The technicalities of a Universal Basic Opportunity Fund
We explore how the fund would be costed and administered in practice
By Anthony Painter, Jake Thorold and Jamie Cooke
Follow Anthony, Jake and Jamie on Twitter @anthonypainter, @thorold_jake and @JamieACooke
This article is an extract from the RSA report Universal Basic Opportunity Fund: Pathways to Universal Basic Income
The model
In today’s prices, we estimate the maximum net cost of an opportunity dividend to be around £14.5bn per annum on average spread over ten or more years should there be full take-up. The real cost is likely to be below this. The annual cost will depend on uptake from year to year. This net cost is the difference between:
· Total costs of providing a £5,000 annual payment for two years to those under 55: £462bn
· Total savings from removing selected benefits, tax reliefs and allowances while these people receive the dividend: £273bn
We estimate the costs based on the Office for National Statistics’ mid-2016 population estimates:
Total costs over the period may vary from the above because of future inflation and population growth. We expect the value of the dividend to increase in line with inflation but revenues (from taxes and savings on benefits etc) to grow similarly. With respect to population growth, most of the future growth is projected for the 55+ age group, who in this particular model would not be eligible for the opportunity dividend. This age group is projected to be 20 percent larger in ten years’ time, whereas the increase for those aged under 55 is less than one percent. In real terms, the opportunity dividend is unlikely to differ markedly from the above.
Savings come from the removal of the following for individuals in years in which they draw an opportunity dividend:
· Benefits: Child Benefit, Tax Credits, Jobseeker’s Allowance, Income Support
· Tax reliefs: the Personal Allowance and, for National Insurance (NI) contributions, the primary threshold, lower profits limit and reduced contributions for the self-employed
We calculate benefits savings using figures from the Office for Budget Responsibility, combining projected expenditure for 2016–17 with estimates of average spending by age (from 2010–11):
Two years of such savings contributes £86bn towards the cost of the opportunity dividend.
This model repurposes tax reliefs. Effectively, it turns the cash value of full Income Tax and National Insurance reliefs into a component of the opportunity dividend. This full cash sum is then available on a universal basis (ie not only in full to those earning over the Personal Allowance threshold which, at time of writing, was £11,500). Therefore, Income Tax and National Insurance allowances would not be available during the period of dividend receipt as to keep them in place would, in effect, be double-counting. HMRC publishes estimates of the costs of various tax reliefs as well as a breakdown of taxpayers by age group. Combining these figures, we estimate the following annual savings in exchange for the opportunity dividend based on 2016–17 cost estimates:
The assumed shares in the rightmost column of the table are calculated as follows from 2014–15 HMRC figures:
· Across all ages, those under 55 accounted for about 70 percent of Income Tax revenues, which we use to split the savings from the Personal Allowance
· Of those aged under 65 (ie required to pay National Insurance contributions), those under 55 accounted for 80 percent of the population of taxpayers, which we use to split savings related to National Insurance
Two years of such savings contributes £187bn towards the cost of the opportunity dividend. The uncertainty associated with the savings from tax reliefs is high relative to the other calculations. This is largely because of the reliance on survey estimates and the likelihood that the range of incomes in each age group is large. In line with the rest of our analysis, which uses administrative/aggregate data, we have used the £97bn from HMRC/OBR for the 2016–17 cost of the personal allowance on the basis that these are the sums which those who have responsibility for managing public finances have adopted. On the face of it, this is substantially higher than that from a study that uses the IPPR microsimulation model. However, correspondence with IPPR modellers highlights a difference in the treatment of the tax bands after removing the personal allowance. In that study, removal of the Personal Allowance is accompanied by a corresponding expansion of the basic rate tax band.
While £14.5bn per year is substantial, when placed in the context of other government policy decisions of late it is a significant but far from unprecedented change. The IFS has estimated, for example, that the planned reductions in corporation tax from 28 percent in 2010 to 17 percent in 2020 will cost the exchequer at least £16.5bn per year in the short-to-medium term (but perhaps less in the longer term). An increase in levels of Corporation Tax back to the mid-20s percentage-wise alone could therefore go a long way towards funding the UBOF and increases less than that could fund some of the intervention alongside the other revenue-raising measures detailed in the previous section.
One option for funding is to create a Norway-style sovereign wealth fund. This could be funded out of a government endowment which raises capital through the gilt markets and transfers the capital to sit in the account of the Universal Basic Opportunity Fund (so a negative balance on government accounts would be balanced by a positive asset in the fund). Obviously, this would have to be executed over time and congruent with government gilt market operations. Norway’s fund is currently worth in excess of $1tn and has historically returned 4.1 percent post inflation and management fees.This model would mean that interest on government debt would have to be covered by the Fund so nominal interest would also have to be netted off. By way of illustration, if the return were 4.1 percent and the interest 0.5 percent then the annual ‘profit’ for the fund would be £7bn. Of course, these calculations are highly sensitive to returns and interest rates. Nonetheless, alongside corporate equity and other funding sources that the fund could acquire in the model outlined here, this could help move the fund towards self-sustainability over the period of its operation.
The fund would have its investment goals established by government. This could include high return global investments and domestic investments for public benefit, such as in housing, digital, energy, and transport infrastructure which need patient finance. In so doing, it could improve the UK’s physical infrastructure as well as supporting the dividend to help people to invest in their own skills and opportunities.
High-income earners disincentive
An important factor that would likely reduce the overall cost of the UBOF is the disincentives to accessing it for high earners, due to the subsequent removal of tax reliefs. As well potential ramifications for expenditure, this could also provide an answer to anticipated critiques of non-targeting.
The removal of the Personal Income Tax Allowance (PITA) means that a basic rate of 20 percent will need to be paid on all income below the higher earnings threshold for income tax. For those earning over £11,500, this means £2,300 per year, or £4,600 over a two-year period (duration of UBOF payments). In line with the elimination of the PITA, the higher rate of tax would kick in earlier — say, at £33,500 rather than £45,000 or a decrease of the limit by £11,500 (figures are slightly different in Scotland). The payment here should be equivalent — if earning over the higher band limit — to the cost from removing the PITA (tax goes from 20 percent to 40 percent for a range of £11,500).
It should be noted that those earning over £100,000 have their Personal Allowance reduced by £1 for every £2 earned over this threshold. As a result, PITA can fall to zero when earnings hit £123,000. For these earners, the higher rate of tax will still kick in earlier, so the £4,600 cost still applies.
The removal of the primary earnings threshold, below which people do not pay National Insurance contributions, again means that NI must be paid on all income. The threshold is £8,160 per year, and a basic rate of 12 percent must be paid on this. This equals £972 per year, or £1,958 over two years.
Together therefore the removal of tax accounts for £6,558 over a two-year period for those earning in the top tax bracket. Although opting to take the dividend would constitute an income of £3,442 for those earning in the top tax bracket, the relative reduction would lead some to opt not to take the dividend thus reducing the cost. In fact, when taken with the process to claim the sum outlined above, the non-take-up amongst higher rate taxpayers is likely to be considerable.
A further option that could be explored should it be decided that high earners should be further disincentivised from accessing the UBOF would be to retain the aforementioned changes to Income Tax brackets and NI contributions until the full value of the UBOF is paid back. In this way, the UBOF would function for higher earners in a similar way to how student loans operate presently. Essentially, the UBOF would offer those in a high income bracket the opportunity to borrow money from the government at a relatively high rate of interest, leaving little incentive, if any, for them to take it. Such an approach would reduce the overall cost of the UBOF, but may risk negating some of the stigma reduction arguments posed by proponents of universality.
Administering the Fund
The manner in which the fund would be administered to recipients is of particular importance. It is vital that recipients be given support to empower them to make the most of their UBOF dividend. While we believe — as supported by results from other conditional cash transfer and Basic Income experiments — that when provided with the means to do so, people overwhelmingly make positive decisions, it is also true that support may help people to make best use of the payment.
For this reason we would like to explore the concept of ‘labelled cash transfers’, an approach to providing citizens with an income which — while still unconditional — is administered in such a way as to support recipients to define (non-binding but explicit) intentions and goals for how they use the dividend. This act of explicit labelling has been shown to be effective in other contexts. For instance, a recent study of labelled cash transfers intended for use on children’s education in Morocco found labelling was seemingly more effective at delivering positive educational outcomes than cash transfers with strict conditions. While not requiring children’s school attendance, by administering the payment through headmasters and suggesting that it be used for education it seems that the transfer was able to encourage the growth of a sentiment among rural Moroccan communities that education was a worthwhile time and monetary investment for their children. The problem with hard conditionality is that the loss of agency and potential for stigma has meant many of those whose families could most benefit from support disengage from the process. Labelling, in contrast, reduces this level of disengagement whilst still emphasising the purpose of support.
By adopting a similar model, the UBOF could assist recipients to develop their own personalised purposes for the payment. Rather than allow a politicised and misleading ‘money for nothing’ discourse to develop, a labelled cash transfer model would support recipients to use the money for some form of betterment, whether that be personal, for their family, for others, or for the community at large.
In line with this approach, the payment could be administered through a range of accredited organisations, which could be local authorities, schools, colleges, advisory services such as the Citizen’s Advice Bureau (CAB) or the National Careers Service (NCS), and accredited employers and trade unions (all subject to a code of conduct). Often, these accredited organisations would be civil society based as opposed to direct government agencies, in order to avoid the alienating effect that a direct government distribution model might have for some communities and individuals.
Upon applying for the payment, the citizen would meet with a representative from one of these accredited organisations, in order to support the recipient to consider how they intend to use the money. While receipt of the payment would not be conditional on the content of the conversation, the act of defining an expressed purpose could, as the Moroccan example suggests, play an important role in developing an individual sense of commitment, purpose and agency. If coupled with ongoing opportunities to access advice and support (again through the likes of the CAB), this show of faith from the state in the ability of citizens to make decisions in their best interests could reverse the damaging impacts of welfare stigma associated with the current welfare system.
It is important that the advisory meeting be just one element of the role of accredited organisations, who would also offer guidance and support for those considering whether and when to access the UBOF, and for those in receipt of it. As much as possible these organisations should be integrated into communities, with the meeting to formally begin accessing the UBOF as just one interaction in a longer relationship. The organisations would of course need support to perform these roles, but this would be a worthwhile investment to effectively support UBOF recipients.
We recognise that for many advocates of UBI the introduction of some form of conditionality — albeit soft conditionality — will represent a major drawback. Yet the time-limited nature of the UBOF means that recipients may require more support in deciding when to access it and how best to use it. The regularity of payment, drastically reduced conditionality and the non-punitive nature of the UBOF remain aligned to many philosophical underpinnings of UBI and a pathway towards full UBI.
The requirement to access the fund through an accredited organisation could also act as a disincentive to collect the payment at the beginning of the ten-year eligibility period in order to invest it. This, of course, would run contrary to the intended purpose of the fund to provide citizens with an opportunity to make changes to their lives or contribute to their communities. This process of reflection and social commitment in addition to the fact that by accepting the payment, individuals would be forgoing Personal Tax Allowances and income-related benefits (and paying additional tax in the case of higher rate tax payers) provides a significant barrier to gaming the system. And, as we have seen in Alaska, these types of dividends without stringent conditions attached, are generally put to good use, often being used to improve the asset position of the family, pay down heavy and burdensome debt or investing in the individual or family’s future.
Alongside the opportunity fund, the government should simultaneously assess whether a full Basic Income would be desirable. By conducting a series of Basic Income experiments such as that currently being undertaken by Finland, a better evidential base can be developed from which to assess a variety of impacts that a Basic Income could have. The recent announcement by the Scottish Government that it will look to support feasibility studies into potential experiments in Glasgow, Edinburgh, Fife and North Ayrshire is a productive step, and should be mirrored by Westminster.
The conversation around Basic Income should not occur exclusively in a government and thinktank bubble. Basic Income is an idea which could profoundly alter conceptions of work, our obligations to one another and relationship to the state. It is only right therefore that it be widely discussed. This is a challenge that all involved in the Basic Income debate should look to confront, by seeking out unlikely conversations, novel alliances and engagements with audiences and organisations beyond our typical comfort zone. These conversations are richer if practical and based on the expectation of action. So it is also a call for the government to support this conversation; entertaining the idea of a UBOF would be an excellent place to start.
This article has summarised the costs and administration of the Universal Basic Opportunity Fund. But who will benefit from the Fund?
We provide case-studies in another article — Using the Opportunity Fund
To find out more about our research, please contact Anthony Painter
For full references and bibliography please visit the RSA website to download the full report
