A British Basic Income: Developing a ‘New Labour’ version

The election of Sir Ed Davey as new Leader of the Liberal Democrats means the UK’s traditional centre party is likely to endorse a version of a universal basic income (UBI), given their new leader’s previous public support. Formal support of a UBI by the Liberal Democrats will help to further ‘mainstream’ the concept of the UBI, a policy often wrongly cast as a utopian fantasy of the radical left.

There are as many different variants of a UBI as they are proponents. Much like ‘Brexit’ or ‘House of Lords Reform’, people can support it for completely different reasons and thus have completely different, even opposing, versions of it. The one common component of all UBI proposals is the fundamental principle of a precise income provided by the state to all citizens (or at least working-age adults) without condition.

One long-standing supporter of a UBI is Tory Grandee Sir Edward Leigh, a former acolyte of Margaret Thatcher and former scourge of ‘extravagant’ government spending as Chairman of the Public Accounts Committee. Across the Atlantic, support for a UBI on at least a temporary basis has also been floated by former Republican Presidential Candidate Mitt Romney.

Within Labour however, the UBI has typically been seen as a policy of the radical left, associated with former Shadow Chancellor John McDonnell and many ‘Corbynites’ within the party. Partly due to such associations, ‘moderates’ in Labour have been relatively sceptical or critical of UBI. They should now engage and begin developing a progressive and realistic centre-left version of a UBI. This is what I have tried to do in ‘A British Basic Income’, a recent e-book accompanied by a detailed excel model to disentangle the fiscal nitty-gritty of a particular version of the UBI.[1]

Unlike most UBI proposals which contrast the superiority of a UBI to the existing benefits system, this approach contrasts a UBI relative to existing anti-poverty components of the tax system. This includes the personal allowance and the VAT zero-rating of a large number of ‘essential’ products. Together, these two policies, both of which are justified on specific anti-poverty grounds, ‘cost’ the Exchequer nearly £200 billion per year in foregone tax revenues. This ‘cost’ to the Exchequer leads to such policies being labelled ‘tax expenditures’ by economists, a phrase which encapsulates their functional equivalence to other anti-poverty expenditure such as Universal Credit.

Due to these two policies constituting ‘reliefs’ from taxation as opposed to direct government expenditure, they do not undergo rigorous scrutiny over value for money as takes place for the NHS budget for example. Since these two policies are very poorly targeted, and with much evidence that the richest receive a disproportionate share of the benefits of these policies, it is quite clear that any progressive government should consider replacing them with a more effective alternative.

Even allowing for compensatory increases in state pensions and child benefit (to compensate for increased prices if VAT was applied consistently at 20%), abolishing the personal allowance and VAT zero-ratings would allow for a basic income of £5,300 per year per working age adult (or nearly £450 per month). Such a move would radically improve post-tax income distribution, but without suffering the disadvantages which arise from high marginal tax rates or other redistributionist policies such as strong trade unions or wage regulation.

Due to the many different versions of a basic income, and possible unpopularity with the media and public (who may see it as ‘something for nothing’), it would be best if it was proposed as a ‘reformed’ personal allowance. This approach most easily demonstrates its clear superiority over the contemporary approach of a high personal allowance and narrow VAT system, as the ‘reformed’ personal allowance enhances post-tax income equality, simplifies taxation but without imposing high marginal tax rates.

This is before we even approach the subject of benefit reform. Integrating the new personal allowance with our existing benefits system will be very complex, and thus it would be best if this was to wait until after the ‘reformed’ personal allowance was initially introduced. However, the slow introduction of the universal credit may help by leaving the next Labour Government with a comprehensive benefit which can be easily integrated with a reformed personal allowance, to create a Universal Personal Allowance (UPA) of £6,000 per year (£500 per month).[2]

Such a payment will enhance income security at a time where job security is threatened, radically simplify our benefit structure, and redistribute post-tax incomes in favour of the poorest. All of this is required for the UK to overcome the social, economic and fiscal fallout from the Covid crisis. Labour’s progressives need to join this conversation by creatively redesigning our tax and benefit system for our new age.

[1] https://www.stevemaceyconsulting.com/british-basic-income

[2] Again, figures via https://www.stevemaceyconsulting.com/british-basic-income

Steve Macey is a former HMRC Economist who has consulted for the IMF, World Bank, UN Environment and the Department for International Development on tax reform in developing countries. He is the author of ‘A British Basic Income’ available via Amazon at https://www.amazon.com/British-Basic-Income-design-implementation-ebook/dp/B08C7X32L4

He tweets @stevemacey1985

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