Is Universal Basic Income The Best Way To Combat Rising Inequality?

A Universal Basic Income (UBI) uses the idea that all the citizens of a working age in an area receive a given sum of money irrespective of their circumstance. This social concept is arguably one of the most ambitious constructs which seeks to remove poverty in a sustainable and efficient manner. The idea is still under debate as to whether it will be used to work with/against the current welfare system where people generate their own incomes to create the necessary funds to live. The system relies on government funding to provide for everyone in the country and is gathering momentum in several different countries having been trialled in regions of Canada and the U.S. Although it has not been used for a sustained period, several modifications have been made to try and satisfy as many people as possible. For example, a Minimum Basic Income ensures that people have enough money to stay out of poverty. At the same people many people feel that it should offer an alternative to work giving the population a choice on how to live. The scheme suggests that the government wouldn t collect any tax revenues, however in 2018, the government aims to collect almost £250bn from income tax, as a result we would inevitably see major cuts in other department to finance the transition. With this new concept, the UBI aims to tackle poverty, and this would theoretically reduce the inequality gap, an arising issue in recent years for the UK. Consumers would feel reassured that they would always be covered by the government in all circumstances, in turn, we could see a significant increase in aggregate demand as consumer confidence increases leading to a rise in consumption. This could act as an insurance policy for many workers, as employees would feel less afraid to demand better working conditions or reasonable wages, ensuring people receive a better working environment, which would improve the living standards of everyone involved.We also need to consider the problem of inequality and what sort of factors influence the distribution of incomes and wealth. In the UK currently, the top 25% of earners have approximately 60% of the wealth in the whole of the UK. This reflects how incomes are skewed to favour the rich, resulting in misleading GDP values which have been weighted. Real household incomes grew by only 0.2% from 2006-16 and are not predicted to return to their peak in 2008 until at least 2025. The problem of inequality is a challenging prospect and with current financial conditions, the rich are likely to become even richer increasing the income gap. Whilst low- income earners have been struggling to pay for basic needs such as food, the constant low-interest rates have offered the perfect opportunity for the rich to invest more. Whilst this increases aggregate demand, the gap will continue to expand, suggesting GDP is not the ideal measure of living standards. For example, high-income workers have turned to property investments because of the relatively risk-free returns which has seen a dramatic increase in house prices as the supply for housing cannot match the demand. Rising house prices again favour the rich as low-income workers find it increasingly harder to get onto the property ladder. This creates a lack of security with no property to act as a safety net, leading to a decrease in consumption and living standards. This is only scratching the surface of inequality in the UK with many other factors also influencing the balance (e.g. the regressive effect of indirect taxes). UBI would first need to address all of these problems before fully being able to enjoy the benefits of this concept.In terms of implementing the concept in society today, the lack of incentives to work is arguably one of the biggest issues surrounding a UBI, if people are guaranteed a certain level of income, then what is the need to work? While this is an alarming thought, when a UBI was trialled in Canada during the 1970s, it was recorded that employment rates only dropped by 1% and therefore this may not be as serious an issue as initially thought. Whilst the overall output of the region dropped slightly, many used the safety net of a guaranteed income to spend more time training and developing skills as well as searching for better jobs, suggesting that if anything, a UBI is an incentive to work at a higher level. It also offers people more choice as to where and how they want to work, which in the long term could increase productivity and output. The common conception is that a UBI promotes laziness and a decrease in productivity, but if we take a look at the current welfare system, there are several fundamental flaws which contradict the ideas of a UBI. Currently, people who have been out of work for an extended period receive unemployment benefits- e.g. a Job Seeker s Allowance (JSA). However, if they find employment, it is often the case that their benefits are cut, and they earn less than they would previously get from benefits. Whilst they are now actively working, they are rewarded with less money and this simply encourages laziness. Why work at all when you earn less while working?Ed Miliband believes that a UBI could be necessary with advancements in technology somewhat threatening employment rates. He stated, For people chopping and changing their jobs, it could be particularly appropriate , with fewer jobs available, many believe there are simply not enough opportunities for people to work and generate an income which they can live off. A UBI would be needed to provide money for at least the short-term future. The government cannot afford to allow a significant decrease in consumption and therefore it is understandable that people are supporting the UBI system. As the gap between the rich and poor continues to separate, it is also important to bear in mind the effects of inequality, most noticeably the change in crime rates. Inequality drives lower income workers to crime because they simply don t have enough money to sustain themselves. In this regard, a UBI could be a viable option as people would have enough resources to survive and since the gap between the rich and the poor would decrease, the stigma of a social hierarchy could be reduced or potentially eradicated altogether. It is important to remove crime as an impact of inequality as this disrupts the balance of society further and has several economic repercussions.Arguably, the biggest difficulty we must overcome as a society if we were to use a UBI is the not long-term effects, but the actual process of implementing and introducing the idea. Firstly, the government must find a way to fund the whole operation. This would require cuts from the budget of other departments, a topic which would certainly lead to some discussion. Alternatively, the Bank of England could opt to use Quantitative Easing as they have done in the past. But QE on this scale would have many unwanted side-effects . The sudden creation of money can completely devalue the GBP, which is a dangerous problem in the long term. With everyone being able to buy everything, we could a significant increase in inflation rates. And if the purchasing power of the population decreases because of this, it almost negates the effect of the UBI in the first place as living standards would decrease overall. The state would have to increase the UBI as purchasing power decreases. This means taxing firms and the rich, if they increase corporation tax for example, then companies will respond by increasing the price of their goods to maintain profit margins. This increases inflation and so the state would be forced to increase the UBI as living standards would continue to decrease despite an increase in nominal incomes. This cycle could cause significant problems for the economy, and even if a UBI were to work, it would require continuous monitoring and maintenance before the state could even consider how to reduce inequality, the primary objective of the UBI.Furthermore, the government will always have to act as a safety net for the population. If people choose to spend the money wastefully, the government will have to step in and offer them the equivalent of a JSA to maintain aggregate demand, and if they do this for a small percentage of the population, there is the danger of a slippery slope where everyone follows this knowing the government must compensate for them. There are major question marks as to how effective a UBI would be in solving the problem of rising inequality, the UBI targets low-income workers to ensure they have enough to survive and stay out of poverty. If we take this logic, little is done to restrict the financial power of the rich as they would still have the conditions and the freedom to expand their wealth. In this way, a UBI would only solve part of the problem and the government would be forced to increase the number and effect of progressive taxes.The first thing that often comes to mind when people discuss a Universal Basic Income is the incentive to work. The idea has divided opinions for several years, and whilst we have not seen a noticeable decrease in productivity when the UBI was tested in Canada, a UBI will obviously have varying effects in different countries. The concept is completely dependent on people being motivated to work productively and sustain economic growth. If this isn t the case, then the foundations of the economy will collapse, and this would certainly lead to an economic crisis. Even if the idea does work in the short-term, there is the danger that future generations might not realise the importance and need for work to produce goods and services. A UBI might imply that all goods just appear on shelves and this kind of thinking can have many negative repercussions. People are pessimistic about the idea because of the uncertainty that surrounds it, there is unavoidable risk attached which may deter people. Politicians would find it incredibly difficult to conceal this whilst promoting the transition from the current welfare system to a UBI. Most of the population s financial security could potentially be threatened which is discouraging for a politician when you need the backing of the public. In principle a Universal Basic Income seems like a clear and easy way to reduce poverty but practically, the concept carries long-term costs and complications which could remove the foundations of an economy. We have seen and discussed the pros and cons of a UBI to combat inequality, but are there any other alternatives to reduce inequality? Firstly, there are different views on inequality and debate over whether we should look at income or wealth as the indicator here. If we focus on incomes, the obvious way to reduce income inequality is to increase taxes on high income workers, this extra revenue from income tax can be pumped back into the economy to support low income workers, in this way the state restricts the financial power of the rich at the same time as helping the other end of the spectrum. This seeks to directly tackle the problem of inequality from two sides which is something the UBI struggles to do. Whilst a UBI could be more effective in preventing poverty, it does little to control the power of the rich. In addition to this, if the UK economy was working at full capacity, then any extra aggregate demand would result in more inflation with little/no GDP increase. This has a regressive impact as low-income workers are hit hardest with increased inflation, in this case, it might be wise to introduce a maximum price control on some markets. This limits the exploitation of lower income workers to reduce the rising inequality.Rising inequality is certainly an issue that needs to be addressed in the UK, as mentioned previously, the government has a few options at their disposal, a UBI as a concept is an idea that is gaining momentum in a few countries although as we have discussed, there are inevitably some drawbacks that come with it. Whilst everyone appreciates that we should aim to remove poverty completely, a UBI doesn t practically solve this. The cycle of inflation and raising the UBI can be problematic and in this sense, I believe that we need inequality in any economy. If everyone were able to afford everything they wished for, we would see the price of goods and services skyrocket and so inequality is important for determining supply and demand of various markets. The costs of implementing the UBI on a national scale and managing these markets make it difficult to see how the system can be sustained over a prolonged period. Then of course there s the question of whether a UBI could work as intended in the UK having been declared a success in regions of Canada.Even if the UBI were to work effectively, whilst poverty may have decreased, the rich will simply continue to get richer with the current financial climate and therefore we still end up with the problem of rising inequality. Whilst we can add other progressive conditions to accompany the UBI, why are we not increasing progressive taxes with the current welfare system? This is epitomised by the fact that income tax on the highest earners has dropped from around 80% to 45% in recent years. Having seen this, there is no surprise the UK faces rising inequality. Because of all these factors and the risks associated, I believe that in the UK, a UBI is not the most effective solution to combat rising inequality.