The expensive truth about a universal basic income

Since the beginning of the pandemic, with its lockdowns and restrictions, the idea of government providing a universal basic income has gained greater interest. Indeed, the idea surfaced (albeit briefly) in the federal election’s English-language debate Thursday night.

A universal basic income (UBI) is one type of guaranteed annual income (GAI). A GAI broadly refers to a cash transfer from government intended to ensure a minimum level of income for everyone. A universal basic income specifically gives everyone a flat cash transfer, regardless of their level of income. Obviously, if Canada enacted a UBI, it would come with a massive price tag.

For example, a recent study analyzed the costs of a UBI based on the $2,000 monthly benefit provided by the Canada Emergency Response Benefit (CERB) program. If all Canadians aged 18 to 64 received annual payments of $24,000 with no strings attached, the annual price tag would reach $465 billion. For perspective, consider that the entire federal budget in 2019-20 including interest on the national debt was $362.9 billion.

Continuing the hypothetical, if the government wanted to restrain costs and better target low-income Canadians with a GAI, it would need to abandon the idea of covering everyone (i.e. universality) and implement claw backs of the benefit as incomes rise.

Consider a GAI based on Canada’s Old Age Security (OAS) program. In this scenario, Ottawa would provide a maximum payment of roughly $7,300 to Canadians aged 18 to 64, but reduce the benefit by 15 cents for every dollar of income exceeding $77,580. This GAI program’s estimated annual price tag would still be a whopping $132 billion. Again, for perspective, this is roughly one-third of the entire federal budget in 2019-20 before COVID.

And although the cost for this type of GAI is less than the universal program, there are new problems. Reducing the cash transfer means Canadians receive significantly less money, so the program could lose its effectiveness as an anti-poverty tool. The Parliamentary Budget Officer (PBO) also notes that clawing back the GAI benefit as incomes rise may prompt some Canadians to reduce their work hours because the “net amount resulting from each additional hour of work is lower.” Put simply, reducing an individual’s payment while they work additional hours encourages them to work less—that’s a harmful incentive and can lead to the welfare traps many Canadians suffered through in the 1980s and early 1990s.

Finally, it’s worth remembering Canada’s current fiscal situation. Ottawa ran an unprecedented $354 billion deficit in 2020/21. And according to Canada’s Budget Watchdog, the federal government will likely run deficits until 2070 if its stays on its current fiscal trajectory (i.e. absent any tax or spending changes). The hefty price tag for a GAI of any design would increase pressure on federal finances and necessitate large-scale tax increases either immediately or in the near future.

So suppose the next government decided to raise taxes today to pay for a GAI, instead of handing the bill to future generations through further deficit-spending. What would that look like?

To pay for a GAI, advocates often suggest raising taxes on upper-income Canadians. But in reality, the entirety of disposable income of Canada’s top earners (those earning $250,000 or more annually) couldn’t fund the program. It would cover only 25 per cent of the CERB model and 87 per cent of the OAS-style model. Instead, a GAI would require a host of substantial tax increases on Canadians of all income levels including potential hikes to the GST and personal income taxes.

Despite any musings on the campaign trial, Canadians should be aware of the challenges and immense costs of any guaranteed annual income program, which would either lead to more debt or a host of tax increases.