Ross Clark

Finland’s Universal Basic Income experiment falls flat

Finland's Universal Basic Income experiment falls flat
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Should governments abolish their welfare states and replace them with a Universal Basic Income (UBI), paid to everyone, even billionaires, regardless of means? Such payments would be designed to cover essential living costs, leaving individuals free to make the choice of whether they wished to work in order to gain themselves a better lifestyle.

It is an idea which until yesterday seemed to be in the ascendant. Bernie Sanders has advocated it. John McDonnell has launched a study to determine whether it should become Labour policy. It hasn’t just attracted the Left – Elon Musk and Mark Zuckerberg have declared themselves in favour, seeing a UBI as a means of softening the mass job losses they expect as a result of technological advance. It has attracted some British Conservatives, too – Alan Duncan wrote a book advocating it as long ago as the 1990s.

One country even put the idea into practice – Finland. In 2016, 2000 unemployed Finns were put onto a trial of UBI in which they were paid 560 Euros (£490) a month, with no strings attached. They didn’t have to prove they were looking for work, and if they did find work they were allowed to carry on receiving the money.

Yesterday, however, the experiment came to a shuddering halt. The Finnish government announced that it is not going to extend the scheme. In a blow which will be felt especially by the British Labour party, it announced that it was instead looking at a welfare system based on Britain’s Universal Credit – which to McDonnell and others has become a byword for social injustice.

So what went wrong with the dream? The Finns have abandoned the experiment simply out of cost. It is extraordinarily expensive to start paying a living wage to the entire populace, and would require a huge rise in taxes to fund it. Notionally, this does not matter too much, as for most people the extra taxes would be offset by the income itself – why should a worker on an average wage mind paying an extra couple of hundred pounds a week in tax if they are receiving the same sum back in UBI? But there is a very big snag. Jack up taxes and you hugely increase the incentive to avoid, or even to evade, it. There are inevitably going to be people who will gladly accept their free handout at the same time as dreaming up wheezes to reduce their tax bill. Any government experimenting with UBI is likely to find itself falling short of revenue to pay its massive extra outgoings.

The higher the UBI, the bigger the problems. Finland has run into difficulties trialling a UBI of less than £500 a week. That would not even nearly cover living costs in Britain. A UK government might instead want to set its UBI at £323 per week – the amount earned by an individual working 37 hours a week at £8.75 an hour, which is the ‘real living wage’ as defined by the Living Wage Foundation. But paying that sum to every adult in Britain would cost £853 billion. True, you could then cut out the £160 billion a year the government spends on pensions and much of the £114 billion it spends on welfare. But still the extra public spending required to support UBI at this level would come to £579 billion – raising current UK public spending (£772 billion) by three quarters. I wouldn’t envy a Chancellor the task of bringing in this extra revenue, even if he was promising everyone a ‘free’ income of £323 a week.

The above assumes there would be no effect on inflation, but of course putting £323 a week into the pockets of the low-paid would inevitably have an impact on prices. Suddenly, £323 a week would no longer seem enough. Moreover, there are people who already receive more than £323 a week in benefits. Would they see their income slashed in order to pay that weekly sum to billionaires? The rollout of Universal Credit may have had teething problems, but they are nothing compared with the lacerated gums which would come with a Universal Basic Income.