Universal Basic Income trumps targeted income grants in multiple fiscal sustainability metrics

["DESIGNING A BASIC INCOME GUARANTEE: TARGETING, UNIVERSALITY AND OTHER CONSIDERATIONS,” Institute for Economic Justice, October 2021, , Accessed 6/26/23, GDS – PL]

***UBIG – Universal Basic Income Grant

***RPL - Food poverty line

***LBPL - Lower-bound poverty line

5.2 COST-EFFECTIVENESS OF TARGETING VS UNIVERSALITY

An argument for targeting is that it ensures costeffectiveness by limiting eligibility. If judged purely in terms of limiting total costs, this is correct. While the significance of comparative savings vary, Table 2 shows that targeted scenarios will provide less costly options. However, universality is not as expensive as it first seems; and targeting is not as cost-efficient as claimed. One complication bedeviling straightforward comparisons is the difficulty of measuring true costs incurred by targeting measures. In analysing programmes in eight middle-income countries, Grosh et al. found that targeting accounts for an average 4% of total expenditure, and range from 25 to 75% of total administrative costs.57 Additional to these are externalised or hidden costs, such as: private expenses of proving eligibility, social costs of exclusion, and continuing economic costs to society of poverty left unaddressed due to persons falling outside of coverage or being incorrectly excluded. Research suggests that when considered holistically, the real price of targeting is often vastly underestimated.58 However, such a holistic perspective is rarely considered or prioritised in policy cost-analysis. Arguably one should offset the costing of a UBIG by the amount raised through the claw-back mechanism to better understand its real cost; as this is effectively eliminating the portion of its costing in benefits distributed to the wealthy.

Additionally, a myriad of economic and social benefits resulting from the stimulus and developmental impacts of a universal basic income would be significantly higher than with a targeted grant. Yet for those who evaluate best policy based purely on the gross line-item cost basis, the choice of targeting a BIG appears to make sense. The second part of the argument supporting targeting is that it ensures cost-effectiveness by enabling higher transfer values. That is, in addition to being less costly, it can allow for larger transfer values per individual by concentrating a limited budget on a smaller pool of recipients - which should have greater impact, making it also the more effective choice. It is logically obvious that a fixed budget divided among a smaller number of recipients results in a larger benefit per person. If we compare the merits of the two options in a fixed budget, however, targeting offers no affordability benefit over universality. Indeed, universality would be more cost-efficient in this scenario given the added administrative expenses of targeting. It is, of course, possible that there are options where targeting may ‘save funds’ and allow for larger values; for example, introducing a BIG that attempts to target only broad unemployment and offered at the LBPL, compared to a UBIG offered at the FPL. However, as we argue below, such an option, while on the face of it increasing benefits to grantees, could actually have a lower impact on reducing poverty if the pool of low-income beneficiaries is far narrower than under a UBIG. The obvious trade-off is that this is done at the expense of much lower coverage, which can undermine the social and economic impacts of a BIG.

Further, cost saving does not speak to what is a more effective and impactful design choice in meeting the desired objectives- in this case to address poverty. While it is always cheaper to do less, the question is whether a policy design frustrates or advances the underlying intention. In unpacking these assumptions further: Section 6 explores the limitations of focusing only on individual transfer values, and failing to consider the impact on households being able to pool grants, while Section 7 looks to the overstated concerns of affordability driving policy preferences for targeting. Ultimately, the fiscal framework, approaches to macroeconomic policy and perspectives on the developmental impact of social policy determine the policy choices which are made.