The Macroeconomic Impacts of a Universal Basic Income : An Application to Scotland

Connolly, Kevin and Eiser, David and Kumar, Ashwin and McGregor, Peter G. and Roy, Graeme (2020) The Macroeconomic Impacts of a Universal Basic Income : An Application to Scotland. Discussion paper. University of Strathclyde, Glasgow.

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UBI is defined as a payment made to all citizens in a region/ nation that is unconditional, permanent and substantial. We explore the macroeconomic consequences of such a UBI proposal for a regional economy, introduced on a fiscally neutral basis. We use Scotland, a country where the First Minister has indicated her support for the principle behind the idea, to illustrate the application of our analytical approach. The implementation of such a UBI at scale represents a major societal shift that involves substantial rises in taxation as well as in payments. Much of the existing empirical evidence relates to schemes that are small and in which the beneficiaries bear none of the costs, so its applicability here is questionable. Our approach combines microsimulation, to identify the immediate impact of the UBI on the tax/benefit system and distribution of income, with macroeconomic modelling to identify and analyse the wider economic impact of potential behavioural responses. The macroeconomic impact of the UBI depends critically on workers’ and potential migrants’ behavioural responses to the increase in taxation as well as to increased benefits. However, it seems clear that any positive stimulus to productivity as a consequence, for example, of reduced precarity and increased training would need to be substantial to offset any adverse impact on the scale of economic activity, unless policymakers succeed in securing a social contract that dampens or eliminates workers’ pressure for higher wages in response to a reduction in take home pay.