The macroeconomics of basic income

Interest in basic income is increasing, spurred by concerns such as rising inequality, the nature of tax and welfare reforms and concerns that automation might destroy jobs. While there is growing work on the small-scale (micro) impacts of basic income on people and households, there is much less that considers how such policies might affect an entire economy.

This new research by Cambridge Econometrics looks more closely at the economy-wide (macroeconomic) effects of basic income as it might operate in the UK.

The research tackled two questions:

1. How might small basic income schemes (of the kind often proposed) operate in the UK? Is there any evidence of negative outcomes in terms of GDP, jobs or inflation?
2. In a scenario of widespread technological unemployment from automation, might a basic income be effective in stabilising household incomes without further negative effects like inflation?

The second question took particular interest in the possible role of debt-free sovereign money as a way to fund the basic income.

Using Cambridge Econometrics’ E3ME model to assess different policy scenarios, we found that:

1. Small basic income schemes (which typically redistribute money around the economy) tend to put more money in the pockets of lower-income households, leading to higher spending. This can (slightly) increase GDP and employment, even if basic income weakens incentives to work.
2. Automation that leads to job losses can lower GDP because it erodes household income, lowering spending. Basic income funded by debt-free sovereign money appears effective as a way to fill that gap in the absence of jobs.

In neither case do we find strong evidence that strong inflation follows the above. In a model such as E3ME, economies are not presumed to operate (or tend towards) full capacity. In the scenarios, the additional money makes use of this slack, raising GDP without undue inflation.

More broadly, we find that the design of the scheme (the basic income payment and how it is funded) matters, with different designs affecting the progressivity of the interventions and the size of the effects.

This research has been made possible through funding generously granted by The Cambridge Trust for New Thinking in Economics.