Would a universal basic income reduce poverty in the aftermath of Covid-19?

Governments have spent large sums of money to protect the most vulnerable in society, but might a universal basic income have been a better response? Such a policy could bring many benefits – but it would be an expensive way to reduce poverty and support the most needy.

The depth of the Covid-19 recession risks exposing large numbers of people to poverty. Economic activity has plummeted and millions of jobs are at risk. The government has spent an unprecedented amount on policies to help to mitigate the worst effects of the crisis, particularly for the most vulnerable in society. Means-tested benefits have increased and the furlough scheme has provided support for over nine million workers across the UK at a cost of over £35 billion by August 2020.

But some people argue that a universal basic income would be a more effective policy. For example, a YouGov poll suggested that support for the idea had increased (The Independent, 27 April).

A universal basic income provides an equal payment to everyone in society, irrespective of their economic situation. It has the attraction of being simple and transparent, of avoiding the complexity of a traditional means-tested benefit system and, for many, it has the advantage of providing greater solidarity across society.

But the big problem with a universal basic income is that it is not targeted at the most needy. This means either that it is very expensive (so the government has to cut expenditure elsewhere, probably on spending that helps the poor, such as universal education or universal healthcare) or, if costs are contained, it provides only a very small level of income, which has little impact on poverty.

As an illustration, a recent study by the Fraser of Allander Institute of the costs of a universal basic income in Scotland showed that the cost per child lifted out of poverty would be £293,000 a year, compared with £10,000 a year for policies targeted at the poorest families.

What does the research show?

In their most basic form, universal basic income schemes constitute a regular payment made to every individual in a society, regardless of their personal circumstances, at a rate designed to achieve at least a basic standard of living. The concept of a universal basic income as we understand it today was first articulated in the mid-20th century, but some of the earliest conceptions can be traced back to the time of the first Industrial Revolution.

While the principle of a universal basic income scheme appears fairly intuitive, the theories motivating advocates of such schemes are varied.

There are broadly three key (overlapping) motivations for introducing a universal basic income:

As a tool to respond to the social challenges stemming from the changing nature of work.
As an empowering social security system.
As a means of reducing poverty and improving health and quality of life (Lowrey, 2018; Bregman, 2017).

Here we focus on the role of a universal basic income in reducing poverty. The introduction of a universal basic income would directly reduce poverty through giving poor individuals and households a guaranteed level of income.

The fiscal reforms required to pay for it would present an opportunity to deliver far-reaching income redistribution. By promoting a basic income set at a level that will at least cover the costs of people’s basic needs, and by implementing redistributive tax policy to help to pay for it, proponents see a basic income as a potentially important tool in using redistribution to reduce if not eradicate poverty.

What would a universal basic income cost?

It is easy to focus on the positives of a universal basic income – that is, the guaranteed payment to an individual no matter what their circumstances are. If we could afford to do this at the level of benefit entitlement of the poorest in society, then this would indeed help to alleviate poverty. Focusing on this element alone will undoubtedly lead to a ‘positive’ view of the benefits of a universal basic income.

But it has to be paid for. And a universal basic income at this scale would be very expensive. For example, the gross cost of providing a universal basic income in Scotland at current UK means-tested benefit levels would be £27 billion a year in 2023/24. This is roughly 15% of (onshore) Scottish GDP.

Removing the standard elements of means-tested benefits and abolishing child benefit would save £4 billion; abolishing the basic state pension would save just over £6 billion; while taking away the income tax personal allowance would save more than £9 billion.

This leaves an outstanding bill of just over £7 billion. To cover this, the government would need either to cut back spending dramatically in other areas (healthcare and education being the two largest), or increase income tax rates by 8 percentage points.

Would a universal basic income mean the end of means-testing?

The theory of a universal basic income is that it should replace means-tested benefits. But it is actually very difficult to do so entirely. The current benefits system provides support not only for food, but also to cover costs relating to housing, childcare and being disabled. These are not fixed amounts: they depend on each family’s costs or the severity of disability.

To remove the need for means-tested benefits, the level of the universal basic income would have to be higher than the highest level of housing, childcare and disability support, or some people with these needs would lose out.

A compromise would be to replace only the standard elements of means-tested benefits and retain the housing, childcare and disability elements. This is not the ideal of a pure universal basic income, but it reflects the complexity of keeping costs manageable while not creating losers among people in significant need.

Would there be winners and losers?

A universal basic income would be a radical change to the status quo in the UK. It would be likely to require the abolition of child benefit, the basic state pension and standard elements of means-tested benefits. It would also be likely to mean that workers will pay income tax on the first pound of earnings at a higher rate than previously, assuming that the additional revenue were raised through income taxes.

On average, people who are less well-off gain more from this policy, and those that are better off lose out, typically through higher income taxes. But that would not be true for everyone. For example, larger high-earning families with only one taxpayer could gain because they have only one income tax personal allowance to lose.

On the other hand, a small low-earning family with two part-time workers on Universal Credit might lose out, if the loss of Universal Credit balanced out against the gains from a universal basic income and they also had to pay more income tax.

Similarly, in the current benefit system, couples get roughly 1.6 times the amount for living costs as a single person. With a universal basic income, couples would get twice as much. So, in general, basic incomes are better for couples than single adults; and couples with children do better than lone parent families, where poverty is much higher.

Would a universal basic income be effective at tackling poverty?

Setting a universal basic income at current benefit levels would be most likely to reduce poverty, mainly because take-up of a basic income is likely to be higher than for current means-tested benefits. For example, in Scotland, poverty would fall by 280,000 from a starting point of 1.15 million. Child poverty would fall by 90,000 from 280,000.

But other policies are far more effective at reducing poverty. In the UK context, abolishing the two-child limit for benefits and the benefit cap, and increasing the main child element of Universal Credit by £40 a week are policies highly targeted at families with children in poverty. In Scotland, this suite of policies would lift 100,000 children out of poverty, cost £1 billion per annum, and could be funded by increasing just the higher and top rates of income tax by 6 percentage points.

A standard measure of how effective a policy is at reducing child poverty is the gross cost per child lifted out of poverty – an indication of the amount of redistribution required for a given amount of poverty reduction. For the targeted suite of policies, this figure is £10,000, but for the basic income, it is £293,000.

In contrast to the basic income, with targeted policies, most people would see no change in family income as only those right at the top (higher and top rate taxpayers) would see a reduction in net income.

Figure 1: Changes in family income under a basic income or an increase in the Universal Credit child element

Figure showing change in annual family income

Source: Modelling the economic impact of a citizens basic income in Scotland

Would a universal basic income have important long-term economic consequences?

Would it affect worker bargaining and labour supply?

The longer-term macroeconomic consequences of a universal basic income depend on how workers change their behaviour in response to higher income taxes. If some workers reduced the amount of work they were prepared to do, then we would expect that the universal basic income would result in lower levels of economic activity and employment. But other workers might bargain for higher wages to replace their lost net earnings, which would lead to different effects.

Instead, if they choose to disregard their own loss of net earnings – because they value the fact that a universal basic income has been introduced that benefits others – then the long-term economic effects will be reduced. Because the scale of change implied by a universal basic income is so unprecedented, we don't have good direct evidence on which of these responses will dominate or what their magnitudes might be.

Would it affect productivity?

One of the arguments for a universal basic income is that it would provide economic security during periods of job search, and therefore increase the extent to which workers do the jobs they really want, rather than taking the first vacancy they find. The argument is that people would be more likely to take the time to do the training to get a better job instead of settling for second best.

Similarly, after being made redundant, workers might take a bit longer to search for the right job, rather than any job because there is some money coming in. The view is that this improved ‘match’ between workers and their jobs will mean higher productivity.

Related question: How can labour market policy help to get people back into the right jobs?

But there are also reasons why we might see a reduction in productivity. If some people choose not to work because now they have enough to live on without working and others bargain for higher wages, this will increase business costs, reduce competitiveness and lead to lower business investment, reducing future productivity. There is not good evidence as to which of these is more likely.