Finnish experiment on unconditional basic income: first steps into a new economic model

Finland attracted attention at the end of 2016, not because the Finnish economy had gradually recovered from many years of recession and structural problems. Rather it was due to the fact that the country is running an experiment on unconditional basic income. This is a fiscal policy transfer concept based on the fundamental idea that every citizen should receive the same fixed amount of state aid, regardless of their financial standing and age. The transfer, which will replace other social benefits such as unemployment benefit, social benefit, pension or child support, is unconditional. While some people are focused on reducing the red tape, streamlining and modernisation of the welfare state, other see it mainly as the financial freedom offered by the basic insurance that should create scope for professional self-fulfilment, independence and innovation.

Regardless of the outcome of the experiment in Finland, the debate will continue and intensify. Advancing digitisation means that an increasingly greater share of added value is no longer generated by people, so that the classic labour force and tax concept so far on which modern society is built no longer applies. The questions to be asked in the future therefore are: what is a fair tax basis? What sources of income are available to the people? The tax basis will have to be widened and generally move in the direction of a value-added tax. This can be siphoned directly from the company. Questions such as investment incentive and tax competition will become very important here. The concept of unconditional basic income could become vital to the existence of some people. As we have only just started to answer these questions, the findings of the first attempts on this topic are all the more important.

The basic income will be made available initially in a trial version. Since the start of the year, 2,000 selected unemployed Finns between the ages of 25 and 58 will receive an unconditional basic income of EUR 560 monthly. This equates roughly to the minimum unemployment support available or the daily requirement projected for the month. Participation is mandatory for the candidates selected. The basic income will not be reduced if a candidate finds work. The two-year experiment should clarify in particular if basic income actually incentivises people to find work or not. However, the concept raises other questions – such as the financial viability or the distribution effects and therefore the issue of fairness.

The experiment is not expected to give much insight as to the incentivisation to work. Unemployed Finns are under great pressure to supplement the basic income of only EUR 560. Because the experiment is restricted to the unemployed, the much more important question as to whether employed persons would use the additional income to work less or not at all remains unanswered. Positive or negative incentives to work also play a key role for the financial viability of the unconditional basic income. Ultimately, these largely determine the economy’s growth prospects and thus widen or narrow the tax basis: the more households that opt to work less or not at all, the higher the tax burden must be on the working population in order to finance the basic income and vice versa.

Regardless of the impact on economic taxable income, funding a basic income for everyone – from an infant up to an old person – would be a major undertaking: if one extrapolates the Finnish experiment of EUR 560 a month to all Finns or Germans, the annual cost in Finland would be around EUR 37bn and around EUR 550bn in Germany. This would represent around 18 percent of GDP for both economies. Based on the state budget, this amounts to around 40 percent of public spending in Germany and around 32 percent in Finland. Even if one takes into account that a share of previous social benefits would cease, massive tax increases would probably be inevitable to finance the basic income.

This would lead to a major redistribution, whose exact extent is determined by the positive or negative incentives to work triggered by the unconditional basic income: the more citizens decide not to work, the higher the tax payable by the working population to finance the non-working population. Whether an unconditional basic income leads to more fairness in terms of income is in the eye of the beholder: while followers of equal distribution are likely to welcome the redistributive effects, supporters of a performance-related distribution of income have an even greater cause for concern, the less incentive there is to work because of the basic income.

The Finnish experiment proposes a basic income of only EUR 560 a month. Furthermore, it is extended to a small number of unemployed Finns only and not to employed persons. For this reason, we cannot expect to gain any representative information on the incentive to work for the entire population and hence on the related economic growth prospects. Because the impact on the incentive to work also determines the financial viability and distribution effect of an unconditional basic income, the benefits of the Finnish experiment are doubtful overall.

 

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