Guy Standing and his colleagues have published Basic Income: A Transformative Policy for India – the results of an extensive Citizen’s Income pilot project in India.
The Joseph Rowntree Foundation has published Reducing Poverty in the UK: A collection of evidence reviews. The report discusses the balance between universal and means-tested benefits, and finds both to be necessary. The report approves of the Government’s ‘strategy of reducing means-testing by combining the basic and second state pensions into an adequate basic pension’, suggests that ‘dependence on [means-tested] benefits could be reduced by working to improve earnings among low-income families, and improving subsidised services used by families and thus reducing family costs’. It says that ‘means-tested demandside subsidies, such as educational maintenance allowances and student grants, can bring clear benefits by encouraging students to take up education opportunities’, that ‘around 40 per cent of those in poverty miss out on benefits such as free prescriptions, while more than 40 per cent of people not in poverty receive them, and given the complication of detailed means testing, more universal access to such benefits may make sense’, and that ‘means-testing can be most effective where it is seen as an essential and legitimate part of income maintenance and where it has a simple delivery mechanism’. In relation to the current debate about whether the Winter Fuel Allowance should be means-tested, the report says that ‘a generalised affluence testing policy could end up complex and, through downward pressure on the eligibility threshold, effectively amount to means-testing by another name’. (pp.61-2). [note]The section of the report on whether means-testing or universalism is the best way to tackle poverty is on pages 59-62 and is by Dimitri Gugushvili and Donald Hirsch, from the Centre for Research in Social Policy, Loughborough University[/note]
The Resolution Foundation has established a panel to review Universal Credit, and has published an initial report on the project: Universal Credit: A policy under review. ‘The principles behind UC are welcome. The benefits system should be simpler and do more to help people into work and to increase their earnings once there. The status quo has significant shortcomings, but the design of the system of UC currently being rolled out also has limitations, quite aside from the IT problems and personal finance requirements that have attracted most attention. Public spending cuts have already weakened many of the functions that were originally intended or forced hasty redesigns. More can be done, even with limited resources, to boost household incomes by encouraging work. Arguably, it would be best to implement changes to UC before it is rolled out to a possible 10 million families, and while changes in entitlement are covered by transitional protection’ (p.35).
The Institute for Fiscal Studies has published From Me to You? How the UK State Pension System Redistributes. ‘We find that state pension benefits under the existing state pension system are unequally distributed across the 1930s cohort. … Lifetime state pension benefits are … higher on average for higher earners than for lower earners. … We estimate that 20% of state pension spending on the 1930s cohort represents a transfer between different individuals, while 80% of spending simply reflects a transfer from earlier in individuals’ lives to later in their own lives. … The single-tier pension system would have a greater effect on reducing the inequality in the distribution of gross lifetime earnings than any of the other sets of state pension rules that we consider … We find that, for any given pension scheme, the extent of redistribution provided by the state pension system is lower once we allow for within-household pooling’ (pp.47-9).
The Joseph Rowntree Foundation has published a report, The UK Without Poverty, which states that ‘poverty is a cost we cannot afford. Reducing the costs associated with high levels of poverty in the UK would be positive for the economy’ (p.3). Among the report’s proposals is that we ‘continue with Universal Credit to increase take-up of benefits and smooth transitions in and out of work, and consider what further benefits could be included. To improve work incentives, increase the work allowance so more can be earned before benefits start being withdrawn, and reduce the taper rate so they’re withdrawn more slowly’ (p.27).
The Institute for Fiscal Studies has published research on tax policy changes in the UK: ‘While this government has followed some consistent policies – notably, in some aspects of corporation tax and in increasing the income tax personal allowance – there are few signs of a wider coherent strategy. The same has been true of other recent governments. Many aspects of the system have become more complex. There have been numerous policy reversals. And few of those aspects of the system in most need of reform have been tackled. The need for reform, and a clear strategy for reform, remain as pressing as ever. … There are very substantial economic and social welfare costs associated with a poorly-designed tax system and, conversely, big benefits to be had from a well-designed one. … There is irrefutable evidence that poorly-designed taxes can result in lower employment, lower wages, lower investment, and lower welfare …’ [note]Paul Johnson, ‘Tax without Design: Recent Developments in UK Tax Policy’, Fiscal Studies, vol.35, no.3, pp.243-73, pp.243, 270[/note] The paper suggests that governments conspire ‘to ensure that certain taxes are not well understood and can be manipulated accordingly. That seems to be the only way of rationalising much policy towards National Insurance contributions’ (p.271).
New research from the Child Poverty Action Group discusses Universal Credit’s ‘steep withdrawal rate’ that ‘kicks in when earning a bit more than £51 a week for a couple family, and just over £60 a week for a lone parent. Critically, the value of these levels (or ‘work allowances’) has been frozen for three years and so is diminishing in real terms. As a result, families claiming universal credit will feel even less of the full benefit of working more as time goes on. Second, once families are earning beyond their allowance, the amount they actually earn from working is pretty small. When they lose 65p of their universal credit award for every extra pound they earn (and then pay tax and national insurance too), it’s easy to see how working more doesn’t necessarily translate into money in pockets for those on low incomes … A recent TUC-CPAG project has shown that we can tinker around with universal credit as much as we like, but that won’t do much for poverty rates. … Unfreezing the work allowances and decreasing universal credit’s withdrawal rate need to be the reforms at the top of the pile’ [note]Lindsay Judge, Senior Policy and Research Officer, CPAG, ‘Credit where it’s due’, Fabian Review, Autumn 2014, vol.126, no.3, p.5[/note]
The International Social Security Association has published a report, Megatrends and social security – Climate change and natural resource scarcity: ‘In the aftermath of climate disasters, households often face great hardships. Privations include scarce basic necessities and lack of access to jobs. As well as increased mortality due to disease and trauma, such conditions can also generate extremism, bitterness and social breakdown. Such scenarios could be avoided or mitigated after the immediate impact by providing basic income security, thereby strengthening social cohesion and reducing conflict. One approach is the payment of a nominal monthly income without conditions, acting as a time-bound “stability grant” or “reconstruction grant” in the form of basic income cash transfers that support affected communities and help to kick start recovery. The provision of basic income security can help people rebuild their lives and livelihoods, increase micro-economic activity (ILO, 2010), so that communities can reach a point of self-reliance again. Such transfers are often considered as being the least costly and most rapid way of helping people in times of crisis after natural catastrophes, war or man-made disasters. They are also the most transparent and easiest to administer in comparison to food-for-work programmes.’ (p.23)
Compass has published a new report, New Times: How a politics of networks and relationship can deliver a good society: ‘… if paid labour is becoming more precarious and we are more able to create and work outside of the labour market – then how are we to put bread on the table? You can’t eat a TEDx talk! We can and must ensure that labour pays – through a decent and enforced minimum wage and wherever feasible a living wage. But that is unlikely to be enough. Nor is it likely to be sustainable to tie social security payments to taxes paid through labour – particularly if part time, zero-hours and precarious jobs are to become more prevalent. These are just some of the reasons why a Citizen’s Income should be more fully examined and discussed. A social payment to all, as of right, would help provide an underpinning to life in which we all have sufficient security to ensure maximum freedom. If work cannot offer us material security then we have to find a way of ensuring it socially. But until we build the consensus for such a radical change, work and labour still have to be meaningful. … If labour cannot offer security, then society must. By consuming less, enjoying the fruits of an era of zero marginal cost and taxing wealth and environmental damage, every citizen will receive a non-conditional income to provide them with the space to live more creative, free and secure lives. And here we have to accept that we cannot be both turbo-consumers, and genuinely free citizens at the same time.’ (pp. 20, 30)
The OECD has published a new report, Does Income Inequality Hurt Economic Growth? ‘The gap between rich and poor is now at its highest level in 30 years in most OECD countries. This long-term trend increase in income inequality has curbed economic growth significantly. While the overall increase in income inequality is also driven by the very rich 1% pulling away, what matters most for growth are families with lower incomes slipping behind. This negative effect of inequality on growth is determined not just by the poorest income decile but actually by the bottom 40% of income earners. This is because inter alia people from disadvantaged social backgrounds underinvest in their education. Tackling inequality through tax and transfer policies does not harm growth, provided these policies are well designed and implemented. In particular, redistribution efforts should focus on families with children and youth, as this is where key decisions on human capital investment are made and should promote skills development and learning across people’s lives.’
The Confederation of British Industry has published a report, A Better off Britain: ‘Firstly, we need to take immediate action to reduce the burden on those on low incomes and working families. These are things that can be done now – on tax and childcare – that will help, without throwing the recovery off course. Then we need to put in place a plan to raise pay on a sustainable basis – this can only be done by improving the UK’s productivity performance. … Ensuring people are equipped to progress in their careers through creating more and better ladders into higher-skilled work is also vital. This should include building a better understanding of the skills needs of the UK, better practice within companies on career paths and a focus on both retraining for adult workers and apprenticeships. A greater focus on making more of our talents by addressing the performance of our schools system to end the drag on living standards intergenerational inequality presents. … Finally, we need to develop ways for people to build financial resilience for when they fall on hard times. If people have the resources to cope with a rainy day, they will be less vulnerable to drifting into unsustainable debt, and the negative impact that has on people’s living standards.’ (p.22)
During a speech in September 2012, Ed Miliband suggested that to tackle poverty the UK needs better ‘predistribution’,  and not just ‘redistribution’: that is, we need people’s pretax incomes to be larger than they are now so that not as much redistribution is required to lift people out of poverty. In his speech to the 2014 Labour Party Conference, Miliband promised an increase in the National Minimum Wage to £8 per hour by 2020. This would represent improved predistribution for the low paid.
It is an interesting question as to whether a Citizen’s Income should count as redistribution or as predistribution. Everyone legally resident in the UK would receive a tax-exempt Citizen’s Income, and to it they would add earnings. This suggests that a Citizen’s Income should be counted as predistribution rather than as redistribution.
Another reason for linking a Citizen’s Income to the predistribution debate is the effect that a Citizen’s Income would have on the incomes of people on low earnings. [note]Richard Wilkinson and Kate Pickett, A Convenient Truth: A better society for us and the planet, Fabian Society, 2014, p. 33-4; Picketty, T., Saez, E., Stantcheva, S., Optimal taxation of top labor incomes: A tale of three elasticities, National Bureau of Economic Research, 2011[/note] As Wilkinson and Pickett point out in a recent Fabian Society essay, when tax rates are reduced we would expect the drive to earn more to moderate because with the same earned income disposable income rises; but the evidence is that the opposite occurs: because additions to earned income become more valuable when tax rates are reduced, lower tax rates result in higher earnings. If someone on means-tested benefits earns more, their benefits are reduced. Withdrawal rates therefore function as a tax on earnings. If the withdrawal rate is reduced, then the effective tax rate is reduced, earned income becomes more valuable, so more income is earned. Again, predistribution.
It would assist the debate on the desirability of a Citizen’s Income if we ceased to think of it as redistribution and instead regarded it as what it is: it is itself predistribution, and at the same time it is a stimulus to further predistribution.
The necessity and the feasibility of a Citizen’s Income
In the context of a discussion of the Labour Party’s intention to increase the National Minimum Wage if it wins the next General Election, the General Secretary of the Fabian Society asks:
But what about social security? A sudden increase in spending may seem impossible given the state of the public finances and public attitudes. But social security will otherwise wither away, with spending on pre-retirement age groups projected to fall sharply as a share of GDP over the next 15 years (from 5.5 per cent today to 3.9 per cent in the early 2030s according to the Office for Budget Responsibility). The Fabian modelling indicates that this will lead to low and middle income working-age households falling far behind everyone else. A long-term plan for social security is therefore essential. Labour should introduce reforms to widen popular support for social security, by seeking affordable ways to expand universal or contributory entitlements which reward effort and give everyone a stake …. [note]Andrew Harrop, ‘The Future of Government’, Fabian Review, vol.126, no.3, p.10[/note]
Readers of this Newsletter are likely to be well aware of the advantages that a universal Citizen’s Income would offer to our society and to our economy. Not only would its universality generate widespread support for the policy, but (to quote from our introductory booklet) a Citizen’s Income would also
- ‘end the poverty and unemployment traps, hence boosting paid employment
- provide a safety net from which no citizen would be excluded
- create a platform on which all citizens are free to build
A Citizen’s Income scheme would encourage individual freedom and responsibility and help to
- bring about social cohesion. Everybody is entitled to a Citizen’s Income and everybody pays tax on all other income
- end perverse incentives that discourage work and savings.
A Citizen’s Income would be simple and efficient and would be:
- affordable within current revenue and expenditure constraints
- easy to understand. It would be a universal entitlement based on citizenship that is non-contributory, non-means-tested and non-taxable
- cheap to administer and to automate.’
The question that we have not been so good at answering so far is this: Is it possible to implement a Citizen’s Income scheme that is at, or close to, revenue neutrality and that does not impose unacceptable losses on some households at the point of implementation? And, in particular: is it possible to implement a Citizen’s Income scheme that is at or close to revenue neutrality and that does not impose unacceptable losses on some of the poorest households at the point of implementation? A previous standard answer to this question has been: even if a household were to suffer a loss of disposable income at the point of implementation, it would be easy for that household to make up the loss by earning additional income, because with a Citizen’s Income the value of additional earned income would not be reduced by the withdrawal of means-tested benefits. However, this response would be little comfort to households at the point of implementation, and the existence of such losses would be likely to make the proposed scheme politically unacceptable.
The root of the problem is, of course, the way in which the current system provides both a Personal Income Tax Allowance and Working Tax Credits to low-earning households, and that a Citizen’s Income would match the Personal Income Tax Allowance in value but not the Working Tax Credits. An article in this edition of the Newsletter offers a solution to this problem. If instead of abolishing in-work and out-of-work means-tested benefits we leave them all in place and take into account the value of the Citizen’s Income when we calculate a household’s entitlement to them, then we find that the number of households with low disposable incomes suffering losses at the point of implementation is negligible, and that the number of losses suffered by households in general is manageable and, with some schemes, negligible.
Because large numbers of households would find themselves no longer entitled to means-tested benefits, and because large numbers of households would be entitled to smaller amounts of them and could therefore decide to do without them and seek additional earned income, the means-tested system would become the safety net that Beveridge originally intended it to be. So whilst some might regret that this way of implementing a Citizen’s Income would not immediately abolish means-tested benefits, for many households the result will be the same.
In the current context, a Citizen’s Income implemented in this way would offer everything that Universal Credit is attempting to achieve and more besides, and the Government that emerges following the General Election next year could well decide that such an easy reform would be a useful replacement for it. Because a Citizen’s Income implemented in this way would be genuinely universal, we would have no objection to it being labelled ‘Universal Credit Mark II’.
Given this possibility, we would be pleased to see further research on this option for implementing a Citizen’s Income, widespread debate on its advantages and disadvantages, and serious political engagement with the possibility.
Our last edition contained an editorial on benefits sanctions. We are pleased to see that the Joseph Rowntree Foundation has published a new report that reveals the depth of the problem. We are of course less pleased that the problem is so deep. We make no apology for repeating in full the report’s summary of its findings:
- Sanctions are now used much more frequently within the welfare benefits system. The severity of sanctions has also increased and conditionality is now applied to previously exempt groups (e.g. lone parents, disabled people).
- Benefit sanctions are having a strongly disproportionate effect on young people under 25, and there is also evidence of severe impacts on homeless people and other vulnerable groups.
- International evidence indicates that benefit sanctions (especially severe sanctions) substantially raise exits from benefits, and may also increase short-term job entry; but the longer-term outcomes for earnings, job quality and employment retention appear unfavourable.
- Little evidence is available on the impact of welfare conditionality in other spheres, such as social housing.
- There is qualitative evidence to suggest that, with appropriate support, interventions including elements of conditionality or enforcement may deter some individuals from anti-social behaviour and street-based lifestyles.
- The ‘theories of behaviour change’ underpinning conditionality have been questioned by commentators from both the Right and the Left, particularly with respect to the assumed ‘rationality’ of welfare recipients’ responses to financial sanctions and incentives.
- There are also concerns that welfare conditionality leads to a range of unintended effects, including: distancing people from support; causing hardship and even destitution; displacing rather than resolving issues such as street homelessness and anti-social behaviour; and negative impacts on ‘third parties’, particularly children. [note]Joseph Rowntree Foundation, Welfare Sanctions and Conditionality in the UK[/note]
The authors offer a discussion of the ‘reciprocity’ argument for conditionality and sanctions, but do not offer a solution to the problem that, in the context of a benefits system that offers little incentive to increase earned income, conditionality and therefore sanctions are likely to be required to move people without employment into employment. In our view, only a benefits system that both offers no employment disincentives will solve the problem, because only such a system will dispense with conditionality and therefore with the need for sanctions.
In a recent article in Renewal, Rachel Reeves, the Shadow Secretary of State for Work and Pensions, and Martin McIvor, an advisor to Rachel Reeves, reflect on the legacy of Clement Attlee and of the 1945 Labour Government, and suggest that the principles underlying Attlee’s and his government’s policies are still relevant today, including ‘the need to ensure our social security system works with the grain of the values and ethos of British people, in particular their belief in fairness, solidarity and the dignity of work’. [note]Rachel Reeves and Martin McIvor, ‘Clement Attlee and the foundations of the British welfare state’, Renewal, vol.22, nos.3-4, 2014, p.57[/note] The way in which our current Tax Credits system ensures that many workers receive only 15p more disposable income for every extra £1 they earn (and for some it’s only 5p) does little to dignify work. The situation will be little better under Universal Credit ( – those paying Income Tax at the same time as their Universal Credit is being withdrawn will retain only about a quarter of any additional earnings). The way in which low-paid or short-hours employment imposes on families complex and demeaning means-tested regulations exacerbates the effect. Employment and dignity are not concepts that sit easily together for low-paid employees in receipt of Tax Credits. And the fact that the higher paid are not subjected to such undignified deductions and regulations, whereas the low-paid are, is not fair and it doesn’t generate solidarity. We hear it said that a 50% Income Tax rate would be too high; but we don’t hear the higher paid saying the same thing about the marginal deduction rate suffered by people with low pay on Tax Credits.
If the Labour Party finds itself in government after the General Election then we look forward to the new Secretary of State for Work and Pensions establishing a fairer benefits system than we have now, and one that promotes both solidarity and the dignity of work. We would recommend a benefits system based on a Citizen’s Income, which would be entirely fair (because the same for everyone), which would generate the kind of solidarity that we have never yet seen in our tax and benefits system, and which would enhance the dignity of work, both by valuing caring and voluntary work and by making it easier for workers to refuse lousy jobs. A welfare state based on a Citizen’s Income would be a worthy successor to Attlee’s welfare state, and to the fair and solidaristic NHS and Family Benefits that were at its heart.