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Universal Basic Income & COVID-19: economic stimulus plans need to go further

Singapore

Square Associates Consultancy
Singapore, March 23rd 2020

It is undeniable that the impact of the Covid-19 pandemic will be long-lasting and multifaceted : humanitarian, social, economic etc… On the latter point, the specific impact on public finances has yet to be established as the situation is still evolving and governments have barely announced some broad lines of economic stimulus measures. The need to get purchasing power back in the hand of the consumer in the fastest way possible has already been identified as a crucial key for success of these stimuli : the USA has announced initial plans to basically send USD 1,200 to every citizen as part of an USD 2 trillion plan; while Japan announced it is considering cash payouts to households as part of an USD 276 billion (JPY 30 trillion) plan. The need to get cash in the hands of household, and fast, is necessary to counter the cardiac arrest provoked to the global economy as a consequence of all the prevention measures enforced in order to stem the spread of the virus. However, some criticism has started to emerge on those measures as the devil is in the detail : the USD 1,200 proposed by the American administration is not a blanket amount, rather is conditional on the recipient declaring taxable income of less than USD 75,000, or USD 150,000 in the case of a couple. Furthermore, that amount is for adults as children receive USD 500. Right from the start, the conditionality (and the need to control/verify/approve the disbursement) attached to this financial support stands to defeat the purpose of fast and timely cash handouts. Furthermore, the one-off nature of this handout is likely to end up “under the mattress” rather than in additional spending as people prepare for the worst ahead of the uncertainties related to this still-evolving pandemic.

In addition, the impact of this cardiac arrest on public finances has barely been mentioned in the public discourse. In particular for developed economies, the current model for government finances couldn’t have been worse designed for the current crisis: it basically relies on perceiving taxes from people’s incomes, and from companies’ profits and employment. This is clearly compromised in the current environment of layoffs and unpaid leave imposed by many affected sectors on its workforce: the number of employed from which the government can perceive taxes is diminishing by the second, and companies’ profits are melting like ice in the sun. To add insult to injury, on the expenditures side of the government budget equation, most advanced economies have long adopted programs that would compensate citizens in case of unemployment. This is clearly going to balloon as a corollary of the previous point. Square Associates, a boutique consultancy based in Singapore, estimates that the USA budget deficit stands to increase from USD 984 billion or 4.6% of GDP in 2019, to USD 3.1 trillion or circa 15% of GDP in 2020, and that is an optimistic assumption. For France and Japan, the consultancy’s estimates of public deficit are respectively 10% and a whopping 19%; up from 3.1% and 3.0% respectively in 2019.

The government balance sheet shape of most developed countries are in no position to withstand the additional debt that would be needed to finance this massive increase in budget deficit. France hasn’t had a budget surplus since 1974, and the USA has seen its debt-to-GDP go from less than 50% pre-Global Financial Crisis to circa 100% as of 2019. As for Japan, it uncontestably tops that statistic with its more-than-200% ratio.

This extremely grave crisis should be a catalyst for government finances to move from the archaic model of taxing income, labor and capital in order to conditionally redistribute across segments of the population; to a more modern model where every citizen receives a monthly, unconditional Universal Basic Income (UBI) which would replace all other social benefits. Square Associates’ recommended policy initiative, as outlaid in its 2017 paper “Roadmap to a 21st century government”, of a transition of all social benefit programs into one Universal Basic Income would be well suited to the current situation: it is unconditional, recurring and stands to be net positive to the government coffers if all the recommended steps are adhered to. Based on publicly available information, the US government spends every year circa 20.4% of GDP on social benefits and social transfers in kind: this translates to more than USD 13,000 for each one of the US’s 330 million population, including children. Similarly, France would be able to equivalently replace all its social transfers by an UBI of more than USD 14,000 annually to each of its 67 million population; and Japan would be fiscally indifferent between giving a circa USD 10,000 annually and its current spending on social transfers. The level of de-complexification that would be achieved by moving from a control/check/approve/re-check model to a plain unconditional one for disbursement of social benefits is incredibly powerful, both from a government organizational and cost point of view.

Similarly, the same report propounds the abolition of all direct taxes such as taxes on income, profit, capital, payroll/labor taxes etc…to replace them with an increased and enlarged indirect tax, the VAT/GST tax. According to Square Associates’ estimates based on the public accounts of several developed economies, these combined measures would be of a nature to turn the structural public deficit that plagues most OECD nations into surplus, hence putting them on a sustainable deleveraging path. For developed nations, solving the issue of perennially broken government finances, referred to in the Square Associates report as the 3 D’s of Deficit, Debt and Deficient pensions, is of crucial importance. Indeed, the increased life expectancy, lower than anticipated population growth, increasing healthcare costs, structural deficit of pension schemes etc… are directing these country’s finances to a “global timebomb” as worded by the World Economic Forum in 2017.

In conclusion, economic plans to stimulate economies hard hit by the Covid-19 pandemic are unquestionably needed. However, they fall short of true short-term impact in their announced forms; and could be a mean to introduce longer-lasting, deeply-needed fiscal reforms. The conscientious and fiscally responsible governments should not stop short at a one-off “handout”, and should take their economic plans further by accelerating the transition to a structural UBI to benefit every citizen unconditionally, while improving the state of public finances.