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Scrap complex welfare systems and just pay everyone

Gareth MorganTax and Welfare

Finland was in the news around the world yesterday with the announcement that they will pilot an unconditional basic income (UBI). This is another massive step forward for an idea whose time has come.

The UBI is a fairly simple idea – scrap your complex welfare systems and the associated bureaucracy and just pay everyone the same amount regardless of whether they work or not. The Dutch, Greeks and Canadians are all looking at it, but it might be the Finns that beat everyone off the mark.

An unconditional basic income has fans on both the left and right of politics. The Right like it because it has low administration costs and it removes any disincentive to work – most welfare systems take benefits off people as they earn income. The Left like it because it improves people’s bargaining power – they don’t have to work if they don’t want to. It is also touted as an answer to the increasing threat of everyone being cast out of a job by robots. For these reasons the concept has been gaining traction for some time.

The plan

Despite reports, Finland isn’t embarking on wholesale change just yet. Instead they are planning to introduce a two-year pilot, starting in 2017, to monitor the impact on a group of randomly selected Finnish people. Details are sketchy, but it appears that they will offer up to 100,000 people up to 1,000 euros per month in lieu of other benefits. Some of the income may be conditional, for example on volunteering for charity.

The full plan will be available by the end of 2016. The idea is to test the policy and monitor the results, to see if it should be rolled out to the entire country.

But won’t people stop working?

From the experiments done so far, it doesn’t look like it. Experiments in the 3rd world show that a UBI allows people the certainty of income to invest in their skills and so they end up with better-paid jobs. In the first world the results are a bit more complicated – a few adults stopped working but mostly these people moved into ‘unpaid’ work like parenting. Those previously on benefits were more likely to work as they weren’t punished for doing do.

Like most of Europe, Finland is having problems with unemployment at the moment, with the jobless rate sitting stubbornly high at 11%. The generosity of the current benefit system appears to be a factor – discouraging people from returning to work. Removing this disincentive might be one of the reasons that the UBI concept has almost 70% support amongst the public.

Of course a lot depends on the income that is set. Set the level too high, and people stop working, and the overall cost of the UBI blows out. Set it too low, and you risk poverty. The London-based magazine, The Economist has backed the UBI concept, but included a long discussion about getting the level right.

How will they pay for it?

At this stage we are just talking about a pilot, so funding it shouldn’t break the bank. But when it comes to rolling out the idea, this issue will be the biggest barrier. In the Finns favour is the fact that they already spend a lot of money on various types of benefits. In addition they have to employ a horde of bureaucrats to manage the complex welfare system that hands out the money. The savings from scrapping this hugely complex system would be large and could go a long way to funding the UBI.

In the New Zealand context, the Morgan Foundation have done quite a lot of work on how a UBI could be funded, as part of the Big Kahuna package. Partly the money would come from scrapping the welfare system, as detailed above. We would also simplify the tax system with a flat tax, which would further reduce the need to employ expensive bureaucrats. The remainder would come from closing loopholes in the tax system – particularly our selective definition of what income is.

The UBI is proving to be one of the best ways to offer aid to the Third World. It may also prove to be a solution to the problems we face in the First World. We are a rich country, we can afford for everyone to have the dignity of a UBI.


Scrap complex welfare systems and just pay everyone was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.