Say ‘No’ to Finnish example of state benefits

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Auckland, March 25, 2017

The idea of a state giving away money to its citizens with no strings attached does not sound like a sustainable economic policy, but that is what Finland began doing at the start of 2017.

University of Auckland Business School economist Dr Ryan Greenaway-McGrevy argues that New Zealand should seriously consider trialling our own version of the universal basic income.

The 2000 participants in Finland’s radical experiment, randomly chosen from those on welfare, will each get 560 euros ($860) a month – and the payment will continue even if they get a job. The hope is that providing a basic income will offer recipients financial security and allow them to make life plans.
It is not the first time a universal basic income (UBI) has been trialled. Pilot schemes have been run in Namibia, Ontario, Manitoba, Utrecht and elsewhere.

Displacing jobs

Recognising that technology is displacing jobs, Silicon Valley start-up accelerator Y Combinator has begun a basic income experiment in Oakland, California to provide what its President Sam Altman, calls “a cushion and a smooth transition to the jobs of the future.”
Dr Greenaway-McGrevy, a senior lecturer in Economics, agrees that the changing basis of economic prosperity demands a fundamental rethink of the way society is organised.
“Finding a job for life is likely to become increasingly difficult as technology advances and roles become automated, so we need to think hard about from where self-worth really comes. A guaranteed income would challenge the notion that people are only valuable to society if they are in paid employment,” he said.
“The industrial revolution also caused massive disruption, and over the long term it led to an increase in everyone’s standard of living. But it took a long time for the people at the bottom to benefit – the latest research suggests it took about a century. Technology is a good thing if everyone can share in its benefits,” he said.
Labour’s concept dismissed
In 2016, the New Zealand Labour Party expressed interest in something similar, pointing to a scheme proposed by economist Gareth Morgan in which every adult New Zealander would receive a basic income of $210 a week. The then Prime Minister John Key was quick to dismiss the concept as unaffordable and “barking mad”.
Instead of dismissing it out of hand, Dr Greenaway-McGrevy said that policymakers should give serious thought to how the UBI could work.
He said that many of the proposals to redistribute wealth have strings attached that cause people to change their behaviour.

Currently, the unemployment benefit, which is intended as a financial safety net and only paid while a person is unemployed, can act as a disincentive for people to take low-paid or temporary work.

A basic income, which is paid regardless of other income, would remove that barrier.
“A UBI would be a one-shot welfare policy that would replace much of the complicated system we have now and would be far less costly to administer. But the cost of paying every citizen a basic income would be substantial, and so it would need to be implemented as part of a broader restructuring of the taxation system.”

Capital Gains Tax
Dr Greenaway-McGrevy suggested implementing a proper capital gains tax or a land tax, and doing away with progressive income taxation which, at the other end of the pay scale, can encourage tax avoidance.
“A flat income tax coupled with the UBI could be quite progressive, because the basic income would be tax-free.”
One of the possible side effects of a UBI could be to raise wages in low-paid jobs such as in supermarkets, fast food outlets and cleaning services as these became less attractive to job seekers. As a result, the price of many goods and services could rise as businesses seek to recover the increased cost of labour from consumers.

Welfare ‘disincentives’
He also emphasised that many other welfare policies create disincentives for firms to hire people. Minimum wages, for example, can contribute to higher unemployment as firms that are reliant on lower-paid workers respond by reducing their workforces.
“If we agree that it is the State’s job to help those who are less well off, let us do it directly, and not force firms to do it by default.”
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