In December last year, Business Insider UK published an article titled “Here’s how much we’d all get if the UK dumped its welfare state and introduced a universal basic income scheme instead”.
The article explored the idea of replacing the entire welfare state with an unconditional universal basic income (UBI) by dividing the current welfare budget of £251 billion among the whole UK population of 64.5 million people. The result was an annual basic income of £3,891 per person.
However, numerous essential elements and complexities of a basic income scheme as well as several options to increase the level of the UBI were completely overlooked by the author.
I believe that a UBI of around £4550 per person is possible, even while retaining some necessary parts of the current welfare budget. In this post I will attempt to explain how this can be done.
Firstly, I will look at the types of existing welfare that should be retained:
The government currently spends slightly over £37.5 billion on “Incapacity, disability & injury benefits”. People with disabilities clearly require additional support and it would be grossly unfair to simply take the budget targeted to their needs and divide it among the rest of the population. I will therefore deduct this amount from the overall welfare budget and keep it separate from the UBI.
Housing benefit is another area of the welfare budget that is probably best dealt with separately. Current spending on housing benefit amounts to just under £26.4 billion. This amount will also be deducted from the initial budget for UBI.
The government includes state and public sector pensions in its welfare budget. I believe that the idea of a basic income won’t get anywhere if it upsets pensioners by taking their state pensions and dividing them up among the rest of the population.
Therefore, the over £104.4 billion that the government spends on pensions will be retained and deducted from the overall budget that is to be converted into UBI.
Deducting these amounts from the initial budget of £251bn leaves us with £82.635 billion to share among the population. However, now that pensioners are excluded, the number of people receiving the UBI can be reduced to 52,188,000.
This results in an annual UBI of just £1586.01 per person.
However, now that we’ve considered the parts of the welfare state that would be retained, we can begin to explore some possible savings and sources of additional revenue that can be used to enlarge the budget for a basic income:
I believe that prisoners should probably be excluded from receiving a basic income. Payments of UBI would be stopped for the duration of their prison sentence and would resume upon their release. According to the latest figures, the prison population of the UK is 85,641.
Assuming this figure stays fairly constant, this would mean the portion of the population receiving UBI can be further lowered to 52,102,359 people.
Additional revenue from efficiency savings
Since UBI would replace most of the existing complex welfare system, consisting of job seekers allowance, working tax credits, Universal Credit and other means-tested benefits, it would be much simpler and cheaper to administer than the current system. Basic income would significantly reduce the level of bureaucracy associated with means-tested benefits.
For example, the complexity of Universal Credit requires a sophisticated computer system with a budget of at least £637m. In 2013 the government wrote off £34 million worth of work on the IT project. All of this would be avoided with basic income.
For these reasons, when the Green Party included UBI in its detailed proposal before the 2015 general election, it assumed administrative savings of £8 billion.
UBI instead of student grants
Rather than administering means-tested grants to students from low-income families, it could be much simpler to give all students a basic income to help them pay for living costs during further education.
An article on the BBC website explains the present situation:
“Currently, students from families with annual incomes of £25,000 or less get the full grant of £3,387 a year. More than half a million students in England receive a maintenance grant from the taxpayer, worth in total £1.57bn a year.”
This money is spent by the Department for Business and is not included in the welfare budge so it can be added to the total welfare budget to be administered as UBI.
Withdrawal of the personal tax allowance
Like most UBI proposals, the Green Party’s plans also included abolishing the personal tax allowance. This is the level of income that someone can earn before they start paying income tax. Currently, this is set at £10,600 and the benefits of it start to be withdrawn when someone’s income exceeds £100,000.
Looking at the government’s estimated income tax figures for 2015-16, we can see roughly the number of tax payers who would be affected by removing this allowance.
In 2015-16, the basic rate of tax (20% on income between £10,600 and £42,385) will be paid by an estimated 24 million people. Abolishing the personal tax allowance and introducing a tax rate of 20% on this group’s first £10,600 of income would mean that anyone earning at least £10,600 would pay an extra £2120 in income tax. This would bring in approximately £50.88 billion.
This doesn’t include anyone whose earnings are below the personal tax allowance threshold. The additional revenue from taxing this group’s income at a rate of 20% has been estimated at around £6.8 billion.
Things get more complicated when we look at the next tax bracket (the higher rate of 40% paid on income between £42,385 and £150,000), since the portion of people with incomes over £100,000 already start to lose the benefit of the personal allowance, with those on incomes of £121,200 having lost the full benefit.
However, if we guess that at least 60% of the 4.65 million people in this bracket are earning less than £100,000, it is possible to estimate a further £5.9 billion in additional revenue.
At the moment, no National Insurance contributions are paid on income below £112 per week. In its UBI proposal the Green Party proposed bringing in extra revenue by scrapping the thresholds for National Insurance contributions:
“- Removing the primary threshold for National Insurance contributions. HMRC estimates that this would raise £21.6 billion in 2013–14. Uprating for inflation to 2015 adds about 4%, so say £22 billion. – Removing the secondary threshold for National Insurance contributions. HMRC says this contributes £25.7 billion in 2013–14, so we assume £26 billion for 2015.”
Their changes to National Insurance would mean that anyone earning £10,600 (the level of the personal tax allowance) would pay an additional £699 in NI contributions.
Using the figures for 2013-14, we have a total of £47.3 billion extra revenue from abolishing the NI thresholds.
Taking a quick look at the amounts that we have deducted and added to the original budget so far, we get the following:
|Abolition of student grants||+£1,570,000,000|
|Abolition of personal tax allowance||+£63,594,800,000|
This isn’t the final amount though, as there are still other adjustments that can be made to increase the figure:£203,099,800,000 / 52,102,359 = £3898.09 per person.If we divide this figure by the total population minus pensioners (as pensions are kept separate here) and prisoners we get an annual UBI of:
£203,099,800,000 / 52,102,359 = £3898.09 per person.
This isn’t the final amount though, as there are still other adjustments that can be made to increase the figure:
Reduced amount for children
Next we can set a lower rate of UBI for children. The previously calculated amount of £3898.09 can be treated as the average rate of UBI for children and adults. If we decide to set the annual UBI for children at, say, £3000 then the difference can be added to the adult UBI.
The Business Insider article gave a figure of 15 million children in the UK so I will use that number too. Consequently, a child UBI of £3000 means that nearly £13.5 billion can be added to the budget for the adult UBI, giving an adult UBI of £4261.18 per year.
Taxing away the UBI of people with sufficient income
A common criticism of basic income is that it gives money to people who are already wealthy (“welfare for the rich”). In his article “The Water Room Analogy”, basic income advocate Scott Santens explains that, for the sake of efficiency, it actually does make sense to give a basic income to even the richest people.
However, a crucial point is that their basic income should be paid back in the form of tax so that they aren’t net beneficiaries of a UBI. The tax system would need to be designed so that a special marginal rate kicks in at a certain point so that the UBI is gradually paid back as a person’s income rises beyond a certain level.
This is necessary to ensure that the UBI can be as targeted towards people with low incomes as possible.
For example, we might decide that anyone with an earned income of over £20,000 no longer really needs the full amount of the UBI anymore. Such people could be taxed an extra 10p on every pound they earn over £20,000 until they have paid back the full amount of the UBI.
Someone earning £30,000 would pay back an extra £1000 of whatever basic income they receive. Someone earning £40,000 would pay back an extra £2000 of their UBI and someone earning £50,000 would pay back £3000, etc.
As soon as someone’s income becomes high enough to have paid back their UBI, any further income they earn would be taxed at the usual rate. At what point this occurs would of course depend on the level of the basic income.
If we assume that the people in the highest income tax bracket (income over £150,000) will always be able to pay the UBI back in tax, no matter what level it is set at, then they can be excluded from the calculations as they effectively don’t receive a basic income.
In 2015/16 an estimated 322,000 people will be in this bracket. This means the number of working-age adults receiving UBI can be lowered to 36,780,359, saving around £1.37 billion.
Next, we can look at people paying the higher rate of tax (income between £42,385 and £150,000). Everyone in this tax bracket earns at least £42,385 and would pay an extra 10% tax on all income above £20,000 until their UBI is paid back.
Since they have already paid an additional £2120 (due to the loss of their personal tax allowance) and an extra £699 in National Insurance, they now only have £1,479.48 of their UBI to pay back. This will already be achieved by the time their income reaches £34,794.80.
Everybody in this tax bracket paying back the rest of their UBI would bring in around an extra £6.88 billion.
Finally, anyone currently paying the basic rate of tax (£10,600 to £42,385) and earning above £20,000 will start paying the additional 10% tax rate.
There are likely to be 24 million people in this tax bracket in 2015/16. We can make a conservative guess that 3 million of those will earn £20,000 or more, paying perhaps an average of £800 of their UBI back because of the extra 10% tax. This would, at the very least, bring in £2.4 billion that can be ploughed straight back into the basic income budget.
These last changes to the tax system would result in a final annual adult UBI of £4550.78, or £87.52 per week.
In addition to this, there would be a child UBI of £3000, and the current budgets for housing benefit, state pensions and disability benefits would remain untouched.
This would mean that, for example, a family of 2 adults with 2 children would receive a basic income of just over £15,000 between them, as well as any housing benefit or disability benefits that they may be entitled to.
Many will say that this level of UBI is still insufficient as it not enough to comfortably live on. However, for the person with mental health problems who has had their benefits sanctioned, the person about to be evicted from their home, the worker on an unstable zero-hours contract, the self-employed tradesman whose income fluctuates wildly from month-to-month, or the single-mother who is too ashamed to admit to her daughter that she claims benefits, an unconditional £87 a week could offer a real lifeline and greater dignity.
For anyone who feels that the amount calculated here is not enough, there are other additional/alternative sources of revenue that can be examined such as a land value tax, carbon tax or an Alaskan-style dividend that is linked to a nationalised industry.
The main point, however, is that an annual basic income of at least £4500 per person can easily be funded on the basis of existing welfare spending and adjustments to the current tax system. It’s just a question of there being the political will to do so.