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10 June 2016

How to get to the basic income in a few easy steps

Andrew Harrop plots a path from here to there.

By Andrew Harrop

Proposals to pay every adult a ‘basic income’ were back in the news this week, after John McDonnell, the shadow chancellor, confirmed his interest in the idea. Paying everyone a modest and unconditional subsistence income is a concept that dates back more than 200 years and every decade or two it bubbles back to the surface. But the policy has just been decisively rejected in a Swiss referendum. So is there any chance that it could be adopted in the UK?

As a deliberately radical, ‘big bang’ reform, the answer must be no. The British public like their social improvements to be gradual, reassuring and cost-effective. What’s more, the political ‘pain’ of rapidly adopting a basic income would undoubtedly outweigh the ‘gain’. Quickly introducing a full basic income would either have very high financial costs or leave huge numbers worse off – and probably both. Meanwhile, the advantages are moot, because a basic income that simply replaces most means-tested benefits will not help the poorest households. According to Compass, there would be many cash losers, even among the lowest income groups, and a significant rise in child poverty.

A basic income is therefore a non-starter, on a rapid and conceptually pure basis. Indeed, even the most expensive versions of the idea fail on their own terms, because there is no way to avoid the need for means-tested benefits to support housing costs. But that is not the end of the story, because modest, partial and affordable variants of a basic income are far more plausible – as long as they are implemented gradually over time and presented as evolution not revolution.

A flat-rate, universal payment for adults becomes conceivable when it is presented, not as a new entitlement, but as a sensible and gradual broadening of the existing support on offer through the tax system. For, by 2020, the state will be providing people with the equivalent of almost £70 per week through tax and national insurance allowances. A Fabian Society report published next month will propose that these allowances should be turned into cash credits, worth the same amount.

Under the plan, all adults would eventually receive a flat-rate credit of around £60 per week, which would either be paid through PAYE or in cash. Alongside this, the tax-free allowances would be slashed, leaving people to pay tax on their whole income, bar a couple of thousand pounds. For those with earnings above the income tax personal allowance, the two changes would cancel each other out and there would be no change to take-home pay. This makes the reform politically workable.

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But people without work, or with low earnings, would see a big financial gain. This would benefit millions of households, from disabled people unable to work through to middle and high income families, where one parent has opted to look after children. Low income households would gain the most and the policy would significantly reduce child poverty, especially if accompanied by more generous child benefit.

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The public would need to be convinced of course. The main argument for this partial basic income is that it shares the generosity of tax allowances fairly, by including people who don’t earn enough to benefit at present. However, for people to conclude that such largesse was warranted, there would need to be conditions attached. The credits might be dependent on paying direct taxes, caring, disability, studying or job-search – and new migrants should only gain access in stages, after paying sufficient taxes.

There’s a catch, however, because the idea only works as an act of Fabian gradualism. Scrapping the tax-free allowances overnight and giving everyone a credit worth the same amount would cost tens of billions of pounds, as there are many more adults than direct taxpayers. To make the sums add up, the government would need to reduce the personal allowance gradually over a decade or more, by a few hundred pounds at a time. To start with, the new credit would therefore be worth only a few pounds a week – although every pound matters for people with the lowest incomes.

Even when times were tough, a cash-strapped chancellor could cut the personal allowance by £500 and replace it with a £100 annual credit on a revenue-neutral basis. But in good years, the pace could be a lot faster, if the proceeds of economic growth were ploughed back into the scheme. The guiding principle of the reform should be to spend the same share of GDP on the new system as the old – around 5 per cent of national output. The slice of the pie that we now devote to tax-free allowances would just gradually shift over to credits – with some of the money going to children as well as adults, by raising child benefit alongside the new adult credits.

This isn’t a pure basic income, because means-testing would continue – it is better thought of as ‘child benefit for adults’. But offering, say, £60 a week, as a basic financial cushion for everyone – however their earnings may fluctuate – would provide a vital new source of economic protection as our labour market becomes more uncertain.

Unlike a full basic income, the policy would help those with least the most, leading to less poverty and inequality. This would make the policy better at mitigating any aggregate fall in employment, which automation may (or may not) bring in the future. And, if introduced gradually, the transition could be achieved without cash losers.  

Up until now, the idea of a basic income has been the preserve of blue-sky dreamers. Now maybe some sort of flat-rate payment for all can become reality, if the pragmatists and gradualists take the lead.

In July the Fabian Society will publish a major report on options for social security in the 2020s, kindly supported by Shelter.