Macroeconomic Implications of a Basic Income

Public interest in basic income schemes have been increasing over recent years. Fears over rising inequality (particularly in the wake of COVID-19), that automation may destroy jobs, and the nature of tax and welfare reforms, are key factors stimulating this renewed interest.

There is already evidence suggesting that technological change, for example, is leading to widespread declines in the labour share (e.g., IPR, 2022). As technological change – such as automation – may lead to high levels of job losses, particularly in low-skilled occupations, it can leave the lowest-income households without a primary source of income and stimulate further increases in income inequality

Research into the microeconomic (i.e., small-scale) impacts of basic income-like schemes on individuals and households has been steadily increasing, however, few research studies consider how such policies may affect entire economies. Consequently, there is limited evidence on which to base a comprehensive account of potentially transformative policy interventions.

This research, in collaboration with Cambridge Econometrics, aims to bridge this gap – demonstrating how basic income policies can be assessed in modelling scenarios, whilst enhancing our understanding of how basic income schemes may operate at macroeconomic scales.

To do so, we examine a range of basic income schemes over a future 15-year period in the UK using Cambridge Econometrics’ macroeconomic model E3ME, to answer two key questions surrounding basic income schemes:

  1. How would small basic income schemes (such as those proposed) operate in the UK? Is there any evidence of negative outcomes on, for example, GDP, jobs, or inflation?
  2. Should automation lead to widespread technological unemployment, can a basic income scheme effectively stabilise household incomes without stimulating further negative impacts?

When investigating these questions, we pay particular attention to how macroeconomic effects are relevant to an assessment of basic income (e.g., via behavioural responses or changes in consumption habits); the importance of scheme design when developing basic income policies (e.g., what other policies may need to accompany it); and the possible application of basic income at scale, alongside the potential for debt-free sovereign money to fund these basic income schemes.

Our series of macroeconomic scenarios reveal important information on the macroeconomic dynamics of basic income schemes at both smaller- and larger-scales. Of chief importance, our research highlights that:

  • Basic income schemes hold the potential to raise GDP without undue inflationary effects: As these schemes typically redistribute money around the economy, and put more money in the pockets of lower-income households, they can lead to higher spending. In turn, this can increase GDP and employment whilst offsetting initial reductions in labour supply that may arise due to weakened incentives to work.
  • Widespread automation is expected to hold substantial negative effects on the economy, income inequality, and employment: Whilst automation can be economically beneficial in the short-term due to initial investment costs, it leads to substantial decreases in household income in the medium- and long-term, as well as increasing market polarisation between high-skilled and low-skilled jobs. For example, automation is estimated to reduce GDP by 5.4% compared to a baseline scenario by 2035, and lead to cross-sectoral job losses of 18% above this baseline scenario.
  • Basic income schemes can balance high technological unemployment without creating extreme inflation, working to stimulate an economy operating below full capacity: Whilst rapid automation can lead to large-scale technological unemployment, a subsequent decline in household income, and severely affect the economy. However, a basic income funded by debt-free sovereign money can be an effective way to moderate these negative economic effects. Debt-free sovereign money would initially use spare capacity in the economy, and thereafter stimulate production and investment, thus avoiding inflation.
  • The design of a basic income scheme is crucially important to its success or failure: Different policy designs and different funding strategies significantly impact the effectiveness of basic income schemes, as well as the size of these effects.

More information on basic income – including arguments for, how it would work in practice, pilot schemes, and how it differs from Universal Credit – is available on the Basic Income Forum webpage The Case for Basic Income.

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