Thursday 18 Apr 2024
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This article first appeared in The Edge Malaysia Weekly on November 21, 2022 - November 27, 2022

WILL the Assistive Basic Income (ABI) scheme, as proposed by Barisan Nasional (BN) in its manifesto for the 15th general election, really “help” the poor as intended? Or is it a hastily crafted promise, made for political expediency, that is structurally flawed and, worse, would end up hurting the economy?

The mechanics of the ABI are simple (as we understand it, since no further clarity has been offered). Under the scheme, the government will “top up” the monthly income for all households to at least RM2,208. For instance, if your current household income is RM1,500, you will receive an automatic credit of RM708 (RM2,208 - RM1,500), no strings attached. Therefore, every Malaysian household will be guaranteed a monthly income of RM2,208 and no household will have to live below this poverty line. Sounds reasonable?

The problem is that this is a “naïve” scenario — there is a massive fundamental flaw, one that could see its cost balloon to as much as RM35 billion a year! Why?

Let us assume, you are currently working very hard for 30 days a month and making a minimum wage of RM1,500. The government gives you a top-up of RM708, boosting your income to RM2,208. Your neighbour, on the other hand, is earning just RM1,000 a month. Based on the scheme, the government will give him RM1,208 (RM2,208 - RM1,000), to also boost his income to RM2,208. We don’t know about you, but we would immediately quit the hard job and take the RM2,208 free money from the government.

In fact, we suspect even those earning a few hundred ringgit above RM2,208 now, might just quit and enjoy life. (If your income is RM2,209 and above, you get nothing.) After all, you still get RM2,208 — for not working at all.

One might argue this is an exaggeration — people are not lazy and not everyone will quit and take the free money. We agree the poor are definitely not lazy. But it would be wrong to assume they are stupid. So, most likely, many (even if not all) will quit, take the RM2,208 and supplement their income with part-time (untraceable) “cash work”.

Whichever the above scenarios, the total cost for the ABI would balloon to RM35.2 billion — which is 1.3 million households x RM2,208 x 12 months a year. (Based on Department of Statistics Malaysia data, we estimate there are 1.3 million households currently earning less than RM2,605 a month [see Table 1]). This massive cost will blow a hole through the government’s budget — public debt will surely rise, as will borrowing costs.

Worse, what about the secondary effects? If a majority of these 1.3 million households choose to quit — or only work part-time, say in the gig economy — who will work in restaurants, service counters, factories, plantations and all the other jobs that currently employ these workers?

Wages will rise, as demand for workers now far exceeds supply. The country’s production and exports will drop precipitously, the ringgit will go into a free fall, businesses will fail — resulting in even more job losses — and the economy will collapse.

What is the goal of basic income?

The idea of a basic income — targeted or universal basic income (UBI) — has been getting a lot of attention globally in recent years. UBI, as the name suggests, is universal, offered to every citizen while others are targeted at lower-income households. We think this subject will increasingly gain momentum as technology (automation, robotics and so on) progressively replaces humans for a widening array of jobs. Against a backdrop of rapidly rising living costs, governments are looking for ways to strengthen social contracts with the people, including the provision of a no-obligation financial safety net.

Many countries have rolled out some form of basic income trials and pilot programmes for limited segments of their populations. There are pros and cons in giving people a guaranteed basic income. One of the biggest worries is that it will encourage poor work ethic. Tellingly, these trials have not provided definitive evidence of success, and were not sufficiently supportive for the pilots to translate into real-world policies.

The Finland experiment

An experiment that attracted broad worldwide attention was the one undertaken in Finland. Here are the facts. It was the first country to complete a UBI nationwide in a controlled, randomised trial. At the start of 2017, some 2,000 unemployed people were selected and given a monthly income of €560 for two years while a control group received the standard basic unemployment allowance.

The main research question was whether a guaranteed monthly income will encourage recipients to seek and accept a job, if there is no risk of losing their unemployment benefits. The findings were ambivalent and open to debate, owing partly to questions raised over the scheme’s design. What was very clear was that the recipients reported much lower levels of insecurity and stress than the control group — they were far happier, more confident and were in better mental and physical health.

We think the concept of UBI is worthy of further research and debate, particularly on coverage, target households, amounts and so on. But any programme must be well thought out, with clearly defined goals, a realistic estimate of the expected cost and, critically, how it is to be funded. There is no question that a massive, unfunded spending package will be severely punished by the markets. A case in point is former UK prime minister Liz Truss’ disastrous fiscal plans, which sent its cost of borrowing surging and the pound plunging.

BN’s ABI will be extremely costly, disincentivise work and damage the economy

The primary goal of the ABI must be to provide help to low-income households while still encouraging people to work. The Finnish experiment does offer some positive findings in this respect. There is one very significant difference, however, between the Finland trial and BN’s ABI — the amount of €560 was well below the poverty threshold (€1,143) and average household income in the country, including for students and other unemployed, retired people who are eligible for other social benefits/allowances. We reproduce here a comparison chart taken from a summary report on the trial by consulting firm McKinsey. In short, the basic income amount is only a supplement — not enough to live on. So, it does not discourage people from working or seeking work.

The ABI amount, on the other hand, is set at a very high level at RM2,208 — well above the minimum wage of RM1,500 (see Table 2). Therefore, its effect on the incentive to work will be totally different — it will actually discourage people from working! After all, why work when you can get more by not working at all? The top-up feature of the ABI is fundamentally flawed, will end up being extremely costly and is dangerous, given the potential damage to the country’s economy.

Don’t be ‘revolutionary’ for the sake of being revolutionary

If the government is sincere in helping the poor, we have a far simpler suggestion. It will achieve the same goal, which is to lift all household incomes above the RM2,208 level. It will definitely cost far less and, most importantly, it will NOT encourage people to quit working and risk untold damage to the economy. How?

We already have in place various schemes to help the hardcore and absolute poor. All that is needed is to increase the allocations for all existing schemes to bridge the current shortfall in household incomes.

According to our back-of-the-envelope calculations, the total additional cost to lift all household income above RM2,208 is just RM1.7 billion (see Table 3). Yes, we understand that this is just an approximate number, based on averages, since precise figures are not publicly available. But it provides some benchmarks. Best of all, there is absolutely no need to reinvent the wheel.

 

See also ‘Funding and execution major hurdles to BN’s proposed Assistive Basic Income, experts stress’  

 

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