The COVID-19 Crisis: A Turning Point for Universal Basic Income? — Indonesia Project on COVID-19
Discourse surrounding universal basic income (UBI)-a concept that a country should financially support every adult citizen’s basic needs, regardless of their socioeconomic status-has been on the rise in recent years. In Indonesia in particular, the COVID-19 pandemic has amplified calls for a UBI, which has been proposed as a way to help to address rises in inequality and unemployment, such as those seen during past epidemics, including SARS, MARS and Ebola.
The Indonesian Ministry of Manpower has reported that the number of unemployed citizens increased by only two million in the past 1.5 months. The government estimates that about 3.8 million Indonesians will fall into poverty following the pandemic, while 5.2 million are likely to become unemployed in the worst-case scenario. Everyone is being affected by the outbreak, from the wealthy who own factories to their labourers. However, the hardest hit in Indonesia are the many informal workers, such as the street vendors or ojek drivers who have lost their livelihoods because of large-scale social restrictions. Supporters of a UBI argue that it may help prevent the gap in equality from widening further.
The Ambiguous Effect on Inequality
According to its proponents, UBI can reduce inequality via three channels. First, the relative share of national income for lower-income groups will rise if there is UBI. A fixed amount of money is a relatively larger amount to the poor than to the rich, so in effect, UBI reduces relative inequality. Second, via existing tax policy: a higher income tax rate for a country’s top income earners than for its bottom earners could reduce income inequality. Third, via an adjusted, progressive tax system-in which people on higher incomes pay a higher proportion of their income in tax-designed to finance the UBI scheme. However, the possible positive effects of a UBI on equality could be reduced by other factors that may widen the income gap. First, replacing the existing social assistance programs, rather than stacking on top of them, may generate a smaller net gain for poor people, and in some cases a net loss. In Indonesia’s case, scrapping the current programs, such as the subsidised rice program and conditional cash transfers may increase inequality. Second, if a country wants to impose a more regressive tax to finance a UBI, such as a value added tax (VAT), the new scheme could exacerbate inequality, even if the VAT excludes expenditure on food, housing and healthcare. Contrary to a progressive tax system, a regressive scheme would hit low income earners proportionally harder than high earners. Given these possibilities, the likely result of a UBI in Indonesia, in terms of income inequality, is ambiguous.
A Quick Remedy, But Not a Panacea
While a UBI may seem an appealing way to reduce inequality stemming from the outbreak, in the long run it could do more harm than good. The most obvious problem is that a UBI scheme requires a tremendous amount of money. Indonesia’s tax capacity is one of the worst in the world. In 2018, Indonesia’s tax ratio was 11.5%, lower than the average of Latin American and the Caribbean countries (22.8%), African countries (18.2%), and far below the average of the OECD countries (34.2%). To implement a massive and costly UBI scheme, Indonesia must first tackle the tax revenue issue.
Additionally, a UBI would add to the macroeconomic pressures in Indonesia. Despite the healthy external debt structure, the crisis will hurt Indonesia’s foreign debt posture. The country has also experienced current account deficits. Policymakers should consider the cost-effectiveness of the whole welfare system. Rather than implementing a costly UBI scheme, improving the existing targeted programs may make more sense, given the limited fiscal space.
More Studies Are Needed
Several pilot projects of basic income have been trialled in other countries, including in welfare states in Western Europe. However, there is no single country that has implemented a ‘pure’ UBI. There must be an economic reason why advanced countries find it difficult to give free money to everyone, not only the poor. A recent study by Hoynes and Rothstein (2019) found that targeted welfare programs give more net benefits to the poor than UBI schemes. In other words, replacing targeted programs with a UBI could be a less effective way to combat inequality.
If we want a UBI in Indonesia, we need to move from ‘the big idea’ towards a ‘specific policy proposal’. The concept of UBI may be gaining attention, but we need more rigorous research to prove the cost-effectiveness and the political feasibility of it in Indonesia. At present, the targeted social assistance programs seem more appropriate.
Originally published at https://www.covid19indonesia.net on May 17, 2020.
