Guaranteed annual income—the challenges of implementation

The Trudeau government’s Canada Emergency Response Benefit (CERB) has sparked interest in an old policy idea known as the guaranteed annual income (GAI). Many proponents suggest a GAI could help alleviate poverty and raise the standard of living for Canadians. However, there are several implementation challenges proponents frequently overlook, which would make it difficult or impossible to create an effective and affordable GAI program.

Although there are many proposed variants of the GAI concept, the fundamental idea is that the government would ensure a mini¬mum annual income to all individuals through cash transfers. Notable proponents of the idea include federal NDP Leader Jagmeet Singh and Green Party leadership candidate Glen Murray.

But problems arise when we begin discussing specifics over program design.

The key features of any GAI—the cash transfer, phase-out rate and income threshold—are especially difficult to design because governments must balance three competing interests, namely cost-control, avoiding negative work incentives and providing a large enough cash transfer to effectively alleviate poverty. In fact, several economists have demonstrated it’s impossible to achieve all three objectives at once.

For instance, consider a universal basic income where the government provides $2,000 per month to all working-age Canadians (aged 18-64) regardless of their income. Such a program would provide a large cash transfer to all Canadians, but at an enormous cost. A GAI of this type would be extremely expensive and many high-income Canadians would receive money despite not needing the assistance.

To restrain program costs and better target low-income Canadians, governments could choose to claw back some of the cash transfer after an individual’s net income passes a specific threshold (e.g. $50,000)—in other words, implement a phase-out rate.

However, rapid phase-out rates designed to reduce costs create strong work disincentives. Put simply, if your benefit is reduced beyond a certain income threshold, you are disincentivized to work more and earn additional income beyond that level. More gradual phase-outs help mitigate this disincentive, but do less to reduce costs and are less effective at targeting resources to lower-income families.

Put differently, phase outs can help restrain costs but only at the expense of work incentives, harming economic growth.

Another option is to significantly reduce the amount of the cash transfer. While lowering the cash transfer limits the program’s cost (although those costs would still be considerable), this option presents further challenges. A sharp decline in the cash transfer would damage its effectiveness as an anti-poverty tool because lower-income Canadians receive less money. In other words, the tension between work incentives and program costs can only be “resolved” by dramatically reducing the amount of money Canadians receive, potentially undermining the program’s purpose.

Other problems emerge when discussing specifics about implementation. Some proponents argue we can control costs by replacing current federal and provincial programs. But this would require extensive coordination between multiple levels of government and the elimination of programs such as disability supports, worker’s compensation benefits, employment insurance, the Canada Child Benefit and various tax credits (i.e. basic personal amount, GST credit). These implementation challenges are daunting.

In summary, the potential effectiveness of a guaranteed annual income is limited by its price tag and its inability to overcome design challenges. As the federal government faces mounting pressure to provide additional income support to Canadians, it should recognize the high cost and implementation challenges of a GAI, which raise serious questions about whether such a program can be affordable and effective.