in inflation.

This – and the potential cost – favours a more cautious approach. But as a template, Hong Kong’s February Budget included a HK$10,000 cash grant (about £1,000) to all permanent residents over the age of 18. A similar payment to each person of working age in the UK would be hugely expensive – costing over £40 billion each time – and this is not a sum to be tossed about lightly. Nonetheless, it may yet be necessary. Some of the money could also be recouped from the better off, at a later date, by making it taxable. If this ‘one-off’ payment has to be repeated, so be it.

In summary, these are of course extraordinary times, requiring extraordinary policy responses. The usual objections to a permanent system of universal basic income remain as valid as ever. But self-isolation is not a credible strategy without the guarantee of a comprehensive safety net to protect incomes, and a patchwork of measures to plug individual gaps may not be enough.

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