A Basic Income

This article by Alison Payne appeared in ‘Light Blue: Policy Adventures for Scottish Conservatives’, edited by Dr Alan Convery

 

Introduction

Reform Scotland published a report in February 2016 looking at how we could reform welfare, specifically welfare aimed at helping people remain in, or go back to work.  That report recommended that a Basic Income should be introduced.

A Basic Income, or a Citizen’s Income, is not a new idea.  The Greens, both at a Scottish and UK level have been calling for this for some time.  However, it has often been viewed as an issue that only has support from the political left.   Reform Scotland believes that a Basic Income is a policy which can attract support from across the political spectrum and should be considered as a way of fixing our broken welfare system.    As opposed to the many sticking plasters that have been applied to our welfare system over past decades, a Basic Income is a radical, ambitious and long-term solution that we should start considering today.

Welfare trap
People are not stupid.  It is believed that if we offer incentives to those at the top with bonuses or other financial rewards, they will work harder.  Yet, we currently have a welfare system which actively discourages work.  Consider the following chart from the Citizen’s Income Trust: [1]

 

welfare chart

It highlights the welfare trap whereby there is little, if any, financial reward to be gained from working more than 10 hours, up to 16 hours per week, on the minimum wage.   In no other situation would you expect someone to work additional hours in return for no financial gain.  So why should someone struggling on minimum wage work more and expect no financial reward in return?  It would be illogical.  Yet that is exactly what our current welfare system does.[2]

While an individual’s precise marginal rate will vary due to factors such as eligibility, family structure etc, this impact is substantial.

In addition, because our current welfare system targets households, as opposed to individuals, our welfare system can reward families for living apart, as well as removing any independent means from adults in vulnerable situations.

As a result, our welfare to work system is broken and a radical new approach is needed.  I believe that a Basic Income could offer such an approach.

Why introduce a Basic Income?
A Basic Income, as proposed by Reform Scotland, would give every working-age person a basic income from the state of £5,200 per year, and every child £2,600.  The income would be a right of citizenship and would be the same regardless of income or gender.

It would be non-means tested and would not increase or decrease as someone’s income changes, thereby removing the need for the associated bureaucracy.

It would replace a number of means-tested work related benefits, as well as child benefit, and be a new way of providing a social safety net.

It would be free of tax, but would replace personal allowances and tax credits.

It would not be a disincentive to work, since it only pays enough income to cover the basics of life.

Crucially, however, a Basic Income would ensure that every additional hour worked would result in additional net income.  In other words, it ensures work pays and there is a very real financial benefit for working more.

It would not penalise those facing additional situations, such as illness, disability or pregnancy, as  hardship benefits such as Employment & Support Allowance would remain in place and be paid in addition to the Basic Income.

Every citizen would have a small independent income, whether or not they were in paid employment, since the individual would be the unit, as opposed to the household.  As a result, people would be treated equally irrespective of gender, and marriage or cohabitation would not be subsidised or penalised.

Although everyone would receive the Basic Income there would be limits to the pressure for it to be increased.  It is likely that increases in the level of the Basic Income would need to be paid for by increases in Income Tax.  As a result, Income Tax and Basic Income levels should keep each other in balance.

Currently, some people who study or train for more than a few hours a week can forfeit some benefits.  This would not be the case with a Basic Income.  As a result, there would be no disincentive to train/retrain or carry out voluntary work.

Paying for the policy
No policy is unaffordable; it is simply a question of choosing priorities and arranging budgets in order to pay for those priorities.  This policy is expensive.  However, I believe that the benefits system currently does not work; there is a welfare trap and clear incentives not to work and changing this has to be a priority.

In our report, Reform Scotland proposed one way that this could be paid for. A full breakdown of all the workings, for delivering both a Scottish and UK Basic Income, can be found in detail in the report here.

To summarise, the cost of providing a Basic Income for all children and working-age people (Reform Scotland did not include pensioners at this time, who would still receive a state pension) in Scotland would be £20.4 billion per year.   This could be paid for by:

  • Scrapping certain benefits generates £3.6 billion
  • Scrapping the personal allowance generates £5.2 billion
  • Merging National Insurance with Income Tax, thereby removing the NI ceiling, generates £4.01 billion
  • Adding 8p to all rates of income tax generates £5.53 billion.

This still leaves a small shortfall, though this is less than 10% of the overall cost.

The proposals to pay for this policy do include tax rises.  Though, as the impact of the policy is felt, it can be expected that lower bureaucracy costs and increases in tax take as more people increase their working hours will mean that the tax rate could be lowered.  Alternatively, savings could be generate from elsewhere in the budget.

The specific impact of the proposals Reform Scotland set out will vary depending on individual and household circumstances.

Everyone earning £26,000 per year and under should be better off.  But the change from a household system to an individual one will mean that even some people earning £100,000 per year will be better off under the proposals.  The following table gives some examples of higher earners who would also benefit from the Basic Income scheme.

Scenario Current net pay (+ child benefit where applicable) Proposed net pay including Basic income Difference
Two parent family, each earning £35,000 per year, with two children £53,772.40 pay + £1,788.80 child benefit =£55,561.20 £42,000 net pay, + £10,400 adult basic income and £5,200 child basic income =£57,600 +£2,038.80
Two parent family, one earning £60,000 one earning £20,000, with two children £58,813.40 net pay, no child benefit £44,357.20 net pay + £10,400 adult basic income and £5,200 child basic income = £59,957.20 +£1,143.80
One parent household earning £40,000 with two children £30,287.20 net pay + £1,788.80 child benefit = £32,076 £24,000 net pay + £5,200 adult basic income and £5,200 child basic income = £34,400 +£2,324
Two parent household, one parent earning £100,000, one parent not working, with three children £65,326.20 net pay, no child benefit £48,400 net pay + £10,400 adult basic income and £7,800 child basic income = £66,600 +£1,273.80

Crucially though, the proposal replaces a system with a welfare trap that discourages work with one which ensures that there will always be a financial gain from working.  Everyone will always be better off by taking, or increasing, the amount they work

Westminster or Holyrood

The costs set out above are for a Basic Income implemented at a Scottish level.  However,  could equally be done on a UK wide level.  Many areas of social justice have already been devolved, and income tax and some welfare benefits are due to be devolved.  As a result, I believe this policy could be introduced in Scotland.  All that is necessary is for Scotland to gain some of the welfare powers that were handed to Northern Ireland in the 1990s.

David Cameron has commented that the Scotland Bill 2015/16 will make Scotland “the strongest devolved government anywhere in the world”.[3]  The legislation proposes to devolve Income Tax, Air Passenger Duty and Aggregates Levy to Scotland, as well as some  benefits, the largest being Disability Living Allowance.

However, contrary to what David Cameron suggested in that statement, Scotland’s proposed devolved welfare powers don’t even go as far as those that were devolved to Northern Ireland in 1998.

The Labour Party has also seemingly forgotten what has been devolved to Northern Ireland.  In his book “My Scotland, Our Britain” Gordon Brown comments thatThe Union exists to provide security and opportunity for all by sharing and pooling our resources to reduce poverty, maximise employment and deliver healthcare free at the point of need.”[4]   While the book was written with regard to the independence debate, the same argument about welfare would presumably apply to devolving the powers within the Union.  In fact, the comments made by Gordon Brown with regard to the importance of welfare to the Union were echoed in Scottish Labour’s Devolution Commission report.[5]

In other words, the argument being made was that the welfare system was an intrinsic part of the United Kingdom and it should not matter whether you live in Manchester or Inverness, if you need support you should have the same entitlement.

However, that argument has not been valid since 1998.  It is already the case that your entitlement depends on what part of the UK you live in.  Therefore, there is no real reason why welfare powers cannot be devolved to Scotland while maintaining the Union, it is simply a matter of political will.

There is another lesson the experience of Northern Ireland also highlights – the need to be in control of raising what you spend. From devolution to Northern Ireland in 1998 up until the election of the coalition government in 2010, the power sharing executive broadly chose to mirror welfare policies followed by the UK Labour Government.[6]

However, a number of changes made by the Coalition Government’s Welfare Reform Act 2012 were not implemented in Northern Ireland.  Although Northern Ireland’s Executive had a bill covering similar policies that was introduced in 2012, the bill failed to be passed at its final stage in 2015.[7]  As a result, the power sharing executive did not implement the following[8]:

  • Household benefits cap
  • The so-called ‘bedroom tax’ for under-occupation affecting people living in social housing
  • Time limiting Employment Support Allowance (ESA) for those considered able to prepare for work
  • Replacing Disability Living Allowance (DLA) with Personal Independence Payments (PIPs)
  • The introduction of Universal Credit

The democratically-elected Northern Ireland Executive had control over welfare and did not want to follow the same policies as those being implemented by Westminster. As welfare had been devolved, this shouldn’t be a problem since welfare, just like education or health, is an Executive responsibility.

However, the Northern Ireland Executive is not responsible for raising the money it spends.  As a result, it was told by Westminster that if it did not introduce the welfare reforms it would face financial penalties.  Basically, its grant would be cut by the amount its benefits budget would have fallen if the reforms had been implemented.[9]

So basically:

Uniform welfare provision is not an intrinsic part of the United Kingdom.

Therefore, substantial welfare powers can be devolved to Scotland.

However, unless control over raising the money being spent is also devolved, devolution simply means devolution of administration.

Conclusion

We have a welfare to work system that is broken beyond repair.  Now is the time to consider a radical new approach.  Now is the time to start looking at a Basic Income.

 

 

[1] Citizen’s Income Trust

[2] People who work less than 16 hours per week may be entitled to income support, while those who work more may be entitled to working tax credit or Universal Credit

[3]  http://www.telegraph.co.uk/news/general-election-2015/11593179/David-Cameron-Scotland-will-be-strongest-devolved-government-in-the-world.html

[4] http://www.theguardian.com/books/2014/jun/10/gordon-brown-save-progressive-union-interests-social-justice

[5] http://www.scottishlabour.org.uk/page/-/Scottish%20Labour%20Devolution%20Commission%20report.pdf

[6] BBC, Northern Ireland welfare reform: Q&A: http://www.bbc.co.uk/news/uk-northern-ireland-32883191

[7] http://www.niassembly.gov.uk/assembly-business/legislation/primary-legislation-current-bills/welfare-reform-bill/

[8] BBC, Northern Ireland welfare reform: Q&A: http://www.bbc.co.uk/news/uk-northern-ireland-32883191

[9] BBC, Northern Ireland welfare reform: Q&A: http://www.bbc.co.uk/news/uk-northern-ireland-32883191