The Institute for Fiscal Studies has published its Green Budget for 2014: ‘There is an inevitable down–side of policies that focus increases in generosity on those with the lowest incomes. While reducing the cost of providing a given level of support to those people, withdrawing the extra support as income rises weakens the incentive for some workers to earn a little more. Increasing in-work benefits might also result in higher administration costs; and take-up rates for means-tested benefits are inevitably less than 100%.’ www.ifs.org.uk/budgets/gb2014/gb2014_ch7.pdf, p.161
The European CEO (Chief Executive Officer) website advocates a Citizen’s Income: ‘Europe’s inflexible labour markets are in need of a structural overhaul, which can perhaps be found in the shape of an unconditional basic income … The concept is especially pertinent for Europe, given that there exists a glut of university graduates whose skills are too often laid to waste in dead-end jobs … The introduction of an unconditional basic income would certainly amount to a structural transformation, and it could well be the overhaul that industry leaders, politicians and economists alike are calling for. … A common criticism of the system is that an austerity stricken Europe can ill afford to fund such a drastic change, however, numerous studies have proceeded to unpick the argument. The Citizens Income Trust claims the full integration of the tax and benefits system would make possible a payment to every UK citizen equivalent [in value] to … the current tax threshold, whilst numerous others argue that proceeds from VAT could do the same. … “Everybody from the wealthiest to the poorest would benefit from reduced crime, reduced need for healthcare, better use of acquired skills and particularly, reduced social tensions caused by unemployment, income disparities and economic migration,” says Barb Jacobson of the ECI [European Citizens’ Initiative on Unconditional Basic Income]. Given that millions of the continent’s skilled workers remain unemployed, now is the time for leaders to address the structural failings of Europe’s labour markets and replace the convoluted mechanisms of social security with an unconditional basic income. In short, doing so would overturn Europe’s inflexible markets and put the region’s pool of skilled youths to far better use.
On the 19th February The Independent reported that ‘only 3,200 people – a fraction of the original target – had been signed up to receive Universal Credit …. Under the original timetable, one million people were supposed to be receiving the payment by April, rising to 1.7 million a year later. … The DWP admitted that only 3,200 had been enrolled for Universal Credit by the end of November … The vast majority are young, single jobseekers, the least complicated category of claimant. As the Government has spent £612m getting the scheme off the ground, the spending so far equates to £191,250 per head. … Government sources insisted David Cameron and senior ministers remained committed to Universal Credit. … However, Whitehall officials were yesterday reported to fear the whole project could be scrapped after the general election, whichever party is victorious in May 2015. … Anne Begg, the chair of the Commons Work and Pensions Select committee, said the “jury is out” over its future.’
The World Bank has published a report on pension provision in Latin America: ‘Policy strategies developed in the region in recent years established three different lines of action. A first group of countries, comprised of Argentina, Brazil, Chile, Panama and Uruguay, opted to include older adults who during their working life did not make contributions to pension systems. Common measures included facilitating entry into the contributory system by relaxing some requirements or simplifying procedures. Other countries – such as Colombia, Costa Rica, Ecuador, El Salvador, Mexico, Paraguay and Peru-, which did not have the necessary resources, decided to focus on vulnerable groups and granted pensions to the most disadvantaged citizens through their own social security institutions. A third group is formed only by Bolivia and Trinidad and Tobago. Their strategy has been to grant pensions to all older adults, regardless of whether or not they worked. “These strategies appear to be working and the overall situation is improving. However, two clear challenges remain: one is political, social and design consoled-ation whereas the other is fiscal sustainability, in other words, they have to be paid,” says Rofman.’
On the 25th February, in the House of Commons, Ben Gummer MP proposed that National Insurance Contributions should instead be known as an Earnings Tax: ‘… At every turn, the link between contributions and benefit, which from the beginning was not entirely true, was eroded, to the point where it now barely exists. That link will become nugatory with the introduction of universal credit and the single state pension, both considerable reforms of this coalition Government. What remains of national insurance is not really a contributions-based system, but a system of entitlement whereby a certain number of years of payment entitles the recipient to additional benefits. Let us be straight. National insurance is now a tax. It has all the features of a tax. Money paid in this financial year in national insurance contributions is used to pay this year’s costs of pensions, health care and much else besides. The surplus in the national insurance fund is transferred to other Government spending. The more robust commentators have explained that it is not an insurance system but a giant Ponzi scheme. … Were national insurance a much smaller tax, we would call it a stealth tax. That was certainly how the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) used it, when he increased NI contributions having promised not to increase income tax. That is the principal reason why I wish to see reform. We know the struggle we have, in this place, to improve the conversation our voters have with the people sent here to represent them. I firmly believe that, if we are clearer about the amount of money we take from people in tax-if that figure were more simply presented-and if we explain equally clearly how it is spent on their behalf, we will have done something important to reconnect voters with their democracy. A small but important part of that is coming clean about national insurance. I propose we call it earnings tax, because it is a tax on earnings. … [This] would … be an important first step in the merging of income and earnings taxes, as proposed most recently by the TaxPayers Alliance, the Institute of Directors and the Chartered Institute for Payroll and Pensions Professionals. I believe that such a merger would have far wider benefits; it would not just benefit the people those organisations represent. But that discussion is for another time. All I propose at this stage is a twofold reform: first, a simple change of name, which would cost next to nothing; and secondly, the merger of the national insurance fund into general Government funds, which would save administration costs that would far more profitably be spent elsewhere. The result would be that we would have made an important move in being clearer, simpler and more transparent about how our constituents are taxed, on what and where it is spent.’
Individuals in society
Discussions of the advantages of a universal unconditional and nonwithdrawable benefits will generally list both the lower marginal deduction rates that individuals would experience compared with those imposed by means-tested benefits, and such social benefits as a greater social cohesion generated by everyone receiving the same Citizen’s Income. What is not always recognised is that changes experienced by one individual might cause changes for another.
Take an example from our current social security system. If a mixture of sanctions and incentives leads to someone previously unemployed finding employment, then, if the supply of jobs at the National Minimum Wage is relatively inelastic – that is, if the supply of jobs does not rise to match a rise in demand for jobs – someone else will not find employment who might otherwise have done so. [note]For instance, Richard Dorsett, Deborah Smeaton and Stefan Speckesser, in their ‘The Effect of Making a Voluntary Labour Market Programme Compulsory: Evidence from a UK Experiment’ (Fiscal Studies, vol. 34, no. 4, 2013, pp. 467-89), find that an individual is more likely to find work if labour market activation provisions are compulsory rather than voluntary, and they evaluate the cost-effectiveness of making the programme compulsory – but only in relation to the individuals subject to the programme. If the person who enters employment is a single person and was on Jobseeker’s Allowance and they deprived of employment someone with dependent children on Jobseeker’s Allowance, then their entering employment would not be cost-effective in the wider context.[/note] If the supply of jobs at any particular wage rate is instead elastic, then one person finding employment will not damage the chances of someone else doing so.
Let us now suppose that a Citizen’s Income scheme has been implemented. Lower marginal deduction rates will mean that individuals will be more likely to seek and to retain employment. Greater demand for jobs would mean that wages would tend to fall. As Anne Gray points out in her article, this might lead to the Government implementing a robust National Minimum Wage or a Living Wage. If employment at a particular wage rate is inelastic then there will be people seeking employment who cannot find it; but if it is elastic then there will be sufficient employment. The question for further research is therefore this: Would the existence of a Citizen’s Income make the supply of jobs more elastic? The Namibian pilot project found that the answer to this is ‘Yes’. Self-employment increased substantially in the context of a Citizen’s Income. The security of the Citizen’s Income had increased people’s willingness and ability to start small businesses. The same would be likely to happen in the UK if a Citizen’s Income were to be implemented. This suggests that employment at the National Minimum (or Living) Wage would indeed be elastic, that those who wanted employment would be able to find it, or they would be able to create self-employment, and that the kind of active labour market programmes to which we have become used would no longer be required and would no longer risk depriving of employment those seeking it.
Terminology
Andrew McAfee’s lecture on Youtube is justifiably popular. He charts the way in which increasing automation is destroying employment, and asks how we are to manage a society in which machines and computers do the work for us. He proposes a ‘guaranteed net income’ and lists the economists and politicians who have advocated the idea. Frequently in this Newsletter we have drawn attention to the importance of accurate terminology. Some of the people McAfee lists recommended a Negative Income Tax, which in some ways works like a Citizen’s Income but can also have similarities to means-tested benefits. The context of McAfee’s lecture suggests that he might be thinking of a Citizen’s Income, because that would be the obvious answer to the problems that he delineates. But what he describes in the term ‘guaranteed net income’ is a means-tested benefit: that is, the government sets a net income level below which no-one will fall, and then guarantees that level by filling the gap between earnings and the stated minimum. This is as far from a Citizen’s Income as it is possible to get, and would do nothing to share out the paid employment still required by an automated society.
If you haven’t seen it, watch the video. It’s very good. But also watch the terminology.