The Unassuming Economist

A new IMF working paper discusses “the definition and modelling of a universal basic income (UBI). After clarifying the debate about what a UBI is and presenting the arguments in favor and against, an analytical approach for its assessment is proposed. The adoption of a UBI as a policy tool is discussed with regard to the policy objectives (shaped by social preferences) it is designed to achieve. Key design dimensions to be considered include: coverage, generosity of the program, overall progressivity of the policy, and its financing.”

“The joint empirical analysis of the relative redistributive performance of a UBI, existing social
safety nets and available financing options is powerful in highlighting the tradeoffs faced by
policymakers when assessing social spending programs along key dimensions:

1. coverage at the bottom of the income distribution vs. leakages to richer households,
2. generosity of transfers vs. incentives and economic distortions,
3. fiscal cost vs. alternative use of scarce fiscal resources.

The fourth aspect that weighs heavily in shaping policy choices is how to reconcile objectives and
implementation challenges.

The saliency of each of these tradeoffs depends on each country specific circumstances, in
particular on its position in the coverage/generosity/progressivity space (Figure 2), its capacity to
raise resources in a progressive and sustainable manner and the ability to roll out a (more or less)
complex program. Social preferences, together with constraints, determine how these tradeoffs
are called.

The relevance of these tradeoffs and the design of a transfer program has implications that go beyond the performance of the specific scheme. They are related to and impact how a country overall benefit-tax system affects individual behaviors,27 bearing far-reaching implications for labor market, consumption and investment decisions that will in turn impact back the fiscal sustainability of the tax-and-transfer system. As mentioned, inefficiencies (e.g., disincentives to
work) are relevant issues also under existing safety nets—that are rarely universal and unconditional—and their current financing mechanism. For this reason, a broader discussion is needed, that would move beyond just looking at UBI in isolation to assessing whether a policy package encompassing a UBI would increase or decrease the distortionary impact of government policies and or improve/reduce the performance of a safety net. As important is the thorough assessment of implementation capacity both for targeted and universal type of programs. In short, efficiency and equity impact of a UBI cannot be gauged in isolation.

Beyond the discussion presented in this paper and short-term considerations, other issues also point to the usefulness of broadening the horizon when discussing universal programs and looking for ways to make social protection systems adequate for facing future challenges. For example, in an economic environment where job security decreases and income volatility increases, expanding available insurance mechanisms for those who are out of work may become an important policy objective; similarly, where there is a need to generate public support while protecting vulnerable households from undesired side effects of structural reforms that impact large segments of the population. protecting vulnerable households from undesired side effects of structural reforms that impact large segments of the population.”