Anti poverty campaigners and economics geeks alike have reason to be cheerful this week with the news that Finland is to carry out a trial of a basic income. A basic income, in its purest sense, is a non means-tested payment to all citizens regardless of income or wealth which replaces existing benefits such as unemployment benefit.
The Finnish trial, which has been developed at the behest of new centre-right Prime Minister Juha Sipilä and is supported across the political spectrum, is an experiment designed to determine which type of a basic income will prove most effective at “[reflecting] social changes, abolishing work disincentives and diminishing bureaucracy”. As explained in this Vox article, there are four options that are to be considered:
- A full basic income, high enough to replace almost all benefits
- A partial basic income, replacing almost all non-insurance based benefits but leaving insurance based benefits in place
- Negative income tax, where (for example) if there was a £10,000 per annum negative income tax with a 50% phase-out, an individual with no income would receive £10,000, if income was £10,000 they would receive £5,000, until their income reached £20,000 and they would receive no benefit at all
- Other approaches, for example merging some existing benefits, and then making additional payments to reward behaviour such as volunteering
The Finnish experiment will provide extremely valuable information on the impact of various basic income schemes. Whilst there have been a small number of trials elsewhere in the world on introducing similar schemes, there is very limited data available on the results of the basic income experiments.
A series of experiments were conducted in the United States in the 1960s and 70s, primarily centred around negative income taxes, when incoming President Richard Nixon tasked Donald Rumsfeld (and his assistant Dick Cheney) with leading the poverty reduction campaign. However, the scheme was subsequently undermined when the data appeared to show that divorce rates in the experimental population were 53% higher than in the control population, and a number of politicians withdrew support for the programme. This result was later identified as a statistical error, and no other experiment found any relationship between basic income and marital stability.
In terms of solid empirical data, the most useful experiment with basic income was the trial carried out in the small Canadian city of Dauphin, Manitoba, between 1974 and 1978, known as MINCOME. Every family in Dauphin (and the surrounding rural area, a population of approximately 10,000) would receive 60% of the Statistics Canada low income cut-off, which varied by family size. Every dollar received from any other source would reduce benefits by 50 cents. An important aspect of the MINCOME scheme was that it led to a significant increase in income for the working poor.
The province of Manitoba maintain data on all contacts between patients and doctors and hospitals going back as far as 1970, which means that it was possible for researchers at the University of Manitoba to compare healthcare outcomes between Dauphin and other comparable towns and cities in the province.
The results are striking; hospital visits per capita in Dauphin were higher than the provincial average before the scheme started in 1974, but at the end of scheme in 1978 there was no difference between hospital visit numbers in Dauphin and what would be expected elsewhere in the province. A similar pattern was observed with mental health diagnoses, with Dauphin having noticeably higher diagnoses than the control population in 1974, with the gap closed entirely after 1978.
There was an impact on education, as well, as students in Dauphin were more likely to progress to the Canadian equivalent of sixth form during the years that the trial was operational.
Despite being a small trial that commenced over forty years ago, the Dauphin experiment remains the best source of empirical data on the potential benefits of a general basic income. The Finnish experiment, due to run from 2017 to 2019, will be crucial to see if the Dauphin experience of improved health outcomes and higher educational achievement will be replicated.
Northern Ireland has a famously high welfare bill compared to Great Britain and the Republic of Ireland. It seems somewhat counter-intuitive that the solution to a higher welfare bill might be an even higher welfare bill, at least in the short run, and to my knowledge the Green Party are the only UK party that support the concept of a universal basic income.
But it could be argued that freeing people of the demeaning cycle of welfare sanctions and food banks could have a transformative effect on the local economy. It would facilitate risk taking and entrepreneurship by ensuring that basic needs are taken care of whilst people start new business ventures, and the multiplier effect of redistributing money to the poorest in society could increase the size of the economy, and the resultant income tax take, far higher than the cost of implementing the basic income policy in the first place.
At a 2014 NICVA Masterclass on Basic Income, it was estimated that the cost of implementing a Basic Income policy in Northern Ireland at the “poverty line” level, defined as £51.60 per week for under 16s and £172 per week for over 16s, would cost £12.565bn after netting off employers’ NI contributions and an increase in VAT revenues, including £25m on administrative savings.
The Northern Ireland Executive currently spends £8.16bn on benefits and pensions. A basic income would see almost all of this spend eliminated and also preclude the need for the form of basic income that already exists in the UK, the tax-free allowance, which currently lets people earn £10,600 per year without paying any income tax, which I’ve roughly estimated costs £1.3bn in lost income tax revenue in Northern Ireland each year.
That would leave a gap of around £3bn which would need to be plugged were Northern Ireland to introduce a basic income of this type, if the Northern Ireland Executive had welfare spending and tax raising powers, which they currently don’t. This is obviously a substantial amount, but not a fantastical amount, and it is certainly possible that the benefits to the economy, healthcare and education would exceed the outlay.
Ultimately, the argument boils down to what sort of economy and society is desirable as technological change quickens and entire industries no longer require human employees. For example, what impact will self-driving cars and lorries have on those who work in the taxi and road haulage industries. If everyone were to find themselves out of a job due to automation, then there would be no consumers and hence no economy.
The lessons from the Finnish experiment will be invaluable in determining what the role of the welfare state could be in the future. The radical approach of a basic income to all citizens may be the key to both unlocking economic potential and ending poverty.
A qualified accountant and data analyst, interested in politics, economics and data. Twitter: @peterdonaghy
