Universal Basic Income Could Work in Italy

(Bloomberg View) -- Universal basic income (UBI) schemes are often rejected out of hand as too expensive. In some countries, however, paying every resident a basic income sufficient for survival could actually result in budget savings. That's the surprising conclusion in a fresh policy brief from the Organization for Economic Cooperation and Development.

The OECD decided to contribute to the basic income debate because an increasing number of countries are willing to experiment with it, and it's become fashionable for leftist politicians to include it in their platforms. Two countries, Finland and Canada, are already running large-scale trials, and the Netherlands may join them in September. Several private experiments are under way as well.

The beauty of UBI is that it enshrines the socialist ideal of eliminating abject poverty, but in doing that, it also appeals to libertarians who'd like a smaller role for governments in redistributing wealth. The different schemes being tried can be on the socialist side -- like the Ontario experiment in Canada, where the amount paid to a person is reduced by 50 percent of what he or she earns by working -- or on the libertarian side, like the Finnish trial that's more in keeping with the classic idea of paying everyone equally. It's not yet clear in either case whether UBI will reduce anxiety about losing an unloved job or stimulate people to give up working altogether. Nor are the experimenters certain that people prefer the cookie-cutter payout to existing benefit systems.

The OECD's contribution doesn't go deeply into these important matters. Its goal was merely to see what different developed nations can afford in the way of a UBI. 

The organization worked with a simple set of basic assumptions that are not realized in any of the existing experiments. They decided that the UBI should be taxed (a fair way to pay less to the wealthy than to the poor) and that the after-tax amount should be equal to a country's guaranteed minimum income -- the least to which a citizen with no income is entitled in the existing social protection system. Existing housing subsidies and in-kind support are left untouched. The elderly retain their current benefits. All existing tax allowances are removed to fund the UBI scheme.

It's a bare-bones, transparent scheme. The OECD researchers tried it on four countries: Finland, France, Italy and the U.K. It turned out to be economically feasible in three of them.

In a number of developed countries, especially those in southern Europe, social safety nets are atrociously designed. In Greece, Italy, Portugal and Spain, more social transfers accrue to the richest 20 percent of the population than to the poorest 20 percent.

Universal Basic Income Could Work in Italy
Source: OECD

That's only partially due to the fact that not all transfers are meant to alleviate poverty. The complexity of the benefit systems is a big contributor: Poor people often find it hard to figure out their entitlements. There's also the legacy of decades of political decisions benefiting various interest groups. In a badly afflicted country, a UBI scheme can erase the unfairness of a social security system and even save the government some money. That's the case of Italy, where close to 80 percent of the people in lower-income groups would gain from the replacement of the current system with a UBI -- but the UBI would actually cost less than the current system, creating savings that could be plowed back into the scheme or used in any other way.

Apart from the design of the social transfer system, its generosity also counts. So the results of the OECD simulation are less straightforward in Finland, where UBI would create some savings but not so many people would be better-off, or in France, where a 2 percent rise in income tax would be necessary to fund UBI but the poverty rate would actually be a little higher than before the reform.

In the U.K., with its relatively well-designed and generous social transfer system, the OECD scheme simply wouldn't work, requiring a 25 percent tax hike and increasing the poverty rate by about 50 percent.

The size of the UBI that the OECD used in its calculations is the big disappointment. It's a mere 158 euros ($176) a month in Italy, about 21 percent of that country's poverty line. It's about half the official poverty level in Finland and France. Living on that kind of money is a challenge, and if one views the UBI as insurance against job-killing automation, it only works for the least-qualified workers. Also, in many countries it would be politically unfeasible to kill tax exemptions to fund this low universal income. The French, for example, wouldn't just need to give up the allowance for hiring domestic help, which most of them don't use -- they'd also lose an exemption for education costs and nursing care. It's hard to imagine most middle-class voters going for that in exchange for a small lump sum that would be substantially depleted by taxes.

Besides, some "deserving" poor who now receive bigger transfers would protest loudly and complicate the politics of moving to UBI. Though any government would appreciate the simplification of social security and tax systems such a move would bring, the guaranteed public outrage would hardly be worth it.

That, however, is no reason to disregard the OECD paper's counterintuitive suggestion that countries thought to be the least able to fund a UBI scheme would benefit the most from one. Reforming a dysfunctional, entrenched social security system like those of southern Europe is a maze in which many an ambitious political leader has gotten lost. Someone who tries to cut through the Gordian knot with a UBI proposal might be more successful, and please more voters, than politicians in these countries dare to imagine today.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

To contact the author of this story: Leonid Bershidsky at lbershidsky@bloomberg.net.

For more columns from Bloomberg View, visit http://www.bloomberg.com/view.