The case against universal basic income

Despite its appeal to many, including politicians and activists who have called for the implementation under Budget 2021, universal basic income (UBI) is inherently prone to misuse so that fiscal policy could be better deployed in more effective, productive and sustainable ways. Fiscal policy that directly creates employment will definitively address the worry over job and job security which ranks as the number one worry for the rakyat according to the National Worry Index (NWI) of EMIR Research’s Third Quarterly Poll 2020.

UBI doesn’t just mean cash payment. In this, it’s different altogether from cash transfer performing the role of welfare benefits (such as Bantuan Prihatin Nasional/BPN).

Simply put, the difference between UBI and welfare lies in the policy purpose.

Basically, UBI is a single, all-encompassing system that is intended to do away with the welfare system with its complex of cash distribution channels.

In its many variations, UBI can serve as permanent income or takes the place of wages for the unemployed.

UBI could also be a scheme that extends to those earning below a certain threshold, or a flat rate paid out to everyone regardless of income levels.

Firstly, some delving into UBI’s background and underlying logic.

UBI embodies the secondary and inferior role that fiscal policy plays to monetary policy. This might come as a surprise to some advocates of UBI. This is so since UBI represents fiscal policy – being government spending – instead of driving consumer spending through monetary policy, i.e. through consumer debt.

To understand why, we can look into UBI’s ideological background.

The original UBI proponents thought that the Great Depression (1928) was a monetary phenomenon – in that there wasn’t enough money to merry-go around for spending and lending as these dried up due to bank-runs, crash of the stock market and plunge in aggregate demand.

The solution was for the central bank to increase money supply (liquidity) in the economy because it controlled the monetary aggregates such as M0 (money base, i.e. reserves held at the central bank and circulation of money in the real economy). The central bank did this through setting of the official interest rate which then had a knock-effect on the market interest rates.

What this means is that the bias was towards monetary policy instead of fiscal policy as the primary driver of economic recovery.

Now, according to these original UBI proponents, the unemployed and those below a certain income level could then simply receive UBI raised from taxes known as negative/reverse income tax, i.e. in proportion to their loss of income and income level, respectively, up to a certain fixed threshold.

Other versions have it that UBI is unconditionally applicable to all irrespective of income and employment status.

Where there’s mass unemployment, the State had no moral responsibility to create jobs directly or in collaboration with the private sector.

Furthermore, UBI, far from promoting fiscal policy, allows for that ideological justification for constraints on welfare spending.

Some advocates like UBI because it justifies the need not to have the minimum wage or meet wage demands by unions, as example. While others think that UBI is a fair, equitable and progressive scheme and policy because the State is still doing its part in eradicating poverty.

But as alluded to, UBI can be used to blunt and weaken wage demands. With UBI, both the State and private sector will have that excuse not to increase employment levels. This, of course, usually requires the State to increase the fiscal deficit to meet the spending shortfall in the economy caused by the saving decisions of the private sector.

If developed further, the UBI could be abused and exploited to subsidise corporations such as big insurance (health) as for example – when it is tied to conditionality (e.g. compulsory subscription under the guise of public healthcare insurance).

In the context of Malaysia’s historic susceptibility to inflationary momentum, introducing a modified UBI but as a permanent policy feature could result in the increment and expansion of GST to double-digits – which will further burden the B40 and M40. This would by extension add fuel to the inflationary pressure.

And it would still not address the problem of low savings for retirement (the EPF and pensions, notwithstanding), let alone the problem of over-spending and indebtedness.

Not to mention also are the challenge of reskilling and upskilling, increasing productivity, enhancing socio-economic mobility, and not reducing dependence on foreign labour.

The government might not be interested to achieve full employment understood as 3% of the available workforce with the structural (e.g. growing youth unemployment) and social implications (e.g. upward mobility doesn’t catch up with the cost of living).

Instead of UBI, the role and function of the State through fiscal policy in addressing all of that – driving growth and productivity as well as stimulating demand in an economic downturn (and beyond) remains indispensable.

And, other than UBI, there’s also actually no need to incentivise the unemployed to work when State-created jobs are available immediately either directly or indirectly (i.e. through government-linked companies, for example).

Finally, to quote the economist Abba Lerner in his Functional Finance: “Government should adjust its rates of expenditure and taxation such that total spending in the economy is neither more nor less than that which is sufficient to purchase the full employment level of output at current prices. If this means there is a deficit, greater borrowing, etc., then these things in themselves are neither good nor bad, they are simply the means to the desired ends of full employment and price stability”.

It could be added that higher fiscal deficits drive profit growth (for the private sector) too.

As it is, Malaysia could be on a cusp regarding our unemployment situation. Far better to prevent structural issues from setting in than to let market forces freely decide as implicit in UBI. For that to happen, the State must be the initiator and lead actor for now until the storm abates, that is.

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Jason Loh Seong Wei is head of Social, Law & Human Rights at EMIR Research, an independent think tank focussed on strategic policy recommendations based on rigorous research.

** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.