UBI fails – it’s too expensive and insuffient funding

The idea of a Universal Basic Income (UBI), an amount paid by the government to its citizens with few restrictions, has been around for a long time. Yet in recent years, the movement towards a UBI has gained momentum, with supporters on the right and the left advocating for a UBI, particularly with leaders in the tech industry.

However, a UBI is a deeply flawed idea, with theoretical arguments not standing up under scrutiny and practical issues that have not been accounted for.

One of the main justifications for introducing a UBI is the impending changes to the labour market as a result of technology. Some researchers have suggested that 47% of US jobs are at risk from advances in machine learning and robotics.

However other estimates are not nearly as pessimistic, suggesting that the number of jobs at risk is much lower, less than 10% on average, and noting that the fact that some occupations are lost does not mean that the workers in those jobs will be permanently unemployed.

In the past, disruptions to the labour market of the size being anticipated by UBI campaigners have actually led to gains for the economy and the workforce. This tallies with analyses of unemployment from factory closures and the decline of industries like manufacturing: while some workers do drop out of the labour force, few of those who remain in the workforce looking for work are unemployed after three years.

At the moment, there is little evidence of technological unemployment in current employment data. Unemployment today is comparable with the level in the 1970s, though it has fluctuated in the interim, and there are relatively few discouraged workers who cite lack of skills or jobs disappearing in their industry as the reason they have left the labour market.

There has been a rise in part-time employment but, as the proportion of part-time workers seeking full- time employment has fallen slightly, it is not clear that technological unemployment is the reason for this trend.

The lack of evidence for technological unemployment is not the only flaw in the case for a UBI. There is a concern that providing money to people without the obligation to seek employment or become self-sufficient may result in people choosing to work less. While UBI trials suggests that overall these effects are fairly limited, and the reduction in working hours is mostly limited to young men and mothers, these trials systemically underestimate the disincentive effects of a UBI because they do not include the effect of additional taxation needed to fund a UBI. If marginal tax rates climb over 50% — and potentially much higher — the disincentives may threaten the viability of the system.

There are also practical issues with a UBI. Modelling suggests that a UBI where everyone over the age of 18 is provided with a payment equivalent to the age pension will have a net cost of $230.9 billion a year, despite nearly $100 billion in year savings and $89 billion in additional taxation. For a UBI where everyone over the age of 18 was provided with $10,000 a year and top ups were provided for current welfare recipients, the net cost would be $102.7 billion a year. While a UBI where only working age Australians were provided with a UBI equal to the level of Newstart would have a net cost of $107.3 billion, though such a UBI would likely be combined with a universal age pension, increasing the cost to between $135 billion and $145 billion.

These three options are all unaffordable with the current taxation system and would involve enormous additional taxation. There are no easy ways to raise more than $100 billion in taxation: current proposals by Labor and the Coalition to raise additional taxation combined would cover less than 10% of the cost of a UBI. Nor is the corporate tax base anywhere near broad enough to raise this money, total corporate profits barely exceeding the cost of main UBI model and estimates of multinational tax avoidance are 3%–5% of the cost at best.

Moreover, if a UBI abolishes income support payments, compensating current welfare recipients for increases in broad base taxes (such as the GST and land tax) would be very difficult, either undermining the universality of the payment or causing current welfare recipients to be worse off.

The GST rate would need to rise to more than 40% to fund a UBI, costing low income households more than $10,000 a year. An alternative is land tax, yet the rate there would need to be set between $20,000 and $30,000 a year, which is particularly problematic for pensioners, who could see their whole pension/UBI eaten up in land tax payments.

If the government were to raise progressive income tax instead, they would avoid these issues but at best the marginal tax rates for median income earners would rise above 60% and those for high income earners above 80%. At these levels it is not even clear that income tax rates would actually raise extra revenue, as the rates would be on the far side of the Laffer Curve.

If government instead chose to fund a UBI from the current welfare budget, it would see a substantially lower UBI payment. Utilising the entire welfare budget, including support for families and children, would see a payment of just over $9,850 a year, a substantial reduction in income for pensioners and single mothers, while just redistributing income support payments would fund a UBI of $6,630 a year. If the system was limited to working age recipients, the payment would be less than $6,900. All three options for redistributing the current welfare budget in the form of a UBI result in substantial losses of income for those currently receiving welfare payments, and none of the payments would be sufficient to live on.