Business Unusual

What would happen if Government just gave everyone free money?

This subject was first raised in January 2017 as Finland started a trial to determine what impact offering 560 Euros to 2000 randomly chosen unemployed citizens would have on their lives and ability to find employment.

It was not the first experiment, nor a new idea. Its history can be traced back over a hundred years. The reason it is getting more attention is two-fold. Despite the reduction in abject poverty around the world, the number of people employed in short-term or freelance and contract work has increased.

They lack the security of a permanent job and the benefits like a pension and paid leave that comes with it. The relatively low wages effectively mean they live from paycheck to paycheck and should funds be needed for an emergency, they could slip into poverty.

The second reason is automation. Many of the jobs referred to above are being filled by robots or computer systems.

For a country to have a significant part of the population either vulnerably employed or unemployed is not sustainable. The near future for most countries suggests this is a real possibility.

There are a variety of interventions to avoid such a scenario and depending on your political outlook it could range from doing nothing to paying everyone a salary.

The crafters of the Finnish trial had hoped to test the impact in two stages; impact on those who are unemployed and on those that are employed. Unfortunately, as with many similar trials in the past, the political appetite to complete it changes over time and so the component to test the impact on those that are employed has been suspended.

The initial results have been released with more statistical elements to be released later. The basic income was set at the same rate as the unemployment benefit; the difference with the test was that it would be paid regardless of whether the employment status changed.

It does not appear to have had a significant impact on lowering unemployment. It does appear to have had an impact on a personal sense of well-being and confidence in the future. The preliminary report is available now with the final report due for release towards the end of the year.

Hope for the future

Historian Rutger Brugman has a TED talk that explores why the poor also make poor decisions about their future. He suggests that poverty induces a scarcity mentality effectively blinding you to future possibilities which leads to only short term actions. Decisions about health, nutrition and wealth which require long term considerations are not taken in favour of living day to day.

When the future does not look hopeful

Economist Guy Standing describes those with limited or no employment as an emerging class - the precariat (the precariously employed and those with limited options for getting work).

He further breaks the group down into three.

The first group are the typically older workforce that has seen the erosion of their earning ability. As the jobs they had held become automated, their dissatisfaction is based on a lost past. He and others attribute the margins needed to support Brexit in the UK and voting for Donald Trump in the US.

The second group consist of minorities, immigrants and women. Their predicament can be described as lacking a present. Their vulnerability is how to survive given they are viewed by the dominant classes as marginal.

The third group are the younger group who after having committed to a path of education in the hope of securing a job in a long term career appear unable to get it. Their predicament is a lack of a future.

Rutger in a recent panel discussion at Davos spoke about the issues facing those with limited prospects by challenging the very wealthy to acknowledge their disproportional benefit in the economy and unwillingness to return a fair share of it. He said philanthropy was not the path to equity, but more equitable taxation was.

The challenge for the future is how nations should best embrace advances in technology and engagement with multinational suppliers of products and services while sustaining their own societies.

Tax avoidance by global companies is one element, the loss of jobs for those that lack significant education and specialist skills is another.

Countries will need to contend with the prospect of stagnant tax receipts from individuals and low receipts from corporates with the prospect that the largest may avoid tax entirely.

At the same time the demands for education, effectively requiring everyone to get tertiary education and healthcare with growing costs to look after an ageing population will further stress existing budgets.

While the Universal Basic Income is one option to provide both a safety net and simplify the implementation, it is not the only option being explored.

Universal Credits are grants provided for everyone relating to child support, housing allowances and other grants relating to healthcare, education and income.

The other option is a negative income tax which uses the revenue service to manage payments to those that earn less than a set amount.

While all have merit, the real challenge is how to best fund the programs. If there is insufficient income in a country, it does not matter what method is suggested. The countries that most need the intervention are those that can’t afford it. Or rather they typically lack the capacity to effectively run the revenue and collection programs that are needed to deliver them.

South Africa uses limited but not insubstantial grants to directly assist those most in need. For the 2018/2019 budget, R268 billion has been allocated for social grants. The cost to manage the dispersal is set at R9.6 billion. Assuming all South Africans could be registered and we maintain the current spending to manage the process it would allow for about R400 per month for each of the 57 million South Africans. If applied as a negative income tax it would reduce the total but only by about 13% which is the proportion of the population that pay income tax.

Even if the administration could be reduced the saving would still not offer a significant increase: R455.

If there is a small light at the end of the tunnel it is that when funds can be more equitably shared and those in poverty can be given some hope for the future, associated costs to health and safety can be reduced. Those reductions may allow the payments to grow to a point that will not only offer a more secure future but begin to generate their own economic impetus as the funds are effectively returned into the economy.

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