Unconditional Basic Income: Why Kazakhstan Cannot Afford It

In Soviet times there was a thesis: to each according to his needs, from each according to his abilities. When that day comes, we can say socialism has been achieved.

Developed countries have approached this ideal through capitalism and the development of democracy. The next logical step, as a result, is a basic income that would meet the population's basic needs. Yet even in countries such as Finland and Switzerland, basic income remains very much in question: its introduction is contested, and no final decision has been taken.

What is unconditional basic income? It is a payment by the state to all citizens, regardless of their status or income. It is also known as a negative tax, or as a distribution of part of the natural resource rent.

There are two basic arguments for introducing unconditional basic income.

The first is based on the social distribution of gross domestic product.

Its proponents build their case on redistributing income among the population: entrepreneurs and the well-off should share their income with ordinary people. The need for such redistribution stems from the sharp rise in labor productivity. Every year machines and robots replace human labor, which prevents the creation of jobs, and people without adequate incomes cannot consume the goods and services that are produced. A basic income would address primary consumption, while secondary consumption would rest on earnings. This argument prevails in Switzerland, where a referendum on the issue is planned.

In this version, unconditional basic income would have to match the average standard of living.

The second is based on the subsistence minimum, which is needed to reduce poverty and resolve problems of social welfare. As a rule, this argument is concerned with providing the population with a minimum level of support. Here, instead of social assistance, people receive a permanent minimum income that is meant to cover the subsistence minimum.

The income should be set at a level that still gives people an incentive to work in order to improve their standard of living. For example, if the minimum income is enough to cover basic needs, people will keep working because they compare their standard of living with that of other citizens.

The second version also lowers the cost of labor for employers. Because every resident has an unconditional basic income, a worker facing high unemployment will accept lower pay to improve his well-being. Put simply, if a worker was previously willing to work for X, after the introduction of unconditional basic income he will be willing to work for X minus the unconditional basic income.

For Kazakhstan, introducing unconditional basic income is feasible only under the second version, that is, to address social problems.

Even so, there are several major problems with introducing it.

1. Introducing unconditional basic income would require abolishing all existing benefits and allowances. Yet some groups of the population sometimes receive more in benefits than the basic income would provide, because the current system is based on solidarity: some receive more, others less. For example, some people never go to the hospital, but benefits go to pensioners because they go more often. This would require introducing more insurance schemes.

2. Introducing unconditional basic income would require higher taxes, especially on wealthier people. Unfortunately, raising direct taxes in Kazakhstan is quite difficult, and many increases come through indirect taxes, which are inherently unfair. Higher direct taxes would also be accompanied by growth in the shadow economy.

3. Introducing unconditional basic income raises the question of the price of labor. In low-income countries it can backfire: some people, receiving enough money to live on, will not strive to improve their living conditions, and this could, on the contrary, make low-paid occupations more expensive.

4. Introducing unconditional basic income would fuel inflation, since it creates additional income based not on labor but on citizenship. This money would go to consumption and put added pressure on inflation without creating any added value.

5. Many people would become freeloaders. With incomes already low, they would have no incentive to work, because the basic income would be enough to cover their needs. For Kazakhstan, which has a labor shortage, this is simply unacceptable.

Now a few words about the advantages.

1. Under such a scheme, every citizen receives a share of the income generated by natural resources, for example if the payments were funded from oil revenues. At current oil prices, however, receiving any natural resource rent is unlikely.

2. Unconditional basic income would increase domestic demand and stimulate domestic producers. It is true that part of the population would receive additional income that could be spent on consumption. But our economy has two nuances here. First, inflation may cancel out this effect. Second, the high share of imports in consumption would push imports up, and the benefit would pass to the countries that export to us.

3. Unconditional basic income would resolve the problem of poverty, since poor people would receive enough income to live on, and that would in turn affect crime and social tension in society.

Whatever the pros and cons, the main problem is where the money would come from. To finance such a project, Kazakhstan would have to produce enough added value.

If unconditional basic income were guaranteed to every citizen of Kazakhstan at the subsistence minimum, the total annual requirement is easy to calculate:

Subsistence minimum: KZT 22,859

Population: 17,693,500

Total requirement: 22,859 × 17,693,500 × 12 = KZT 4,853,468,598,000

Total budget expenditure in 2015 was KZT 8.227 trillion, of which KZT 1.713 trillion went to social welfare. In other words, even if all benefits and social payments were abolished, the state budget would have to grow by KZT 3.14 trillion (4.853 – 1.713 = 3.14), or 38%, which is simply impossible in current conditions.

Total tax revenue in 2015, excluding oil revenues (which go to the National Fund), came to KZT 4.883 trillion. The tax burden would therefore have to rise by at least 64%.

In current conditions, raising the tax burden by 64% is improbable and economically inexpedient.

If we regard unconditional basic income as part of the natural resource rent that the state should pay out of oil revenues, we need to establish how much actually flows into the National Fund of Kazakhstan.

In 2015, only KZT 1.613 trillion flowed into the National Fund, while KZT 2.468 trillion was withdrawn to cover the budget deficit. In other words, in current conditions the inflows into the National Fund do not even cover the country's budget deficit, so we cannot count on this source.

With the current state budget, the only possible source is an expansion of the tax base through economic growth. To cover such a gap at current economic indicators, the economy would have to grow by at least 65%. Active economic growth in Kazakhstan began in 1999 and averaged 7% a year through 2015. Since 2008, average growth has been 4.3%. The more developed an economy and the higher its base, the slower its growth.

This year zero growth is expected, so the tax base can only begin to expand from next year. Suppose that average growth over the next 10 years is 3% a year. Then growing by 65% would take about 17 years of uninterrupted growth at 3% a year before it would be possible to pay even a minimum level of income.

Thus, the question of introducing unconditional basic income is not a pressing one. It could be considered in 2034, 18 years from now.