Posted by Rewan Tremethick on March 10th, 2016.
Just a few weeks after we wrote Why No One’s Going to Give You Free Money, exploring the concept of ‘helicopter money’ and why it was unlikely to materialise, several countries are looking to implement some kind of regular cash payments. Finland, Switzerland and Ontario, Canada, are all in various stages of considering handouts to their citizens.
But is any form of ‘helicopter money’ a sound economic plan, or just a sign of desperation?
Finland was the first country to announce the plan to hand out money to its citizens. It’s currently considering proposals by the Finnish Social Insurance Institution (Kela) to create a national basic income. Under the suggested plan, each citizen would receive €800 (£575) per month tax free, regardless of whether or not they were employed or receiving another income source.
Switzerland is going a step further, with a referendum planned in early June to allow the Swiss people to vote on whether or not they want to receive free payments. A ‘Yes’ vote could see every adult citizen receive an income of around CHF2,500 (£1,760), with an additional CHF625 (£440) paid for each child. In total, it is estimated the programme would cost the federal government CHF208 billion (£146 billion) each year, the equivalent of 30% of Switzerland’s GDP.
Ontario has yet to announce exactly how much it is planning to distribute to residents on a monthly basis. Ontario Premier Kathleen Wynne revealed that the region’s government was planning to ‘test a growing view at home and abroad that a basic income could build on the success of minimum-wage policies and increases in child benefits by providing more consistent and predictable support in the context of today’s dynamic labour market.’
Helicopter money was previously tried in Canada, with residents of Manitoba receiving regular payments for five years from 1974, but weak data collection made it hard to examine the impact it had.
Four municipalities in the Netherlands have also expressed an interest in trialling the system.
There’s a lot more to it than simply being given cash every month in exchange for nothing. The idea is that the regular payments will replace welfare payments and social security. If everyone is earning enough to cover their basic bill payments, no one need fall into poverty and require state handouts.
According to the latest data from the Organisation of Economic Co-Operation and Development (OECD) in 2014 Finland’s welfare bill was 31% of GDP, Switzerland’s was 19.4% and Canada’s was 17%. Considering the worsening global conditions since the beginning of the year (Finland’s unemployment rate has increased 0.7% to 9.4% since 2014), it is likely the proportion of GDP spent on welfare has increased.
A ‘basic income’, as it’s called, would be paid out regardless of a person’s employment status and wouldn’t be taxed. As a result, most benefits and welfare payments would be scrapped.
Of course, income from employment would be subject to a much higher rate of tax in order to recoup the cost of handing out free cash.
There are lots of arguments for ‘helicopter money’ in the form of a basic income. For starters, it may seem counter-intuitive, but a basic income could actually save the government money. Welfare systems involve a lot of bureaucracy and red tape, requiring thousands of employees, consuming lots of resources in order to process, assess and regulate the system.
A blanket payments system cuts out all of that, as everyone gets money regardless of their status. Don’t worry about the potential for massive job losses – these people are being made redundant thanks to a system that will pay enough to cover their living costs each month!
As an example, Finland’s GDP in 2014 was €200 billion (£154 billion), so welfare cost the country €62 billion (£48 billion) during the course of the year. According to Kela’s proposals, the basic income programme would cost €46.7 billion per year, saving over €15 billion; that’s 7.5% of GDP.
Supporters of the basic income argue that it provides a better quality of life and is perhaps the security net against destitution that the current welfare system was originally intended to be.
However, it could be argued that a basic income will raise prices significantly. Rent may shoot up if landlords know that their tenants are getting a certain amount each month. Everything from food to services could appreciate because companies will reason that everyone can hold down a job on top of the free payments.
Detractors argue that free money will damage the economy, because it discourages people from going to work. How, they wonder, will society find people to carry out the vital but undesirable jobs? People will surely be less motivated to work if they have enough to live on, sapping productivity and weakening annual output.
But those in favour of the plan argue exactly the opposite: that a basic income will encourage people to go out and find work. Many welfare systems across the world, including ours here in the UK, struggle with the criticism that those receiving payments would be worse off were they to try and find work. Finding a well-paying full time job straight away might not be possible, but for many on welfare, taking a part time role would actually be to their disadvantage once tax and benefit cuts due to them earning a wage are taken into account.
Without having to worry about meeting essential costs, those who are currently unemployed would be free to take on any kind of job, even part time roles. This could increase the amount of taxable earnings inside the country.
This doesn’t even take into account the potential boost from higher morale – with more people pursuing their interests and offices full of workers who want to be there, productivity could potentially shoot up. One study found that happy employees are 12% more productive, while unhappy employees are 10% less productive. With a study in the US finding just 1 in 8 workers were engaged in their job – i.e. happy to be there – which costs US companies an estimated $500 billion (£351 billion) annually, it could be that fewer, more motivated workers are needed to produce the same level of economic output.
Another potential problem is that a basic income scenario would surely encourage immigration. Why wouldn’t you want to move to a country that paid all your bills with no obligation to earn a living unless you wanted a better lifestyle? Considering that one of the main factors driving the UK’s ‘Brexit’ referendum is the debate over migrants in the UK having access to the welfare system, you can see how contentious an issue free money for every citizen would be.
There’s also an argument that the longer someone stays out of work and relies on the basic income to survive, the less employable they become. Many people might take advantage of the opportunity to enjoy themselves and remain free from the shackles of employment. But priorities and desires often change and people are still going to need jobs if they want to live a comfortable or luxurious lifestyle. Someone who decides to return to work after several years of unemployment may not be looked on favourably.
It seems unlikely. Considering the focus, criticism and attacks directed at our current welfare system, it is hard to imagine widespread support for a universal system. The basic income system is a very left-wing idea; Canada has a liberal government while Switzerland is considering the proposal simply because a petition reached the requisite number of signatures to trigger a referendum on the matter. Britain’s Conservative government continues to cut the welfare bill, so is unlikely to favour a system which ostensibly increases expenditure.
That being said, when ‘helicopter money’ was first proposed, it was entirely theoretical and meant as a hypothetical experiment. So in many ways the impossible has already happened. But the Bank of England (BoE) has a relatively small QE programme and positive interest rates, so there’s lots to of room for manoeuvre.
Lots of economists and governments are firmly against the idea of helicopter money, but if the experiments in Finland, Switzerland, Ontario or the Netherlands are a success that could all change. We’ll keep you updated.
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