Our great UBI experiment
Initial findings into a Universal Basic Income (UBI) experiment in Finland have generated a lot of interest worldwide. Over the past few years, 2000 randomly selected Finns have been getting a $940/month, ‘‘no strings attached’’, allowance to see if it makes a positive difference in their lives commensurate with the cost. It’s early days and, as expected, the results are mixed.
Giving people money irrespective of income or effort seems a bit ludicrous at first but the idea has a steady stream of support from high powered thinkers from a remarkably diverse range of political perspectives.
On closer inspection, a UBI has quite a lot to recommend it.
UBIs are not without their detractors. As well as concerns over cost, those against argue that, while great in theory, there is no proof that they work in real life.
The Finnish trial is an attempt to address this but, like others, it involves only a small group of people for a short time period. A genuine large-scale trial seems like a pipe dream. Or is it?
As it happens New Zealand has two big UBI trials on the go, potentially providing lots of data to inform the debate. Surprisingly, the first trial is the whole tax system. About 80 per cent of tax is paid out universally, just mainly in services rather than cash. The big-ticket items are public healthcare (a form of insurance), compulsory primary and secondary education, superannuation, and core government services such as roading, law and order, and defence.
This is roughly equivalent to a UBI of $13,000 a year. There is no free lunch here. The average taxpayer receives services roughly equivalent to what they contribute in tax. If the tax rate is increased, they will receive more services largely in line with the increase (but less money in their pocket), and vice versa.
What a universal system does do is redistribute resources, as above-average taxpayers pay more tax than they get back in services and vice versa. As a UBI experiment, this has two obvious problems. First, most don’t view services provided by the government in the same way as a cash benefit. With little choice over what you get this is fair enough. However, it does show that concerns about a UBI being too expensive are a bit misplaced as we already have one.
It also shows that providing the same benefits to everyone, irrespective of income or effort, is not a fringe idea as we do this as well. Admittedly, providing baselevel services may be more politically palatable than providing straight cash.
Secondly, since everyone gets this UBI there is no obvious control group to compare outcomes.
The good news is that part of our tax system addresses those two issues – NZ superannuation.
NZ superannuation is a genuine UBI in that everyone
65 and over gets a non-means-tested cash payment. You can continue to work, earn as much or as little as you like, and the level of your superannuation is unaffected.
NZ super also provides a pretty good control group –
64 year olds. The difference between being 64 and 65 is so marginal that the effects of a UBI should be able to be isolated. In fact, in this day and age, comparing 60-64 year olds to those between 65 and 69 is viable.
Demographics within these two groups should be able to be sliced and diced to draw quite definitive conclusions about the impact of a UBI. As means testing was removed in 1997 there is 21 years of data ready and waiting to be mined.
However, if a UBI comes out as a good option, and the tax system is adjusted to make one happen then, like always, there is no free lunch. A UBI will not be a net cash windfall for the average taxpayer as whatever they get must first come from them. However, because it is just a cash out/cash in situation, the average taxpayer will be no better or worse off (as opposed to a service based UBI where they might not have bought what they were given).
Any change will have benefits and costs. The potential benefits are: a more efficient redistribution system; greater individual choice; and reducing benefits disproportionately paid to those above the average income (hint – tertiary subsidies is the large area) and instead allocating them to those below the average income.
Before we go down that track it would be worth knowing if the costs are worth it. The good news is that we may have the data to find out.
Justin Stevenson has a PhD in engineering and a postgraduate diploma in economics.