Gareth Morgan reports on the proposal by Finland to pilot a UBI model; assesses the likely impacts and how New Zealand could do it

Gareth Morgan reports on the proposal by Finland to pilot a UBI model; assesses the likely impacts and how New Zealand could do it

By Gareth Morgan

Finland was in the news around the world last week with the announcement that they will pilot an unconditional basic income (UBI).

This is another massive step forward for an idea whose time has come.

The UBI is a fairly simple idea – scrap your complex welfare systems and the associated bureaucracy and just pay everyone the same amount regardless of whether they work or not. The Dutch, Greeks and Canadians are all looking at it, but it might be the Finns that beat everyone off the mark.

An unconditional basic income has fans on both the left and right of politics.

The Right like it because it has low administration costs and it removes any disincentive to work – most welfare systems take benefits off people as they earn income.

The Left like it because it improves people’s bargaining power – they don’t have to work if they don’t want to. It is also touted as an answer to the increasing threat of everyone being cast out of a job by robots. For these reasons the concept has been gaining traction for some time.

The plan

Despite reports, Finland isn’t embarking on wholesale change just yet. Instead they are planning to introduce a two-year pilot, starting in 2017, to monitor the impact on a group of randomly selected Finnish people. Details are sketchy, but it appears that they will offer up to 100,000 people up to 1,000 euros per month in lieu of other benefits. Some of the income may be conditional, for example on volunteering for charity.

The full plan will be available by the end of 2016. The idea is to test the policy and monitor the results, to see if it should be rolled out to the entire country.

But won’t people stop working?

From the experiments done so far, it doesn’t look like it. Experiments in the 3rd world show that a UBI allows people the certainty of income to invest in their skills and so they end up with better-paid jobs. In the first world the results are a bit more complicated – a few adults stopped working but mostly these people moved into ‘unpaid’ work like parenting. Those previously on benefits were more likely to work as they weren’t punished for doing do.

Like most of Europe, Finland is having problems with unemployment at the moment, with the jobless rate sitting stubbornly high at 11%. The generosity of the current benefit system appears to be a factor – discouraging people from returning to work. Removing this disincentive might be one of the reasons that the UBI concept has almost 70% support amongst the public.

Of course a lot depends on the income that is set. Set the level too high, and people stop working, and the overall cost of the UBI blows out. Set it too low, and you risk poverty. The London-based magazine, The Economist has backed the UBI concept, but included a long discussion about getting the level right.

How will they pay for it?

At this stage we are just talking about a pilot, so funding it shouldn’t break the bank. But when it comes to rolling out the idea, this issue will be the biggest barrier. In the Finns favour is the fact that they already spend a lot of money on various types of benefits. In addition they have to employ a horde of bureaucrats to manage the complex welfare system that hands out the money. The savings from scrapping this hugely complex system would be large and could go a long way to funding the UBI.

In the New Zealand context, the Morgan Foundation have done quite a lot of work on how a UBI could be funded, as part of the Big Kahuna package.

Partly the money would come from scrapping the welfare system, as detailed above. We would also simplify the tax system with a flat tax, which would further reduce the need to employ expensive bureaucrats. The remainder would come from closing loopholes in the tax system – particularly our selective definition of what income is.

The UBI is proving to be one of the best ways to offer aid to the Third World. It may also prove to be a solution to the problems we face in the First World. We are a rich country, we can afford for everyone to have the dignity of a UBI.

This article was first published on his blog, Gareth's World. It is here with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Yes, I agree we should introduce or trial a UBI. If within 20 years 40% of existing jobs will be done by robots it is imperative to start looking at an alternative system of how people can live. The existing universal superannuation is a good guide and is very inexpensive to administer. Any UBI must be annually inflation adjusted and also by say 70% of the average wage. This anxiety that people won't work is really silly. There have always been rich and poor people who don't want to work but somehow we only address this anxiety on the poor. Most people enjoy working. What they don't enjoy is the pressure of working just to live.

If you really want to be frightened and worried for your children read The Rise of the Robot by Martin Ford. You will start to think that there has to be a different way to run an economy.

There is a lot to like about the idea. As you note, sorting out a manageable level would be a real challenge. Presumably a level that met those relying on it only could survive on, while not so much that cost was unmanageable. Would all benefits, including e.g. accommodation supplements disappear? Or even National Superannuation? How much of the bureaucracy, and therefore cost, would be made redundant? It would be interesting for someone here to do the maths, including some case studies at the top and bottom ends.

It's a great idea to discuss. Very libertarian in the way that one decides freely what to do with his basic income based on his priorities and doesn't rely on the State to "help him" or blame the system if his mismanagement leads him to a difficult financial situation.

If we're afraid of people not returning to work (I think most of us would continue working although in different conditions and with different "attitude", i.e less hours, more open to change if unhappy) the best thing is not to tax work income and to increase consumption taxes instead.

If people have a guaranteed income, saving for the rainy days is still good but not that extremely important. Instead I think people would tend to consume more instead delaying it, so increasing GST would make sense and salaries would be better linked to production demand.

If taxes on work remain the same I'd be the first one working less or working by my own instead.

Also it's important to note some things and its effect to the productive system. For example the issue with undesired jobs.

Right now many people do undesired jobs (cleaning dirt, physical unhealthier tasks..) mainly because
1-it's the only they can do,
2-because they really need a job and are not a good fit for other type of jobs..
3-or because the money is good.

By removing 1 and 2, the only reason many would decide to do these jobs is if the money is better, so some sectors would become immediately unprofitable if workers don't accept low salaries.

Would that mean the need of importing cheap labour without the right for Basic Income? Would that mean subsidies (or nationalize the sector) to necessary tasks that may be unprofitable? Woul;d that translate in higher costs for other sectors serviced by this unattractive companies?

Looking forward to seeing these experiments up and running.

Hopefully most of these types of jobs will be automated. Where they aren't, you're right, the money would need to be good. However, this wouldn't make the sectors unprofitable. They would simply charge more for their services. It would also send economic signals to improve the jobs or simply stop relying on "dirty" services.

How much would need to be to paid to each individual to get rid of all welfare? A solo mum with 2 children in Auckland would need at least $400 for rent and $400 in expenses per week; can we really pay that amount to everyone?
Also I imagine there is a payout per child - won't that incentivise people to have more and more children?

Thing is, at present the solo parent can't decide to share living expenses with other adults - as benefits get rebated. Under a UBI this would not be the case. Hence, the amount set can assume a certain amount of pooling of resources which simply doesn't happen these days due to the disincentives to do so.

So how much would a solo mum with 2 kids get under the Big Kahuna scheme? Unless they plan on giving everyone at least $800 a week, she will be out on the street. I think you would still need a welfare system, so what is the point?

The Big Kahuna proposal doesn't propose to adjust the adult UBI amount based on number of dependents. It is suggested by some that the fact that the current welfare system does increase payments based on number of dependents may have some influence on people's choices to have children despite being unable to support them without such government assistance. Not that I've seen any empirical data on that suggestion.

Wouldn't the children be entitled to their own UBI. Or when the say "unconditional" do they really mean conditional on the recipient being able to vote?

Yes, it's an adult-only "universal".

Far too little detail to even begin considering this idea. Give us some costings before suggesting this might be the way to go. Universal super is already robbing the next generations, having workers pay for the lazy as well as the old will be the straw that breaks their backs.

The Big Kahuna consideration does go into plenty of detail. As it is presently proposed, the amount paid as a UBI is lower than the present level of superannuation.

So what is the cost compared with our current social welfare bill?

If the cost is greater how is this to be funded?

The Big Kahuna proposes replacing the $17,000 super payment that a 70 year old widow gets with a $11,000 UBI and charging her roughly $18,000 + rates ( say $3,000) = $ 21,000 per year to live in her home of 50 years that her husband left her. (Based on average Auckland house value)

Current: $17,000 super - $3,000 rates = $14,000
The Big Kahuna: $11,000 - $18,000 Comprehensive Capital Tax - $3,000 rates = -$10,000

In this example the widow would be $24,000 worse off every year.

The Big Kahuna also proposes that during economic recessions you will be required to pay tax as though your property appreciated in value by 6% even if in reality the value of the property has dropped by 30%.

My favorite part of The Big Kahuna is the deemed rate of return (assumed at 6% by them) this implies to me that they expect inflation to run at 6% ( giving the RBNZ a few heart attacks in the process ) or want the price of housing to grow at roughly 3x the rate at which everything else inflates (wages come to mind). They haven't set the deemed rate of return based on expected rental return because owner occupiers pay it as well ( this would imply that even if you own a house you still pay the tax component of the rent you would normally pay to live in it and create the situation where the deemed rate of return is used as the benchmark rate for setting rents ).

Still keen to know what will be the total cost, and how it compares with the total cost of the current arrangement of benefits and entitlements (plus their administrative costs) that it will replace.

I think you have misunderstood the rate of return. The rate (say 6%) is the assumed rate of return on capital invested. Each year, you would pay tax as if your capital had earned a 6% return on its value at the start of the tax year. Your pensions funds already do this under the FIF regime and it is quite simple to administer (much simpler than a CGT).

It also has the benefit of reallocating capital to be more productive - if you can earn 7% then you still only get taxed as if you earned 6%,

And it is for this reason that the housing investor class seem to object to it.

I would stop listening to the Big kahuna. Whoever he/she is they are clearly talking gibberish.

Fancy that as a notion, landlords having to accept what the tenant is willing to pay because it is no longer largely a handout so they now know how much work they have to do to pay for that roof. I wonder how that would end?

Regarding the dear old widow, the 18,000 pa Comprehensive Capital Tax and the $3,000 rates can be accumulated against the property and paid out on the sale of the property out of the estate.

Yes, to this piece. We need to reassess societal and economic fundamentals.

Industrial capitalism expanded via providing valued products to largely under-supplied, under-developed markets. In this, it has been a mechanism of genuine human progress. Goods in one direction, work in the other, in a mutually supporting equation.

Together product production and product purchase formed a means, not an end. What we see now, in the wealthier parts of the world, is a broken system. What was previously a means to some human betterment has become an end in itself.

Plain consumerism has become the expected economic and social norm. At the same time, it has become harder and harder to drive. On one hand, we see the efforts of central banks to fuel consumerism in what are now over-supplied, highly developed markets. On the other hand, industrial capitalism needs radically fewer numbers of professionals and workers. In the new environment of oversupplied markets and reducing producer-employment requirements, the mantra of 'growth' is irrelevant to actual circumstances.

We need to consider how we are to provide for individual well-being in what may increasingly become a non-traditionally working, even volunteer, economy. The unpaid are already a substantial influence in keeping society and the economy on the rails.

It should be noted that the net position of most people will remain basically the same. The extra income will be paid for out of tax. There are administrative savings but the net effect of these will be low on an individual basis.

Source and basis for your calculations please.

If it made everyone poorer then it wouldn't be accepted. It may make us slightly richer due to lower compliance costs and better participation rates (e.g. Apple etc could not hide the tax offshore). There will always be edge cases but, for the large majority, it will be neutral.

See also the Big Kahuna for their calculations.

The flaw is surely in the pretended savings. Maybe a small number of low level public sector jobs will be sacrificed, but only if those who remain get paid more.

It would make the need for WINZ completely redundant - and that's not just the staff but all of the buildings/infrastructure that goes with it.

that's a lot of people etc that would not be needed 9931

and this is a bad thing how? The ppl would then have to be re-deployed on something productive...

not a bad thing at all, the present model of redistribution of wealth is flawed as administration costs eat up a high proportion of the funds. this model would make those funds go further and directly to the people.
its similar to when you give to a charity, if you give to marketed charities the collectors take their cut against if you give direct to a charity i.e walk into spca and donate they get all the funds

The objective is a fairer and more efficient system, sounds great. I was just looking for the likely political outcomes - you cannot just close WINZ without causing a political backlash. The cost of change will be far more than expected. Ten years of acrimony and delay and disfunction across all the public sector at the very least. The "reforms" of the late eighties were largely bought by the increase in the pay of the public sector to parity (actually 15-25% more by some accounts) with the private sector. The real savings were minimal to non existent.

Usually the bulk of salaries is in the quantity of lower and mid paid.

"if it made everyone poorer then it wouldn't be accepted" - if it was going to make everyone richer then it would have been done already.

We still have not been told what is expected to be the total cost of this scheme and how it compares with the cost of the present benefit system plus its administrative costs.

Not an easy path to take.

A trial? It will be voluntary I'm sure (or it would be in NZ) Thus those signing up would be those who would not loose but gain from the system.

Vested Interest. Most powerful. Staff at IRD & WINZ, not to mention associated lawyers, contractors, advisors, policy person and so on. An incredibly powerful group. The noise from those who will be affected will drown out rational argument.

Where will the savings go? ..based on recent history, not to joe middle earner but into the pockets of the 1% er's. So a radical social/tax reform is also indeed. Until I could see a remedy for wealth accumulation by 1% er's at the same time as such a system.......for me, forget it.

Naturally Gareth will propose that everyone(including himself) will pay a tax of 25% pa on any net wealth over , say 5 million; this will encourage more innovation by the 1%, or force them to give their ill-gotten gains to the plebs (taxpayers) they robbed legally, illegally or immorally in the first place.

I'd like to add that a UBI could also be used as a Monetary/Fiscal policy tool...

Without trying to sound like a Social Credit funny money advocate.... When our Money Supply increases , it is mostly thru the Private Sector Banking system in the form of "credit"..
( My own philosophy is that we have a Fixed Money supply, and as wealth is created thru productivity, and things get cheaper, we just introduce smaller denominations of our currency.. )

Rather than the private Banking system creating the new money...maybe the UBI can be funded thru a mixture of Taxation and money creation....????

This mix could be adjusted as we go thru the business cycle of expansion and contraction...

This would help mitigate the effects of money creation thru the private banking system.... the biggest effect being the transfer and concentration of wealth.

the cantillion effect...

Careful Roelof, don't mention Social Credit around here. It's practically a banning offense. No one remembers the Green Shirts it seems. I have a great deal of sympathy for your views, but don't tell anyone.

Didn't Raf Manji and Lowell Manning propose something like that a few years ago?

You need to separate out UBI from The Big Kahuna. If UBI stacks up on its own as being cost neutral after savings on admin, and incentivising people to work, then that is great. But let's not confuse it by taxing wealth to pay for it, which is what the BK is promoting.
What incentive is there to own your house where you can retire, if you are going to have to keep paying for it forever via taxes?

On another note... "Some of the income may be conditional, for example on volunteering for charity." lol. Is that a contradiction in terms?

How come Human beings have to pay to live on earth while all other species live here for free?

because we're greedy and can't clean up after our selves.