The S in ESG - the waning relevance of a basic income

In its most popular form, a universal basic income (UBI) is a guaranteed cash benefit that the government provides to citizens.

UBI guarantees income for non-working parents and caregivers, thus empowering important traditionally unpaid roles, especially for women. This is not a new idea, but one that has historically resurfaced from time to time.

English philosopher Thomas More proposed such an idea in his novel Utopia in 1516, although it wasn’t until the 1960s and 1970s that economists began to think more seriously about how it could be applied. The US economist Milton Friedman proposed an idea related to UBI called a negative income tax in 1962, in which those earning under a certain amount would receive supplemental funds from the government rather than paying tax.

The COVID virus gave scope to panicky wage supplement measures which governments deployed at a vast fiscal cost. These measures discriminate as they exclude many people, notably the most vulnerable, and are a bureaucratic nightmare. They also serve to ossify the unsustainable pre-coronavirus economic structure and may (as was rumoured in Malta) in the end prop up zombie companies.

By contrast, a universal basic income would go to everybody, without exception, eliminating the huge administrative costs of means tests and eligibility checks. Simply put, a UBI true to its name would be unconditional and carries no means test for eligibility. It would be given to every individual, regardless of their own or their family income. The move to support universal basic income (UBI) comes at a time of unprecedented sluggish economies brought on in the aftermath of the coronavirus pandemic and the ongoing Ukraine invasion.

One of the potential benefits of UBI is the mitigation of stress associated with a means test to qualify for benefits.  Removal of such stress testing could lead to better mental and physical health. It is easy to see the well-being advantages of a UBI system providing a reliable income, uncoupled from complex conditions, shorn of the fear of failing.

Still a UBI is not popular in Europe except for its application in Norway. China becomes one of the first countries to successfully implement provisional Universal Basic Income for "most" of its citizens. The UBI programme is funded primarily via taxation out of the portion of business revenue generated through industrial, commercial or agricultural automation.

Spain was one of the hardest-hit countries in the early days of the pandemic.  The nationwide lockdown in Spain curbed the spread of the virus, but came at a staggering financial cost. Millions of people lost their jobs as the economy shrank rapidly, putting many of the most vulnerable citizens at risk. Spain introduced a temporary minimum basic income in May 2020.  This was stratified, covering only about 2% of the population, “to fight a spike in poverty due to the coronavirus pandemic”.

The ambitious scheme aims to guarantee an income of €462 per month for an adult living alone, while for families, there would be an additional €139 per person, whether adult or child, up to a monthly maximum of €1,015 per home. It is expected to cost €3 billion a year.

A scheme in Malta paid €800 monthly (less tax) to qualifying cases. As a condition, employers had to cough up €400 to each furlough worker (in practice few did).  It goes without saying, that the high cost of a universal basic income is one of the thorny questions in the public sphere and the research community. Surely, its cost depends on many things.

It is first and foremost dependent on the level of the basic income as such, but it also depends on many technicalities regarding exactly how it is constructed.  Critics argue that UBI does not make a distinction between "deserving" and "undeserving" individuals when making payments. Opponents of UBI, observe that this lack of discrimination is unfair. UBIs are also less cost-effective than targeted welfare programs because many people lack more than just cash. UBI does not cure addiction, poor health, lack of skills, or other factors that contribute to and exacerbate poverty.

For example, during a referendum in June 2016, a fifth of the Swiss electorate voted in favour of introducing a UBI, although it seems likely that only a minority of these supporters would have been able to provide a discerning answer to how it can be funded.

In most countries, the traditional view is that earned income motivates people to work, be successful, work cooperatively with colleagues, and gain skills.  However, “if we pay people, with a UBI unconditionally, to do nothing… they will do nothing” and this attitude leads to a less effective economy.  Hence, logically the popularity of a UBI is attractive to poorer countries yet in the rich world, only Norway uses it in its welfare net.  In times of high interest rates, ostensibly topped up by central bankers to fight inflation, the economy is misfiring, rigged by a wages spiral.  Thus, few governments can afford to upscale welfare sustenance.

Unions concentrate on solving the chronic problem of scarcity of skilled workers and fighting precariat. So, is a UBI a good idea after all?

It is not practised in many economies nowadays. Really and truly, some versions of UBI could reduce poverty and improve recipients’ mental health and well-being.  But it would be expensive. To fund it, would require significant increases in tax rates, which people are reluctant to accept. Ideally, those on low- to middle incomes would be better off living under the safety net of their UBI.  Perhaps, Malta found out a better way to fight the spiralling cost of living. 

A partisan way is to distribute free cheques to voters (ostensibly code-named sustainability help or negative income tax) preferably before elections but now as a pretext to refund overpaid personal taxes in past years.  These unique pennies from heaven may sound attractive (enough for an outing of four ordering pizza, mineral water and dessert), but it is like using drips of water to kill a raging fire.

The temporary taste of its sweetness is quickly forgotten as the plague of inflation remonstrates unabatedly.