Unconditional basic income – an emanation of populism and a misunderstanding of how a market economy functions

The topic of “Unconditional Basic Income” has been gaining traction in the last few years. Most commentators with at least a basic understanding of economics and finance have not paid much attention to the topic, but unfortunately, public interest in the idea is likely to grow.

Most recently, the Swiss people strongly opposed the introduction of the BDD by voting against it in a referendum held in their country. In doing so, they made it very clear why some societies are rich and others are poor. Immediately after the results of the vote were released, the national television airwaves were filled with socialists, populists and trade unions who tried to explain to us at length why the BDD was so useful. It even went so far as to say that the Swiss almost did not understand what they were voting for.

The following lines summarize why the introduction of an unconditional basic income is absolutely impossible in Bulgaria. They also outline the long-term negative effects that a universal basic income will have on the economy, politics, and society.

What is BBD?

Without going into unnecessary details, in general, the whole idea of the BBS is based on the utopia that every citizen should receive from the state a lifetime unconditional basic income, which is not a function of his education, career and material status. That is, every citizen from the CEO of a large company to the unemployed with primary education should receive from the republican budget fixed monthly payments from the moment of his birth until his death. The different varieties of the BBS mention various amounts, but in theory it should be large enough to cover all the basic needs of a person, such as food, utility bills, education, basic healthcare, etc. The ultimate goal is for the BBS to consolidate within itself all social payments of the state to the individual.

Financing of the BBD

The inapplicability and absurdity of the Basic Income is most easily illustrated when you look at the numbers. For 2016, the cabinet set a poverty line of 300 leva per month per person. That is, this is the minimum monthly income that a Bulgarian must receive to cover his or her existential minimum. For the same period of time, the Confederation of Bulgarian Trade Unions and Employers (CITUB) set a poverty line of 562 leva, which, however, includes a much broader range of social services. If we assume that a government comes to power tomorrow that decides that it will fight poverty and inequality in society by introducing an unconditional basic income, the effect on the budget, in general and simply put, will be the following.

1. Increase in social and health insurance payments by 12.29 billion leva, for the BBD option of 300 leva per month and by 34.78 billion leva for the CITUB option of 562 leva per month;
2. From a theoretical point of view, this increase in public spending could be compensated for in the following ways.

• Reducing and optimizing other public spending– In order to compensate for the increase in social and health insurance costs, the state can reduce other expenses. This is a good wish, but unfortunately in recent years we have witnessed a steady trend of constant increase in public spending. For this reason, I am convinced that this is not a realistic hypothesis;
• By increasing tax revenues– In 2016, the cabinet expects to collect tax and social security revenues in the amount of 25.99 billion leva. In order to be able to pay off its obligations under the Social Security Act, the state will have to increase the tax burden several times. This is neither desirable nor realistic.
• Financing the deficit by taking on new government debt– Another theoretical option for financing the unconditional basic income is by issuing new government debt. However, then the EC will put us in an excessive deficit procedure. There is also a risk of violating some prohibitive condition for the level of public spending and debt to GDP on current bond issues. Again, financing the UBI with government debt is not possible;
• Combination of a) and b) and c)– The state may use different combinations of the points listed above, but the net result will be the same.

The data clearly prove that the introduction of the unconditional basic income is extremely expensive and practically impossible. Even if we allow for one of the milder options for the unconditional basic income, such as only adults receiving it, or reducing its size, even with these parameters the expense would be unbearable for the state budget. Moreover, then the fundamental ideology of the UBI would be violated - providing an income with which the individual can live above the poverty line. In this situation, why are we even commenting on this measure?

Negative effects on the labor market

A significant negative effect of the introduction of the BBD will be an increase in structural unemployment, because many people of working age will decide to live on this income without looking for work. They will have no incentive to get educated, to improve their qualifications for the purpose of better career development. The lack of a qualified and motivated workforce will in turn have a negative impact on the potential for sustainable economic growth of the Bulgarian economy.

A secondary effect of the BDD will be an increase in labor costs for businesses. Due to the reduced incentive for the population to seek work, employers will have to start offering significantly higher wages to get people to work. This, in turn, will reduce business profit margins, and hence reduce the competitiveness of the economy and the willingness of businesses to invest, due to the lower return on invested capital.

Negative effects on the investment climate and economic growth

One of the main parameters that investors analyze when making an investment decision is the future state of the country's macroeconomic framework. With the introduction of a BDD, the state will have to constantly operate on budget deficits, which will be financed either with new debt or by increasing the tax burden. Both options are negatively assessed by business, which will lead to an inevitable collapse of both foreign and domestic investments. Economic theory clearly proves [1] that increasing taxes has a negative effect on economic growth. The same negative effect [2] on economic growth is also observed with increasing levels of government debt.

Breaking the connection between effort and profit

Bulgarians have a wonderful proverb: "He who does not work shall not eat." From an early age, it has introduced many generations to the causal relationship between effort and well-being. The adoption of an unconditional basic income will irrevocably break this relationship that is so important for all forms of progress. Theoretically, people will reduce their desire to get an education and build a career in order to receive a higher salary, because the additional efforts for this will be much higher than the positive benefits derived. I have observed this phenomenon firsthand in Northern Bulgaria. A client of mine could not find seasonal workers for a long time because a wage of 50 leva per day for field work seemed too little to them. An important clarification is that all of these people were on social benefits. It is very interesting, would they not have accepted the job if they were not on state benefits?

Another moral problem that arises from the introduction of the BDD is that a large part of the income of working people will invariably be taken away by the state in the form of higher taxes in order to support all the people who are not working. This will further reduce the motivation of those who are still participating in the labor market - why should they make efforts for the rest of others.

Social, moral and political consequences

As I illustrated above, in order to make an unconditional basic income possible, businesses and the wealthier people would have to pay significantly higher taxes. This in itself raises many moral and political problems. It is impossible to defend the thesis that it is right for the state to tax high-wage earners with high taxes in order to make it possible to pay a basic income to people for whom there is no reciprocal obligation. The introduction of a basic income would create a number of social problems by antagonizing different classes in society.

When the BDD is paid in cash, some of its recipients will decide to use it for drugs, alcohol, or other goods and services that the taxpayer would not want. Even if this part of the population is negligible, this cannot but lead to tension in different layers of society. This negative social effect will be especially strong if it comes to people from minorities. We will see an increase in the negative attitude of society towards immigrants or other such groups of "others". This is just another factor that increases tension in society.

Conclusion

The introduction of an unconditional basic income is not only fiscally impossible, but also immoral because it breaks the extremely important link between effort and wealth. Numerous empirical economic studies clearly prove the negative correlation between increasing the tax burden / levels of government debt and economic growth / investment. A secondary effect of the introduction of a UBI would be an increase in structural unemployment and a decrease in the competitiveness of the Bulgarian economy, due to the increase in labor costs.

Our society will also be faced with a number of social problems, such as class and minority opposition, which are extremely difficult to correct.

[1] What Is the Evidence on Taxes and Growth?

[2] What the latest research says about government debt and economic growth

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