Tuesday 22 December 2015

How high could a UK Universal Basic Income be?

Tom Streithorst, in Coppola Comment, discusses the rationale for a Universal Basic Income (UBI). He states that:
It may seem impractical, even utopian: but I am convinced the BIG [UBI]will be instituted within the next few decades because it solves modern capitalism’s most fundamental problem, lack of demand.
It is a view that that I have a lot of sympathy with. There is clearly not enough demand in the economy and this is one way of fixing this. Also, as Streithorst points out, and I discuss here, technology may be improving productivity, but it is up to us to make sure that this translates into improved quality of life for everyone rather than a bounty for the owners of technology and serfdom for the remainder. UBI is one way of distributing the wealth of society more evenly.

When a £72 a week basic income was included in the Green party election manifesto, at a cost of £280bn per year, Natalie Bennett, the Green party leader, was ridiculed for not having details of funding. However, I believe that it is possible and here I propose to work out an approximate level of basic income that would be feasible given that the government is trying to hit a nominal GDP target.

The basis of these calculations is the DBCF model I develop here. This model looks at demand and how targeting of cash flows can influence this demand and hence NGDP. The analysis from the paper is that the UK economy has a structural savings rate of around 3%. This is to say that for every £100 spent on GDP additive goods and services in year 1, only £97 is spent in year 2. The remainder of the demand is made up for  in government deficits and private sector debt.

We currently have a chronic shortage of demand and the UBI can fill this gap. For this reason, and because it has a high multiplier, it is valid expenditure. It can be funded either with a helicopter drop or with government debt; the important point is that a NGDP level is targeted and that it is done responsibly so there is no loss of confidence in the government.

I attach a spreadsheet here with the calculations so any assumptions made can be changed by the reader.

The assumptions are as follows (the reasons for these can largely be found in my paper here):

  1. The structural savings rate in the economy is 3%.
  2. NGDP growth target is 5%.
  3. The multipliers of both UBI spending on NGDP and current government deficit spending on GDP are both 1.
  4. Recipients will be all people 15 years and older.
  5. Current government deficit is 4%.
  6. All UBI is taxed at marginal rates of income tax.
  7. The average marginal rate of income tax is 30%.
  8. The UBI replaces 80% of current pension spending.
  9. The UBI replaces 50% of current welfare spending.
Given all of these assumptions, a viable level for the Universal Basic Income is shown to be approximately:

Note that this level is around the level of the basic state pension, so pensioners would not lose out. This could replace tax credits and also a fair amount of welfare spending (I have put 50% into the calculation above). 

Obviously it would be recommended that this is slowly built up to; the assumptions, especially around multipliers, may be incorrect. But it gives an approximate idea - and I think that this is important.


  1. without a land value tax the UBI surplus would just go straight to the Landlord in the form of higher rents,which would undermine the even distribution of increased demand that this policy hopes to achieve.Although I believe the green party included the LVT in their last Manifesto.

    1. I do see your fear here. But the first step to a lower house price and lower rent economy is to rebalance the economy to increase the gdp to private debt ratio. More demand without increasing debt, with higher interest rates, are the way to do this imo.
      I agree too that a land tax is not a bad idea though. The incentives to the rentier need to be reduced.

  2. Ari, thanks for this and thanks for your spreadsheet and thanks for your comment on Frances's blog. My question: why is £6,600 the affordable BIG? My own nonquantitative understanding of BIG is we get some savings by eliminating other welfare payments but mostly we finance BIG by either increasing the deficit or by printing money. With increased demand, the economy grows but inevitably BIG will be inflationary. Fortunately, we have the tools to fight inflation (at the zero lower bound we don't have the tools to fight deflation). So,a BIG financed mostly by helicopter drops stimulates the economy, is inflationary, and thus is redistributive, from the rich to the poor, from creditors to debtors. Is this how you see it? I would very much like to continue this conversation. Perhaps you could email me at tstreithorst@gmail.com. Thanks.

    1. Tom, thanks for the reply, and I will email you with more detail but briefly wanted to respond here as it is an important question.

      Basically, I agree with how you see BIG. But you are asking (I think) why there is a maximum level in the model I use.

      In general, I see the success of the post-war Western economies as a 'success' in regulating demand such that the economy has enough money spent to be able to hit the trend level of growth determined by new technology etc. But in a way, it was a huge experiment involving growing private sector debt by around 10% of GDP each year. By gradually lowering rates it was possible to keep private sector debt growing so much, but now we have hit the lower bound and are stuck.

      Unfortunately this is now seen as a success for free market economics and financialisation of the economy, and not as a total failure (which it should be seen as because it was unsustainable and has led to a stagnant rentier economy). The economy now in the UK, as discussed in my paper (on the sidebar), has a structural savings rate of probably over 3% per year. For every £100 spent in a year, only £97 is spent the next year. The remainder needs to be found from somewhere and preferably this is not by forcing more private sector debt on people (although this appears to be the aim of this government).

      But just as there is a limit to monetary policy at the zero bound, there is also a limit to monetary policy the other way.

      As a thought experiment, imagine that a basic income of £50k was paid to 50 million people in the UK. If a multiplier of 1 is assumed, an extra £2.5 trn would be added to a £1.6 trn economy.

      What could the central bank do? The main tools at the central bank's disposal are creating and discouraging new debt. This is how they have traditionally increased money flow enough to keep spending high enough. Now they have to work the other way. They have to encourage loans to be paid back. They could increase interest rates to 20%, they may create massive bankruptcies and a lot of people would pay back loans. It would be unorthodox and cause a lot of misery, but this may keep inflation stable with this.

      But then what would they do next year? They could then create much more deleveraging. But eventually private debt would be down to almost zero and they would have hit the upper bound!

      This is an extreme example, but the point is that ideally the economy will not rely long-term on deleveraging to keep the economy stable. Because this too is unsustainable (in the opposite direction - we will have uncontrollable inflation, rather than deflation).

      The idea of the model I have formulated is that demand should be kept in an equilibrium whereby new private debt is not required but also deleveraging is not necessary. For this condition to be kept, the basic income above is approximately one that fulfils the mandate.

      (that wasn't very brief, was it? Anyway, I will email you now to continue as I am very interested in your views on this)


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