A Universal Basic Income Could Actually Save Money


Addressing two concerns about a UBI.

A Guaranteed Basic Income is a big idea. And like most big ideas, it generates some opposition. Much of this opposition centres around two issues: The concern that people won’t work if provided with income security, and the concern that a basic income would be too costly.

I will address those two concerns:

COST:

The cost concern is one of the most recurrent concerns about a basic income. It is part of the reason the Swiss referendum failed. The Swiss referendum on a basic income of $2,600 (in Swiss Francs) per month per person (less for children), was to be distributed on top of current welfare programs. That would clearly be highly expensive, and the fact that it was not replacing any current spending was a contributing factor in its defeat. Yet, a basic income that replaced current government welfare programs would be very affordable, and could even save money.

Here’s how that would work, with Canada as an example.

Consider that there are roughly 6 million Canadians who make $15,000 or less per year. If the basic income was set at $15,000 (meaning nobody could ever have less), was distributed to all Canadians below the poverty line, we can roughly estimate that those 6 million people would keep on average $7,500 – since it would be topping up income, not providing all of it. The overall cost would be roughly $45 billion. This sounds like a lot, but consider that the government has run deficits much larger than that. Also, this would be the cost without eliminating any other bureaucratic welfare programs.

The Canada Child Benefit – which could be eliminated under a basic income – costs $17 Billion per year. Employment Insurance costs $17.3 Billion per year.

But let’s assume that the basic income would incorporate the Child Benefit (as a smaller universal payment for children). If it replaced Employment Insurance, we’re looking at an increased investment of $28 billion. Again, I’ll emphasize that the government has run deficits twice as large.

But we’re not done. An efficiently applied Basic Income (we always have to leave room for some government incompetence), would cut poverty dramatically. According to Canada Without Poverty, Poverty costs Canada between $72 – $84 Billion per year. Let’s carefully estimate that the basic income would provide savings to the governement equal to 25 per cent of that cost (I believe it would be much more). That would bring savings of $18 Billion.

So, now we are down to a cost of $10 Billion. Even with no further savings, this would be a sustainable deficit. But there would be even more benefits. The International Monetary Fund has stated that the best way to grow economies (in contrast to their years of advocacy for austerity), is to increase the incomes of poor people. Here are some quotes from their study, as reported in the Guardian:

“A report by five IMF economists dismissed “trickle-down” economics, and said that if governments wanted to increase the pace of growth they should concentrate on helping the poorest 20% of citizens.

The study – covering advanced, emerging and developing countries – said technological progress, weaker trade unions, globalisation and tax policies that favoured the wealthy had all played their part in making widening inequality “the defining challenge of our time”.

The IMF report said the way income is distributed matters for growth. “If the income share of the top 20% increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20% is associated with higher GDP growth,” said the report.

Echoing the frequent warnings about rising inequality from the IMF’s managing director, Christine Lagarde, the report says governments around the world need to tackle the problem. It said: “Raising the income share of the poor, and ensuring that there is no hollowing-out of the middle class, is actually good for growth.”

So, a guaranteed income that boosted the incomes of the poor and cut poverty would grow the economy, meaning more tax revenue for government. Additionally, a reduction (or elimination) in poverty would create savings in the healthcare system and the justice system. So, the potential increase in tax revenue, combined with savings could well exceed $10 billion, meaning we could save money and reduce poverty at the same time.

WORK:

When it comes to the worry about whether people who receive a Universal Basic Income would work, University of Manitoba Economist Evelyn Forget has done a detailed study on the effects of the Dauphin Mincome Experiment (which was set at $15,000). Courtesy of Freakonomics, here is what Forget said in an interview on her study of the Mincome Data:

“So what if Forget could look in these data for people who lived in Dauphin, and who presumably got that extra government money, and compare them to other low-income people in other towns who didn’t get that mincome boost?

FORGET: And I was able to find everyone that was living in Dauphin during that particular period. So the first thing I did was to look at hospitalization rates. And I found that hospitalization rates had fallen by about 8.5 percent for the test group in Dauphin relative to the matched control group.

OK, so it looked like the mincome recipients were healthier. What else did Forget find in the data?

FORGET: One of the findings was that high-school completion rates had increased, and we discovered that boys, in particular, in low-income families had been under a fair amount of pressure to become self-supporting as quickly as they could. When mincome came along, some of the families decided that they could allow their sons to stay in high school just a little bit longer. So instead of quitting school at age 16 and getting their first full-time job, these boys stayed in school until they were 18, until they graduated from high school and took their first full-time job a little bit later.

So in the raw data it might look like employment fell, since a bunch of 16- and 17-year-old boys were not joining the workforce. But, in fact, this was good news, since they were staying in school, presumably setting themselves up for a better work life. But what about employment among grown-ups? That’s the big concern of any guaranteed-income plan. Did they stop working once they started getting a government check?

FORGET: Grown-up people with full time jobs don’t actually reduce the number of hours they work by very much.

One exception: women, especially those who wanted more time off after having a baby.

FORGET: At the time I think the legal entitlement was four weeks. And it’s sort of interesting because as a society we’ve already decided that longer parental leaves are something that we want to support. So they effectively anticipated that policy change.”

So, we see the potential for increased educational attainment – which would boost the economy – and huge potential savings in healthcare. This would provide big savings, while showing that the effect on employment is limited, and arguably positive when we consider the future of those getting needed support.

Of course, the issue of whether a Universal Basic Income (or Mincome, Guaranteed Basic Income, etc.), would be a disincentive to work would depend on what level it was set at. Obviously, setting it at $50,000 would be extreme and would cause many people to quit their jobs. But at $15,000 per year, you’re looking at $1,250 per month at most (again, most people would receive only a portion of that to make up the difference between their income and the $15,000 minimum).

And according to Forget’s analysis, it seems the effect would be to free people to focus more on education – which is clearly positive for the economy and our future.

This is already a long post, and there are further issues to address. I will do so in upcoming posts. But clearly, it is demonstrable that a Universal Basic Income could be both affordable, and empowering for workers.

It has the potential to be a win win for all of us.

Photo credit: KMR Photography (Flickr) https://creativecommons.org/licenses/by/2.0/