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Basic income: a substitute for welfare state?

Swiss residents will vote in 2016 on a proposal for a basic income of 2,500 Swiss francs ($2,700) per month. The basic income would be a government payment to all citizens without considering their income and situation. This unconditional payment could be an appropriate substitute for welfare state, which faces criticisms.

Welfare state’s opponents indeed argue that this system implies negative effects. Means-tested welfare programs require much bureaucracy as these benefits have to be defined based on households’ income and situation. The welfare state can also have an impact on family composition and lead to a free-riding effect: social benefits may discourage people from working.

Criticisms against the welfare state have multiplied in relation to the economic crisis, as it can be viewed as a burden on public budget.

Did the welfare state become unsustainable and should it be replaced? Swiss government seems to consider this idea. Welfare state has also been reformed in the United Kingdom and a new welfare benefit replacing means-tested benefits and tax credits has been implemented.

Reforming welfare state seems to be a current issue. Basic income would solve some issues of welfare state: as basic income does not depend on people situation, it would reduce intrusive and costly bureaucracy and would not influence family formation. Besides, it could also tackle the disincentive to work: regular flow of benefits would not be interrupted because of administrative delays when working situation changes and people would be able to look for work without fearing uncertainty.

However, we have to consider the affordability of the basic income. Using a formula computed by James Tobin, Nobel laureate in Economics, The Economist tried to assess the increase in taxes required to fund basic income. They concluded that eradicating poverty using this system would trigger a 60% additional income tax for everyone, which is “basically unaffordable”. However, large savings resulting from the replacement of most of welfare benefits and tax reliefs were not taken into account. According to The Huffington Post, the additional income tax would amount to 18% approximately for everyone, which is far much lower than The Economist estimation. If we consider that such increase could be offset by the basic income, this system is not unaffordable. However, studies carried out in Europe and in the United States show that costs of universal basic income would be lower if this basic income is combined with comprehensive and means-tested payments. Moreover, replacing the whole welfare state by basic income would have significant impact on income distribution and we can fear that living conditions of needy people would be worsened under such system.

To conclude, basic income would provide incontestable advantages but may not be a substitute for welfare state as a whole. To ensure a fair, optimized and affordable social safety net, basic income should be combined with a few targeted and means-tested welfare benefits, which would still enable to reduce bureaucracy.

Elise Grégoire

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Author: studentnovasbe

Master student in Nova Sbe

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