The lessons from the Swiss basic income referendum

 

 

Just having a referendum on a Basic Income proposal was a huge step forward, but we must still learn the lessons from its emphatic rejection by Swiss voters.

 

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It’s easy to criticise a bold act that has fallen short of its objectives, so let me start with praising those who petitioned the Swiss government to hold a referendum on the establishment of a Universal Basic Income and who campaigned for a Yes vote. Basic Income broke into the mainstream political discourse and a very solid stepping stone on the road to success has been laid by this campaign.

However, we should also recognise one incontrovertible fact: the referendum was lost, and by a significant margin (23% in favour, 77% opposed). It doesn’t mean we can’t move forward from this, but it does mean that we have to take stock of this defeat and think about how we can get a different result next time around.

It’s difficult to know why people rejected it without in-depth surveys and research, but I would like to address some of the main points of objection that were raised (in order of ease of answering)

  1. It was a risky experiment
  2. It was a Utopian fairy tale with no basis in reality
  3. It would result in inflation if adopted
  4. The Swiss are not poor, so a Basic Income is not really required
  5. Switzerland already has a very good and effective system of social welfare, so it does not need to be replaced
  6. People should earn their income, not just receive it
  7. The proposal was prohibitively expensive and would require a huge increase in tax
  8. There was no plan in place to fund it

By addressing each of these issues, we can perhaps come closer to a proposal that electorates will not only accept, but embrace.

It was a risky experiment

If you oppose or are generally fearful of change, then any proposal that suggests it will be viewed as potentially dangerous and risky. Of course, any change will present certain risks, but that is not a reason to avoid it, but rather a reason to plan and manage the change. Generally, a change like this would be accompanied by consultations, trials, research, communication with the public, perhaps phasing in stages and amending where practically necessary.

Opposing a new idea because it presents risks is a bit like not opening your front door in case something bad happens to you outside.

It is a non-argument, but it is a reminder that most people are wary of change, especially radical change, and rarely vote for it. If a Basic Income is ever to gain electoral support we must recognise this and go to greater lengths to inform and reassure voters.

It was a Utopian fairy tale with no basis in reality

Again, this is a thin excuse to oppose something. Many of the things we now think of as integral parts of modern life began as an aspiration or dream by somebody. Social welfare comprehensive health cover, universal suffrage and a million technological advances that we now view as unremarkable.

Change requires people to reach for their dream, even if they fall well short, and the desire to shape a new ‘reality’ is the thing that drives any improvement in our lives.

Being accused of being Utopian is essentially to be accused of having an idea. A compliment really. Nonetheless, electorates like to see at least some practical application before they take the plunge and pointing to the few studies and experiments that have been, or currently are being, undertaken might help the future cause.

It would result in inflation if adopted

Whether this is true or not depends on how a Basic Income is implemented. If, as some argue, it is the result of a huge amount of new money being injected into the economy, with no corresponding increase in the supply of goods and services, then it might well result in a significant hike in prices.

Most of those who argue for a Basic Income envisage one that is funded from either existing spending or additional/different taxation, i.e. it is an act of redistribution from one part of the economy to another. It should, therefore, have no overall effect on inflation across the economy.

I would argue that even within this scenario, however, there is some potential for inflation to swallow up the income increase that a Basic Income would produce for many people. The most obvious group that this might apply to are those who rent their home. Rent, especially on land, is notorious for rising with incomes, thus swallowing large chunks of any economic productivity gains by tenants. This phenomenon is not unique to a Basic Income scenario: any income gains by renters will be at least partially absorbed by landlords – or rent-extractors as perhaps we should call them – who put up rents accordingly (fixed supply of a necessity doesn’t give consumers much choice but to compete to spend their money, thus pushing up prices).

This is why it is important that a Basic Income policy must also be accompanied by market reforms that allow for effective competition to keep prices from rising, and nowhere is this more crucial than with housing. Increasing or ensuring sufficient housing supply is absolutely crucial to the success of any Basic Income, but the problem of rent-extraction could also be tackled with a Tax on the rental value of land, which would recapture any rent increases imposed by landlords and return it to the public purse. Land Value Tax, which I discuss in more detail later, has other potential positive benefits, but this is certainly one of the most important in relation to a Basic Income.

The Swiss are not poor, so a Basic Income is not really required

This is not an entirely unreasonable point, as Switzerland is the second wealthiest country in the world when measured by GDP per capita and the bulk of its inhabitants are either well paid or have the opportunity to become fairly affluent by any standards.

However, it is a mistake to conflate average figures with the experience of individuals. Switzerland is very wealthy, but it is also extremely expensive. To be above the poverty line in Switzerland would require a monthly income of at least CHF2200/€2500 per month. This would provide a very comfortable living in most countries, but not in Switzerland. As a result one in 8 adults live around or below the poverty line. This is not dissimilar to many other developed countries and renders the argument about Switzerland’s overall wealth somewhat redundant.

However, most of Switzerland’s voters probably do not feel that there is a major poverty crisis in their country and are therefore not especially driven to solve it with a radical and universal solution like Basic Income.

This is perhaps one reason why the argument about Basic Income being a solution to poverty is not necessarily a vote winner. To those who argue for it currently, it is clearly a prime motivator, but to the electorate as a whole it might be failing to resonate with those who are not personally experiencing poverty themselves.

Any future campaign for a basic income perhaps needs to break out of the poverty argument and instead address the positive impact it can have for those on average working incomes as well.

Switzerland already has a very good and effective system of social welfare, so it does not need to be replaced

This is perhaps one of the most powerful political arguments against Basic Income for many people on the traditional left.

It might be accurately described as defending the legacy, rather than aspiring for a better future, but the labour movement which dominated political change in the twentieth century fought many long and bitter battles to establish the modern welfare state that most developed countries now have in place.

The Basic Income model mostly dismantles that legacy and replaces it with something simpler, less involved and bureaucratic, and probably more effective, but try arguing that with someone who receives (and depends upon) the current crop of means tested benefits! A common response even among those who loathe the cruel application and disincentivising effects of the current system is “Something needs to change, but I’m not sure Basic Income is the answer.”

A true basic income (i.e. replacing all current benefits with one equal payment to all adults) would leave many current benefit recipients worse off in absolute terms. They might ultimately be better off as they would be free to earn as much as they want without losing their Basic Income, but one of the products of poverty is enormous financial insecurity, and expecting people in that situation to make a bold move towards Basic Income is perhaps unrealistic.

There are many Basic Income proposals (including the Transformation Deal) that argue for the retention of some traditional benefits, at least until such time as the Basic Income is high enough to compensate for those payments. In truth, there will always be some people who require additional support at a level that no Basic Income will ever match (i.e. people with multiple disabilities who require 24 hour a day care).

Future Basic Income arguments should make room for the inclusion of at least some retention of current benefits, to reassure those who are dependent upon them, but also to ensure that those in genuine need do not fall between the gaps between the old system and the new.

People should earn their income, not just receive it

This is the kind of argument that provokes anger in Basic Income activists.

The fact is, plenty of people receive their income without earning it, and most are subsidised by the state. This includes:

  • All current benefits recipients (including pensioners)
  • Investors who receive dividend payments from their stocks and shares
  • (Successful) Gamblers
  • Those who inherit money and assets
  • People who make windfall capital gains on the sale of assets
  • Homeowners who have equity in their home (i.e. who see the price of their home rise without lifting a finger)
  • Landowners who receive government subsidy
  • Landowners who see the price of land rise
  • Owners of other businesses who receive subisdies and grants

I go into further detail on this in another post, but it is fair to say that it is a flimsy argument often used by the very rent-extractors who themselves receive an income without working for it.

But it does present a challenge for proponents of a Basic Income as it is a very widely held belief. Let’s put aside for a moment that the likely level of any Basic Income is unlikely to allow many people to completely give up work. More likely is that it will increase flexibility, the number of people choosing to re-train and the amount of time spent rearing children, all of which can be argued as being ‘a good thing’. Let’s assume that a person with limited needs does use it to stop working altogether. We can only justify that payment in the eyes of the ‘work is a moral obligation’ brigade if we argue that the money they receive is already theirs as of right (and therefore how they spend it is nobody’s business but their own).

I do this in a previous post and feel that the only way to win this argument is to move away from the idea that the Basic Income is a welfare payment, and instead argue that it is each citizen’s equal share of the country’s natural (and common) resources. Welfare immediately demands the response, “Why should person X receive payment Y?”

We need to establish the rightful claim of every citizen to a Basic Income beyond the confines of benevolent welfare. The Basic Income is really the Citizen’s Dividend.

The proposal was prohibitively expensive and would require a huge increase in tax

There was no specific number put on the level of the Basic Income proposed in the Swiss referendum, but the most commonly discussed figure was CHF2,500 (£1,765) a month or CHF30,000 per year.

The average disposable income in Switzerland is around CHF34,000 per year, which means the Basic Income suggested was likely to be equal to around 87% of disposable income, which, by any standard, is really rather high!

There was no clear explanation of how this was likely to be funded. The cost of this Basic Income would be around CHF195 billion per annum. Total central government spending in 2016 is likely to be around CHF70 billion, while total GDP is CHF665bn, meaning the suggested amount would be 30% of GDP or 278% of central government spending.

That suggests that the numbers being bandied around were utterly unrealistic. A Basic Income should meet basic needs and be adminstered by government, but if people are to believe that it is possible to achieve, then those numbers have to bear some relation to people’s current understanding of national finances. Perhaps CHF30,000 per year is a noble aspiration, but it feels like a very steep starting point indeed. Most voters looking at that would most likely get a bit of a fright.

We need to present voters with numbers they can believe.

There was no plan in place to fund it

This is perhaps an unfair criticism of the Swiss proposal, as referenda often start out with broad principles, which once agreed would then lead to more detailed proposals to be worked out in the normal legislative way. However, if you’re going to ask people to vote on their future income, they are almost certainly going to want to know what that income will be and how it’s going to be provided.

I have crunched some of the numbers myself and feel that a more modest income of just over CHF15,000 could be achieved with a Land Value Tax of 3% plus licensing of common resources to private interests.

I have previously shown how these figures add up for the UK and the USA and at first glance Switzerland seems to have a similar breakdown  (any other input on this would be most welcome).

I can only find figures for Switzerland’s residential real estate market, but with an average pre-tax income of CHF66,000 and an income/price ratio for housing of 8.6, the average house price would be CHF567,000. Multiplied by the number of households (3.36 million), gives a residential property value of around CHF1.9 trillion. A Land Value Tax of 3% (or CHF17,000 per household) produce an annual revenue of CHF57 billion, which when divided among Switzerland’s 6.5 million adults would result in an annual payment to each citizen of CHF8,770.

However, LVT from residential land generally provides just over 50% of the total LVT revenue (57% in the UK model I set out). Commercial, agricultural and government owned real estate, along with public resources like the airways, the seas, commercial licences, underwriting to banks/other corporate subsidies and pollution taxes tend to provide the remainder.

If we assume the same ratios as the UK, that means Switzerland could raise £100bn from a Land Value Tax and public licences, which would provide sufficient funding to grant each adult CHF15,400 per year. So the average owner-occupier household would pay just under CHF17,000 in LVT and receive just under CHF30,000 in Basic Income. A net gain of CHF13,000 for home owners and a lot more for those who rent.

LVT has other advantages, but its revenue raising capability alone would be enough for us to want to tie it to the provision of the Basic Income.

Of course, I can’t guarantee this would have changed the choice of any of the 77% of voters who opposed the Swiss proposal, but if we’re going to give voters the chance to choose a Basic Income model, we should make some attempt to cost it and explain what impact it would have on each voter’s finances.

Armchair General

I realise that it’s easy to pontificate about how things could have been done better from the comfort of my armchair, but that’s not what this article is about.

I think the Swiss referendum was a landmark in the move towards a Basic Income for all and applaud all those who took part in it.

But let’s learn the lessons from the defeat here and come back with an even more powerful message and an even more convincing set of proposals next time round

 

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