The case for a citizenship income (and its caveats)

If a government wants to eradicate poverty, it has to first provide its own definition of poverty – that is, what is deemed to be the minimum amount of income a person needs to be able to live in that country – and then it has to transfer to each citizen that minimum amount of income. Would this work? Possibly yes. This course of action takes many names: citizenship income, universal basic income, or basic income guarantee. To keep it as close as possible from the Italian equivalent, we will call it citizenship income (CI).

Although it is a rather old concept, following the Italian elections in March 2018, CI is now as popular as ever. Why a political party brought up a CI in its manifesto? Does it really help the poor? Who pays for it? Is it a feasible measure to adopt? Answers to these questions are rarely binary, but we can still try to understand the economic reasoning behind.

Economists envisage a CI as a non-conditional and un-targeted (universal) cash transfer (Van Parijs, 2003). For instance, if the poverty line in country A is set to €500 per month, each of its citizens will receive a monthly transfer of €500, regardless of the socio-economic status and behaviour. Given these features, CI performs well compared to other State’s benefits, which are normally conditional and/or means-tested. For example, a CI would allow the State to cut on administrative costs, since there is no need for intense screening or monitoring (that is, all the actions conducted to make sure that the eligibility criteria for a benefit are met). On the contrary, some institutional body should closely supervise a cash transfer to families conditional on sending their children to school and whose income is below a certain threshold, since these three facts need to be verified (i.e., family, school attendance and income threshold). Universality helps making the system more transparent and limits corruption, and unconditionality makes sure that recipients’ actions are not distorted (Ghatak, 2017) – as it would happen to the families in the example above, where they need to send their children to school to receive the transfer.

Despite its many advantages (lower administrative costs, less room for corruption and less interference with a citizen’s personal life), CI has several detractors. The main arguments raised against it are three: it is too expensive, it is a disincentive to work, and it increases prices. While the veracity of these arguments is debatable, let’s see why none of them is may be a real threat to the implementation of a well-designed CI.

“If we had to pay each citizen €500 every month, the national budget wouldn’t be able to sustain it and we’d had to raise taxes” – who has never heard such sentence? Many countries spend already a share of their budget to reduce poverty or to help the poor. So, in practice, existing resources would be reallocated towards a CI at the expenses of other national safety nets, which are not needed anymore (Ravallion, 2017). For example, unemployment benefits may disappear and health care receive fewer subsidies from the State. By saving on some costs, the State would be able to provide a CI almost without touching taxes.

“A CI incentivises laziness and it is a disincentive to work”. We need to point out that the CI amount would be designed to barely allow a person to make ends meet, so that a person’s incentives to improve his financial situation remain. On this respect, it could even promote employment since it relaxes many constraints that poor people face when looking for jobs, such as the costs of buying a suit, printing CVs, taking public transports, give up on the informal job’s opportunity, and so forth. On the other hand, it would act as a disincentive to work if the benefits were to be taken away from the citizen once he finds a job – this is one of the most serious issues for targeted policies such as the unemployment benefits.

“If we inject €500 in the economy per each citizen every month, prices will rise offsetting the benefits”. This may be true if the government followed the famous helicopter vignette that throws newly printed notes to people. However, the money transferred to each citizen already exists and circulates in the economy, so the impact would be a shift in demand from certain goods and services to others. For instance, we can expect demand for leisure to go up, which can have a positive impact to people’s well-being; but for prices to increase as a result it is not possible to make a prediction: that depends on the supply’s response. Having said that, the way the government decides to fund the CI matters for price levels. If indirect taxes, such as VAT, are used to finance the policy, then prices of goods on which these taxes are applied will increase.

In the context of Italy, the Five Star Movement has proposed a CI that presents different features from the one just described. Financial help will be given to families, or single citizens, who are considered in “absolute poverty” (people who have a monthly income of €780 or less, according to Istat), and who are looking for jobs and have not taken down job opportunities for more than three times. If a citizen’s income is below €780, a transfer is made of the difference between this amount and her income; lastly, when her income is more than €780, financial assistance is interrupted.

So, the name is CI but its features make it closer to targeted assistance, of which we have discussed the drawbacks. Above all, this targeted assistance risks to create a real disincentive to work: why would someone keep working if earning anything less than €780, when she would receive that amount anyway? Maybe she’d rather take on a position in the informal economy to have two incomes, or stop looking for jobs if unemployed. People’s reaction to a policy matters because it shows the possible side-effects. For instance, if people cease to actively look for formal jobs, fewer taxes are paid and the budget for the financial aid gets smaller. As a result, workers will have to pay a larger share of taxes and may start to find it unfair: political stability may be undermined, capital would fly off borders and other people may find it more optimal to just quit their jobs and live out the aid and some informal activity.

Now, there surely are many sound (economic) reasons why a CI found plenty of detractors, nevertheless it seems a plausible policy if well designed and implemented. In other words, it may be politically difficult, but it may be economically viable; a targeted assistance as the one proposed, conversely, does not seem to have sound economic ground.

Andrea Ibba

Andrea Ibba comes from Genova where he was born in 1992. He left Italy when he was 19 in a quest to learn skills and gain experience to make a fairer, more sustainable world with better human rights. He holds a BSc in Economics from City University of London and a masters in Public Policy and Development from the Paris School of Economics. Andrea’s research interests comprise labour economics, tax and transfers, economics of development, credit risk and poverty alleviation. Andrea works as a Research Officer at the Centre for Economic Policy Research (CEPR). At CEPR Andrea works in the Private Enterprise Development in Low-Income Countries (PEDL) programme, where he is responsible for assisting the Scientific Coordinator with the evaluation of research proposals, the assessment of scientific progress of ongoing grants, and the output and dissemination of results from funded projects. He loves reading and travelling. Although he may be travelling alone, he will always have a book by his side. Sometimes, for fun, he puts down a few lines. 

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