Tuesday, 24 May 2016

Could A Basic Income Work?

Recently Tim Harford, in an article in the Financial Times, talked about the idea of a 'basic income' - a much vaunted idea in some circles and a much deprecated idea in others. It's not even an idea that's more popularly left or right - figures as far to the right as Friedrich Hayek and Milton Friedman, and groups as far to the left as the Green Party have both come out in support of it, although as you'd expect they differ on the nuts and bolts of the mechanism.

But can it work? Obviously, as most people would concur, it's ridiculous and absurd to offer a basic income universally, because lots of middle and high earners don't need it. However, a basic income given to people who have no work-based earnings or low earnings from work would be okay, as long as it tapers out according to a certain threshold of earnings, but in a way that doesn't disincentivise work either.

Whether there is a basic income system that could get the balance right between managing the varying and complex needs of a whole range of people and not being too expensive and bureaucratic, I'm not sure. I'm even less sure about whether our politicians are intelligent enough to devise such a system.  

If such a thing were to work then off the top of my head I could envision it being along these lines. The government could set a basic income of x per year by using a cut-off point of y per year, and a withdrawal rate of 50%. That means that a basic supplement to a person's income would be equal to 50% of the difference between annual income and the y cut-off point. So a person out of work would get the basic income of x, and a person who earned an amount lower than y would get a supplementary income, and this keeps narrowing as earnings increase up until y.

So, picking a figure for simplicity's sake (a proper study would need to be done by people with all the facts to hand to find the optimal figure), if y = £17,000, and the basic income is £8,000, someone earning nothing gets a basic income of £8,000, someone earning £11,000 per year gets a £3,000 supplement (half the difference between his or her earnings and y), and someone on £15,000 per year gets a £1,500 supplement, and so on, and then when y is reached (£17,000) there is no supplementary income, and y is the point at which every pound earned thereafter is taxed.

Whether it's with a basic income, or other kinds of change, something needs to be done to revise our welfare system - it is anachronistic and has evolved far beyond the original scope of its intention, in a country that's very different from the one at the time of its inception in the late 1940s. The method of tackling a diverse range of welfare needs in a one-size-fits-all fashion is now entirely unworkable, as is the perverse conflict between whether a claimant is better off working or on benefits. Basic income or no basic income, the UK has for a long while now needed a new Beveridge Report for the 21st century.