Welfare lessons from Finland


The OECD’s economic surveys are always treasure troves of information about the countries they cover. But they are often just as useful for policymakers in other countries because of the lessons they can impart. So it is with the new economic survey of Finland, a country watched around the world because of its trial of universal basic income, the policy of giving everyone an unconditional money grant in the place of means-tested benefits.

The report homes in on exactly what matters in the Finnish experiment. It acknowledges that Finland’s interest is in lowering barriers to work — it is a highly pragmatic approach. (In contrast, some other UBI proponents often express more romantic motivations about the greater freedom the system can grant; others care about ending the bureaucracy and clientilisation of means-tested benefits. Indeed the long list of good effects UBI is supposed to bring about is a reason to be cautious.) The new study points out that this is the right priority, because Finland has notably lower rates of labour market participation than its Nordic neighbours. Seventy per cent of the country’s 15 to 64-year-olds work, which is higher than the OECD average but well below the 74 per cent rate in Norway and Denmark, let alone Sweden’s 77 per cent.

A blog post that accompanies the report nicely sets out why, when the problem is low work participation, the benefit system is a natural target for reform. The problem is not only that means-testing of benefits means there is little financial gain for someone who moves from benefits to paid work. (Though that matters hugely: in Finland, more than 60 per cent of people in such a situation face an effective average income tax rate, including the withdrawal of welfare benefits, above 80 per cent.)

It is also what Jon Kristian Pareliussen of the OECD highlights: “Complex benefit rules combine with administrative practices to create ‘bureaucratic traps’ when individuals taking up temporary, part-time or unstable employment face a real or perceived risk of losing eligibility or receiving benefits with a delay as their claims are re-evaluated. A [further] weakness of existing welfare systems is that they are built around traditional employer-employee relationships, and are thus ill-adapted to the future of work, which is likely to involve more changes in careers, part-time work, self-employment and platform work.”

But UBI is not the only way to address this. In a very useful exercise, the OECD compares basic income with a similar but distinct policy: the universal credit currently being pioneered by the UK. A UC, in essence, co-ordinates all benefits a welfare recipient is entitled to, imposing a single and moderate “taper” or withdrawal rate as recipient incomes rise. Both aspects are crucial elements of the approach: the single taper should remove bureaucratic complexity, the moderate rate should make it more rewarding to seek more or better-paid work.

I have noted the similarities between UBI and UC before. While both aim to smooth the way into work, the latter is clearly the less radical reform. If it can produce similar results as basic income, let alone better ones, it is the more promising route to take.

On the OECD’s modelling, this would be the case in Finland — it finds that UC has overall better work incentives (lower effective tax rates for people going from benefits to work) and better distributional effect. Given their assumptions, UBI creates higher effective tax rates than UC for many types of households; and, worryingly, it would redistribute more and in unfortunate ways, actually increasing inequality and the poverty rate.

Although the OECD does not report this, it seems however to follow from its UBI design that the poverty gap — how far below the poverty line those in poverty find themselves — would improve. That is partly because of the high effective tax rates, partly because the existing Finnish benefit system is unusually well targeted on the poorest. This counterintuitive effect that a UBI reform could potentially increase poverty is something the OECD has also examined for other countries.

With these particular parameters, UC is clearly the better reform. It should be said that the UK’s UC reform has been bedevilled with problems, both in the logistics of the rollout and in new bureaucratic complications that have partly defeated its purpose of simplification. But Finland could no doubt do better.

The more important retort is that the OECD is not comparing like for like. It leaves means-tested social assistance and housing benefits intact in the UBI scenario, which adds to the effective tax rates on low earners, but incorporates them in the universal credit with a common single withdrawal rate, thereby making UC work incentives better by design. Any smart UBI would have to be designed with effectively a single taper built into it.

Second, both scenarios actually improve public finances, but the basic income does so by more. In an effort to stylise fiscally neutral reforms, the OECD assumes these fiscal gains are returned by cutting marginal tax rates across the board in the UBI scenario, and reducing the taper in the UC scenario. But the former choice is clearly less progressive than the latter, so this accounts for some of the differential effects on poverty and redistribution as well as on work incentives.

This is still a very useful comparative exercise. But the first lesson to draw should not be to prefer a universal credit over a basic income. It should be to note why UC performs better, and model UBI with the same advantages, ie using the greater fiscal gains to incorporate all the same means-tested benefits and/or reduce only the lowest-band tax rate (corresponding to the single taper).

Before making a policy choice, make sure to optimise the policy options you are choosing between.

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Welfare lessons from Finland

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