Could universal basic income work in Wales?

The Welsh government recently announced that it will pilot a universal basic income (UBI) scheme to alleviate poverty in the country. Other UBI experiments, such as Finland’s, may provide important lessons for Welsh policy-makers.

Wales has historically had the highest poverty rate of all UK nations. Before the pandemic, one in four adults and one in three children were living in poverty. This has likely increased since Covid-19, with unemployment up 75% since March 2020.

The full effects of the pandemic have not been seen yet. Many households at risk of falling into poverty are currently being protected by the government’s furlough scheme and/or a £20-per-week increase in Universal Credit. But in September, both policies will come to an end, which may further increase poverty in Wales and across the UK.

Evidence shows that poverty is strongly linked to low levels of reported life satisfaction, mental and physical health, and social trust. As such, questions about how to provide security from poverty will become even more important as current support winds down. Earlier this year, the Welsh Government proposed piloting a universal basic income scheme as a potential solution. In the pilot, the Welsh government has suggested focusing on people leaving care, in a bid to support the most vulnerable. While these plans may be welcome news to many, a group of organisations recently campaigned against the proposal, arguing that a more representative sample of the population would provide more reliable evidence on how UBI could affect society in general.

What is universal basic income?

Unlike means-tested benefits, universal basic income (UBI) provides a set amount of money to everyone regardless of their financial situation. An earlier Economics Observatory article discusses the costs of such a scheme, plus a discussion of its possible effects on recovery from the Covid-19 crisis.

Recent research shows that 70% of the population were in favour of UBI in Wales. Proponents argue that its introduction could help alleviate poverty by guaranteeing an income to the poorest in society, without requiring them to ‘jump through the hoops’ of the current means-tested benefits system, which has received criticism for being overly bureaucratic.

But, one major concern is that it could disincentivise unemployed workers from seeking paid work, as they will have an income without needing to work or look for a job.

What does the evidence from economic research tell us?

To get an idea of how successful a UBI in Wales may be, we can learn from past examples. Many countries have experimented with universal basic income. For instance, Barcelona improved wellbeing by giving between €462 and €592 to the poorest members of society from 2017 until 2020. And more recently, the UBI launched in Stockton, California last year in response to the pandemic has measurably improved wellbeing, job prospects and financial stability after just one year. However, Finland is the only country to complete a trial at a national level with recipients selected at random. These conditions allow us to draw reliable conclusions from the results.

From January 2017 to December 2018, 2,000 unemployed Finns were given a modest payment of €560 per month (£490), instead of standard means-tested benefits of a similar amount. They were then surveyed across the two-year period on a range of financial and well-being measures.

The survey results provide strong evidence that UBI could be a powerful tool for sheltering people from poverty and the associated negative effects on well-being. For example, the proportion of people perceiving their financial situation to be at least ‘Ok’ was eight percentage points higher amongst those receiving UBI. In addition, the group receiving the payment experienced substantially higher reported life satisfaction, mental and physical health, and social trust.

Figure 1: The effect of UBI on various wellbeing indicators

Change from January 2017 – December 2018, UBI recipients vs control group

Source: Kangas et al; McKinsey analysis

And contrary to concerns that UBI would discourage employment, those who received the payment worked slightly more days than those on standard benefits (78 days across the two-year period, compared with 73 in the control group). Many believe this is because the amount people received as UBI was modest enough that it was insufficient to live on without supplementing their income.

How reliable is the evidence?

While the small increase in employment among UBI recipients indicates that the concern about disincentivising work may be misguided, this result cannot be attributed to UBI alone. A new legislation known as the ‘activation model’ was introduced in Finland at the beginning of 2018 – during the UBI pilot. This made it harder to qualify for standard unemployment benefits. The apparent positive relationship between UBI and employment was only observed after the activation model was implemented.

What’s more, even if the increase in employment could be attributed to UBI, we cannot presume that the same result will apply in Wales. The OECD’s PISA tests, which assesses reading, maths and science skills amongst 15-year-olds internationally, ranks Finland’s education system as 3^rd best in the world. Meanwhile, the UK ranks 17^th, and within the UK, Wales is ranked lowest, trailing behind the OECD average (see Figure 2). As a result, it may be that UBI recipients in Finland are in general more likely to have the education and skills that will make it easier to find a job than those in Wales.

Figure 2: Education rankings by country

Source: OECD

On the other hand, although the increase in employment seen in Finland could be an overestimate, the increase in well-being may have actually been underestimated. In the experiment, participants had to forgo a range of unemployment, housing and social benefits to qualify. But in reality, when UBI is implemented in Wales, qualifying recipients will likely continue to receive some of these benefits alongside UBI. The fact that well-being increased in Finland’s experiment despite these benefits being waived suggests that Welsh recipients of UBI could see an even greater increase in wellbeing.

What else do we need to know?

Overall, the relevance of the evidence from Finland’s UBI experiment for Wales is limited. While it is hard to attribute the increase in employment with the introduction of UBI alone – due to the coinciding implementation of the activation model policy – improvements in well-being may be greater if UBI were to be paid alongside other benefits.

Both effects rely heavily on the size of the UBI payment, which Wales is yet to announce. Finally, costs cannot be ignored. Opponents of UBI argue that giving money to everyone, including the rich, is inefficient compared with the current system of targeting those who need it most. A full UBI in Wales could cost between £35-40 billion annually, dwarfing the £10 billion currently spent on benefits each year. It is unknown whether the benefit will outweigh the cost.